Buffalo Wild Wings vs. DineEquity: Which Is Stronger for the Long Term?

I know it's been a crazy year in the equity markets, but this week's price movements regarding Buffalo Wild Wings (BWLD) and DineEquity (DIN) show how inefficient and short focused the market is. DIN posted a positive earnings surprise ($.47 share profit vs. $.09 expected loss) while BWLD missed earnings estimates by about $.06/share.

But look at the quality of the numbers.

DIN of course is the 3300 unit massive casual dining combination of Applebee's and IHOP, while Buffalo Wild Wings is the smaller, 535 unit casual dining sports theme operator, that is in growth mode.

DIN took on a boatload of debt last year in purchasing Applebee's, and almost the entire October 27, 2008, earnings call was consumed by defense of its financial and debt structure and the complicated refranchising and sale-leasebacks underway to cut its debt.

We got a great tutorial of its debt covenants and its tight cushion, but there was no discussion whatsoever—in the earnings call or the news release—not a word, about how it is growing units, just how it will get through this phase.

DIN is, with all of its IHOP units, and eventually will be with Applebee's, a 100% franchisee operated company. Its future depends on getting through this phase intact and then growing the brands, and making sure the franchisees survive.

DIN did post positive .2% sales comps for IHOP and -3.1% comps for Applebee's. .2% comps is not good—with the commodity and wage inflation underway right now, restaurants need to be posting 4-6% positive comps just to stay even from a margin perspective. And, sales of 110 Applebee's for an estimated pre-tax value of around $900K isn't great for a $2-3M per unit asset.

I don't wish DIN ill. But reality is reality.

BWLD on the other hand, missed earnings estimates due to higher pre-opening costs, stock comp costs and depreciation costs (a non-cash expense, which is a source of cash, really) increases. The point is, most of the earnings miss came from growth, which is what restaurant companies are supposed to do, and should pay off downstream. They opened new units, had a decent price increase (3.5%) that wasn't consumed by negative traffic, and really had great sales comps: plus 6.8% for the company units and 2.1% for the franchisee units. BWLD continues to open and operate both company and franchisee units. Best of all, BWLD has no debt. Cost of goods and labor together actually fell 40 basis points combined, which in this environment is great.

The market is what it is. But we can hope that clearer analysis and identification of the issues will make for a more efficient market, eventually!

Stock position: None.

Comments

[sevilsivle:]

BWLD continues to be a fresh concept. DIN has two old and rundown ideas that they are trying to pawn off as "brand new". BWLD has a guest interaction momenteum with all of the video and audio features available at their locations. DIN is just boring and with the current leadership in place they have no one to step forward and improve the brand of Applebees so that it can be competitive in the future. BWLD will continue to grow in it's number of units and DIN will not. The really sad part of this is that DIN will begin to roll over these poor perfomance numbers in the second quarter of 2009 and the leadership will claim some type of "long term" victory. BWLD is a good bet and DIN is still on it's last leg and if the franchise community of the Applebees brand does not step up and get the majority of the company held units under their control we could see DIN underwater by the forth quarter of 2009. Good decision making by BWLD leadership is evident and DIN simply has no leadership. DIN will have to pay out the retention bonus to it's managers in the second quarter of 2009 due to the deal it struck upon accquistion. Let's see what that looks like in March and April and how many of the field leaders will get off that sinking ship once they have their money.

2008 Oct 31 10:40 AM

[discov:]

I think DIN may struggle to even make it to the 2nd quarter of 2009.

2008 Nov 01 02:25 AM

[Big D/Big D:]

So who is honestly reporting a +4% to +6% sales growth in the full service-full-category, national restaurant chain segment?? WHO?


On Oct 31 10:40 AM sevilsivle wrote:

> BWLD continues to be a fresh concept. DIN has two old and rundown
> ideas that they are trying to pawn off as "brand new". BWLD has a
> guest interaction momenteum with all of the video and audio features
> available at their locations. DIN is just boring and with the current
> leadership in place they have no one to step forward and improve
> the brand of Applebees so that it can be competitive in the future.
> BWLD will continue to grow in it's number of units and DIN will not.
> The really sad part of this is that DIN will begin to roll over these
> poor perfomance numbers in the second quarter of 2009 and the leadership
> will claim some type of "long term" victory. BWLD is a good bet and
> DIN is still on it's last leg and if the franchise community of the
> Applebees brand does not step up and get the majority of the company
> held units under their control we could see DIN underwater by the
> forth quarter of 2009. Good decision making by BWLD leadership is
> evident and DIN simply has no leadership. DIN will have to pay out
> the retention bonus to it's managers in the second quarter of 2009
> due to the deal it struck upon accquistion. Let's see what that looks
> like in March and April and how many of the field leaders will get
> off that sinking ship once they have their money.

Jan 22 12:00 AM