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DineEquity Inc. (DIN), operating under the Applebee's Neighborhood Grill & Bar and IHOP brands, reported first quarter adjusted earnings of $1.42 per share, handily beating the Zacks Consensus Estimate of $1.16 and the prior-year quarter earnings of $1.08. The better-than-expected results were driven by higher sales at Applebee's. 

Revenues for the quarter under review plunged 16.0% year over year to $300.2 million. However, it surpassed the Zacks Consensus Estimate of $298.0 million. The company experienced negative comparable sales in the chain of restaurants under the IHOP brand.

Inside the Headline Numbers

Applebee's domestic system-wide comparable-store sales spiked 3.9% during the quarter, with franchise same-restaurant sales and company-operated comparable restaurant sales up 4.3% and 0.7%, respectively.

The upside in Applebee's comparable store sales was driven by ongoing marketing and operational initiatives and new menu offerings aimed at driving traffic. Same-store sales also benefited from the Easter day shift and remained positive for three consecutive quarters.

IHOP's domestic system-wide same-store sales results dipped 2.7% during the quarter due to lower traffic and failure of the limited-time offer promotion.

Restaurant operating margin at Applebee's company-operated restaurants expanded 50 basis points (bps) to 15.3% during the quarter, driven by lower commodity cost, menu price increase and refranchising of 148 Applebee's company-operated restaurants and closure of 7. However, the upside in margin was partially offset by lower traffic and higher facility cost.

Store Update

During the quarter, DineEquity completed the sale of 65 company-operated Applebee's restaurants in St. Louis, Missouri and in some areas of Illinois and Washington, D.C, in line with the company’s strategy of becoming more highly franchised. The company continues to focus on  the franchise model as it is less capital intensive and reduces volatility of cash flow. DineEquity also expects to use the sale proceeds for reducing its debt burden.

During the first quarter, DineEquity opened 3 and closed 2 Applebee’s franchised restaurants. The company also opened 13 and closed 4 IHOP franchised restaurants. At the end of the quarter, DineEquity had 2,011 Applebee’s and 1513 IHOP restaurants.

Financial Position

DineEquity ended the reported quarter with cash and cash equivalents of $50.4 million and shareholders’ equity of $122.4 million.

At the end of the quarter, cash from operation was $50.5 million, capital expenditure was $3.8 million and free cash flow was $50 million.

As of March 31, 2011, the company’s long-term debt liability was $1,485.9 million compared with $1,631.5 million as of December 31, 2010. DineEquity remains focused on debt reduction and continues to use its free cash flow and cash proceeds from the sale of restaurants to lower its total debt. During the quarter, the company reduced its total debt burden by 8.8%.

For 2011, DineEquity expects capital expenditure of $26 million, cash from operation between $125 million and $135 million and free cash flow in the range of $112 million to $122 million.

Outlook

The largest full-service restaurant company in the world raised its outlook for Applebee's domestic system-wide comparable-store sales to 2% to 4% from its prior range of 1% to 3% for fiscal 2011. However, the company reaffirmed its  domestic system-wide same-store sales range between negative 2% and positive 1% for IOHP.

For fiscal 2011, Applebee's franchise plans to open 24 to 28 restaurants, half of which are expected to open in the international market. IHOP franchisee expects to open 55 to 65 restaurants, mostly in the domestic market.

Our Take

DineEquity reported robust results on the back of improved same-restaurant sales at its Applebee chain and expects the same to continue through 2011 driven by higher menu prices and an improved offering. Hence, we expect the estimates to go up in the coming quarters. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $4.28 and $4.25, respectively.

One of DineEquity’s primary competitors, BJ’s Restaurants, Inc. (BJRI) posted first quarter 2011 adjusted earnings of 25 cents per share, which surpassed the Zacks Consensus Estimate of 19 cents, on the back of strong comparable restaurant sales growth.

 
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