2nd UPDATE: DineEquity 1Q Profit Doubles On Margin Growth

DineEquity Inc.'s (DIN) first-quarter earnings more than doubled, as the casual-dining company improved its margins and continued to pay down its debt.

The owner of the Applebee's and IHOP has made refranchising and revitalizing Applebee's restaurants its priority since acquiring the chain in 2007.

The turnaround of Applebee's is evident, as domestic same-restaurant sales increased 3.9% in the first quarter compared to the same period a year earlier. Low-priced items, such as its all-you-can-eat soup, salad and breadsticks promotion starting at $5.99, hit on customer value without cutting in to margins.

IHOP, on the other hand, is coming off a rough first quarter. Same-store sales decreased 2.7% as the breakfast chain's all-you-can-eat pancakes, launched in January, proved to be a miss, likely dampened by popular New Year's resolutions to eat healthier, the company said.

Stewart said the current chicken-and-waffles promotion is resonating much better with customers.

IHOP entered into a licensing agreement allowing the sale of eight IHOP-branded frozen items in Wal-Mart Stores Inc. (WMT) through a partnership with a consumer packaged goods company, which DineEquity declined to name.

"Our goal is to extend the reach of the brand to areas it doesn't normally go," Chief Executive Julia Stewart told Dow Jones Newswires, adding that the company will have more details of the impact later in the year.

The products will be in 3,000 Wal-Mart stores in the next 30 days, but the deal isn't exclusive to Wal-Mart, Stewart said. The products will face competition from Kellogg Co.'s (K) Eggo Waffles and other popular frozen breakfast treats.

IHOP's second quarter is also expected to see a boost form Easter brunch business. DineEquity said the shift in the holiday from the first to second quarter this year caused a decline of 0.4 percentage points in first quarter same-store sales for the chain.

DineEquity continues to make progress on plans to sell company-owned Applebee's restaurants to franchisee's, trading future sales for more consistent royalty revenue. Largely because of the refranchising of 65 additional Applebee's restaurants in the first quarter, DineEquity was able to reduce its total debt by 8.8%, or $178.6 million, from the previous quarter.

The company reported a first-quarter profit of $28.1 million, or $1.53 a share, up from $12.8 million, or 75 cents a share, a year earlier.

Shares of DineEquity were recently up 3.3% to $51.42. The stock is up about 21% over the past 12 months.

DineEquity's gross margin grew to 36.9% from 32.2% in the year-earlier period, as Applebee's restaurant operating margin rose to 15.3% from 14.8%.

While most casual-dining chains are struggling to offset commodity inflation and are concerned about the effect of rising gas prices on consumers, DineEquity said it doesn't see the industry headwinds as an issue for its chains.

"I'm cautious in terms of saying they won't have an impact on our brands, but it hasn't to date," Stewart said. "And I think we can price to cover their impact at both brands, if we need to."

She said in lieu of using discounting to drive traffic, the company relies on a pipeline of new items that are already value-oriented with good margins. Restaurants who don't have interesting new food to advertise are sometimes forced to discount their current offers, sacrificing margins, "in order to have something to talk about on TV," she said.

-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; annie.gasparro@dowjones.com

--Melodie Warner contributed to this article.

Darden Restaurants (NYSE:DRI)
Historical Stock Chart
From Aug 2024 to Sep 2024