Applebee’s has long been on the road to recovery alongside IHOP, and the two casual dining icons received a checkup in the form of parent brand DineEquity’s fourth-quarter earnings report, which came complete with a name change to Dine Brands Global Inc., soaring income on account of recent tax legislation, and news that more fat would be trimmed in the coming year.
For those conflicting factors, this report might seem a bit muddled. On paper, things looked pretty good for the newly anointed Dine Brands magnate. Net income shot up to $83 million in the fourth quarter of 2017, or $4.67 in earnings per diluted share. That figure is nearly quadruple that of Dine’s net income in 2016’s final quarter, which totaled $21.1 million.
Same-restaurant sales bumped 1.3 percent for Applebee’s over 2016’s fourth quarter while IHOP’s domestic system-wide sales were down 0.4 percent from this time last year. Those figures closed out the fiscal year on a relatively positive note for both restaurants, which both struggled in 2017. Applebee’s same-store sales dropped 5.3 percent year-over-year. IHOP was down 1.9 percent compared to the 2016 fiscal year.
Of course, straight net income, comparable sales, and diluted earnings per share aren’t the same as profit.
The leap in net income was primarily due to a tax benefit of $66.6 million based on a reduction in the brand’s future corporate tax rate. This news follows President Donald Trump’s signing of the Tax Cuts and Jobs Act in December, an external factor that also produced boosted income in recent earnings reports from chains like Cracker Barrel.
The details of the report are less positive for Applebee’s and IHOP. Adjusted net income was only $13.1 million, or $0.74 in adjusted earnings per share, barely more than half of adjusted net income during 2016’s final quarter, when that figure was $24.5 million.
Gross profit slumped, too, which leaders at Dine explained was due to several reasons in their earnings release.
“The decrease in gross profit was due to an increase in franchisor contributions to the Applebee's national advertising fund, higher bad debt expense, a reduction in revenue recognized due to the non-collectability of Applebee's franchisee royalties and the impact of restaurant closures,” the brand said in a statement.
At the very least, closures are not expected to stop at Dine. Following the shuttering of nearly 100 restaurants in 2017 (after projecting 135 would close), Applebee’s updated financial performance guidance for 2018 anticipated an additional 60–80 restaurants to shutter. About 10 to 15 stores will open, mostly in international locations.
IHOP, on the other hand, had a more positive forecast. The brand is expecting to open between 85–100 locations globally, with the majority of the pancake houses popping up in the U.S. Still, 30–40 restaurants are expected to shut down permanently this year.
For both brands, Dine projected same-restaurant sales to land somewhere between even and positive 3 percent, which is a promising sign compared to recent reports, although these numbers are being measured against what was a very challenging fiscal 2017. In the third quarter, for example, domestic systemwide same-store sales fell 7.7 percent, year-over-year.
Despite the conflicted report, though, Wall Street seemed to be satisfied by the latest news out of Dine. Following the earnings release, Dine shares have jumped about a dozen points, surpassing $60 per share for the first time since February 27, 2017.
Overall, it seems IHOP and Applebee’s are continuing down the right path, but there’s still plenty of work to be done. Both chains are fighting a nationwide decline in casual chain dining, largely due to restaurants like Dine’s being unable to attract younger demographics to the table.
At least for now, investors have shown they have faith in the comeback effort. Doubtlessly, though, 2018 will be a pivotal year for both Dine brands.