DineEquity's Capitalization Meltdown: What Took So Long?

Tuesday's DineEquity (DIN) 25% capitalization meltdown was predictable and had to happen. The question is, what took so long for this to sink in?

While people come and go, this really is a structural problem, not just the well respected CFO leaving.

It’s been well known that the casual dining sector had peaked in 2004-2006 and was on a slow decrease thereafter. IHOP's Julia Stewart worked to acquire Applebee's, her former company, in 2007, despite clear evidence of their decreased comparable sales and decreasing operating margins.

Load up on debt ($2B) and try to do financial engineering as a key business tenant, in a credit crunch, and this is what happens.

There were many signals of trouble in the company's August 25th 2008 earnings call, with just a few noted below:

1. Marketing emphasis on value: when you emphasize value that means operating margins erode. Just a fact.
2. Sales price of $700k to $800K per company unit refranchised is a low, bad price.
3. DIN’s sales leaseback strategy=increased rent= lower earnings

Disclosure: none

Comments

[WSWWW:]

There are a few critical things wrong with this tiny analysis:

1. DIN operates very few of its restaurants. So, value offerings and higher rent will affect the franchisees, not DIN. The franchisees are used to value offerings, a standard play. All DIN cares about is raising revenues, and vaule offers do just that.
2. Re rent. Again, once the sale/leaseback and franchiing occurs, DIN just collects royalites. Rents don't affect them.
3. $700-800K too low? based on what?

2008 Sep 11 09:47 AM

[Ban Ray:]

Julia Stewart engineered the Applebee's purchase out of ego and hubris, she is well-known as a casual and chronic liar among her own staff. She wanted revenge for not getting what she thought was due her at Applebee's (when she was there) so she did this stunt. That stock will go to $5.00 before the board dumps her and her stilettoed croonies.

2008 Sep 12 02:34 AM

[Ban Ray:]

WSWWW:

Your own "tiny analysis" is very naive and equally shortsighted:
So you believe higher rents and low margin promotions won't effect DIN? If the franchises are struggling (and they are) how long do you think they'll pay their bills (especially to DIN?) Higher rent will hurt DIN too not the day it's raised but in the ensuing years.

BTW DIN owns restaurants...lots of them. They financed their deal with Wall Street based on theory that they would unload all those corporate stores and retire their MASSIVE debt. But the restaurant(s) that they could have sold a year ago at 1$ Million is now down to 700-800K... if they can find a buyer, if the buyer has financing and is willing to pay for a concept that may be hopelessly outdated

Ihop is Americana, their margins are based on pancakes and coffee (very good margin makers) Applebee's is not anyones destination, hasn't been for , well forever.

If I owned an Applebee's I'd use the lettering and an anagram program to change the sign to read...Pepe's or something else and stop paying DIN a dime.
3. $700-800K too low? based on what?

2008 Sep 18 11:52 AM

[Big D/Big D:]

I am a top performing GM for DIN (sales&profit), specifically the Applebees brand, I'm talking about the top 10 of 476 publicly owned units. This undoing was about a hedge fund operator by the name of Sir.Richard Breedan, former chairman of the SEC, current CEO and founder of his group of manipulators/short sellers. While Mr. Breedan is long gone with his and his investors wind fall, the Applebees brand is going to suffer as a result of this egotistical fiasco between Mr. Breedan's greed and Ms. Stewarts amazing ego.

2008 Sep 18 01:26 PM

[sevilsivle:]

I also work for DineEquity and do not claim to be a top performer. I have been with the brand for eight years and on both the corp. side and the franchise side. This was started by Richard Breeden but in no way his fault or the fault of Lloyd Hill, or Dave Gobel. Breeden just held the board accountable for poor performance and at the time it was poor. The industry in cyclic and it will be back. When the good times come back around and sales are great and profits are good whoever is in charge will be a hero. Julia Stewart does have an ego issue and I do agree she used her position with IHOP to leverage a personal war on those at Applebees that did not give her what she thought she deserved. For her to make statements like "We are not concerned about the state of the economey, the price of gas, or weather issues" as she did in Las Vegas is an example of her egomania. Stewart has ruined the lives of thousands, from the upper management to the dishwasher with her personal agenda. She has cut bonus dollars for managers through unattainable goals and cut the hours of valued associates which in turn has killed the guest service. If you come to Applebees please understand that we are doing the best we can with what this crazy woman, Julia Stewart, has given us.

2008 Sep 22 03:20 PM

[Big D/Big D:]

DIN is out of money. That is why the dividend does not get paid to the investors. DIN is DONE and has exhausted the sale of all of Applebee's assets, there is nothing left to liquidate.

Let us do the math, you borrow $2B, that is with a $Billion, to buy 500 restaurants...you back out a corporate head quarters worth $39M and you end up paying over $3.5M per restaurant...then you valuate each unit at less than $1M... I would put that short by about...oh say..$2.5M per unit.

A little short on the cash side?...I think so. What a disaster, I would hope that Ms. Stewart gets tossed out on her nasty ass.

Jan 21 11:34 PM