Dine Brands Global: Pricing In A Post-Pandemic Recovery For Restaurants
- Dine Brands Global reported its Q4 earnings which remained impacted by COVID disruptions including new restrictions on indoor dining at the end of the quarter during December.
- Management highlights nearly all restaurants are now reopened and there is an expectation for sales to begin recovering.
- The company across the Applebee's and IHOP brands are well-positioned to benefit as the pandemic ends supporting higher earnings growth.
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Dine Brands Global Inc (NYSE:DIN) is the holding company that owns and franchises over 3,500 "Applebee's" and "IHOP" restaurants in the United States. This is a market segment that has been particularly disrupted during the pandemic given the combination of social distancing requirements and local government restrictions against indoor dining limiting customer traffic. The company just reported its latest quarterly result highlighted by ongoing challenges with weak sales although some encouraging signs suggest conditions are improving. Indeed, shares of DIN are up over 40% in 2021 supported by an expectation that the pandemic will end allowing operations to normalize and the company to reclaim its growth trajectory. While we expect more modest gains in the stock from the current level, we believe the outlook is positive and DIN brands can emerge stronger into an industry recovery.
DIN Earnings Recap
Dine Brands Global reported its fiscal 2021 Q4 earnings on March 2nd with non-GAAP EPS of $0.39, which missed expectations by $0.27. A GAAP EPS loss of -$0.10 was also below estimates. Revenue of $196 million in the quarter represented a decline of 13.8% year over year although $3.5 million above the consensus.
There wasn't much of a surprise in terms of the headline weakness given the circumstances surrounding the pandemic. For the full year, the revenue of $689 million was down 24% compared to 2019. Keep in mind here that the revenue for the company includes the small number of corporate-owned locations while the majority of the business is based on royalties and franchise fees. Favorably, the company was able to remain cash flow positive generating $107 million in free cash flow as it pulled back on advertising while benefiting from other cost-savings measures. 2020 positive adjusted EPS of $1.79 was down from $6.95 in 2019
(source: Company IR)
One of the themes during the quarter was a resurgence of COVID that forced certain regions to tighten restrictions on indoor dining or slow plans to relax regulations. Applebee's comparable same-restaurant sales declined 17.6% while IHOP's decreased 30.1% compared to the period last year.
For Applebee's segment, while comparable sales have improved from a negative 49.4% at the worse point in Q2, the data for Q4 was also a step back from the -13.3% in Q3 when trends were more positive as COVID levels appeared to be stable. It's important to note that the company has a heavy presence in the Northeast region which faced tighter restrictions. The results for Q4 include 412 dining rooms that were closed at the end of December due to government-imposed mandates resulting in a particularly weak December period. On the other hand, data for the early part of Q1 into January and February already show an improvement. Nearly all dining rooms are now open for business. Management commented on these trends during the conference call:
Thankfully, the landscape has changed dramatically over the past month in virtually all of our 1,600 dining rooms are now open for business. In many respects, our current operating environment feels very similar to late summer of last year. If you recall, when we saw Applebee's sales momentum accelerate as restrictions were eased, including our first positive sales week at the end of September. And barring unforeseen circumstances, I anticipate a similar dynamic to unfold very soon here in 2021.
In the IHOP segment, the brand has a large presence in California which similarly to the Northeast was subject to restrictive indoor dining regulations. The company has made an effort to enhance its to-go and delivery capabilities supporting off-premise dining which has increased 130% year over year mitigating some of the financial impacts.
The key message here is that despite the challenges, fundamentals remain stable. The company ended the quarter with $456 million in cash and equivalents, along with restrictive cash, on the balance sheet while a financial current ratio of 1.7x highlights overall strong liquidity. While the company is not providing official earnings guidance for the year ahead, the expectation is for conditions to continue improving as dining room capacity restrictions are eliminated across the U.S. Management maintained a positive tone during the conference call pointing to a looming end of the pandemic as a turning point for the company:
I believe we're on the cusp of a restaurant renaissance. And as we enter what we expect to be the beginning of the end of the pandemic, all restaurants face a common challenge. And that's the eating out in America has changed. Those who win the new era of restaurants are those who remained resilient and those who invested in new menu and service innovations and new technology during 2020. And that's the story of Dine Brands with solid fundamentals, two category main iconic brands, and certainly the most talented team members and franchisees in the industry.
Analysis and Forward-Looking Commentary
We are encouraged by the stability of financial results for Dine Brands Global despite the circumstances. Management's positive outlook suggests there is an upside as restaurant traffic recovers supporting comparable sales. The bullish case for the stock is that as the pandemic ends, and COVID restrictions are lifted across the U.S. as states like Texas and Mississippi have already done, consumers will become more comfortable taking trips for leisure and entertainment representing a key source of the traffic to restaurant locations.
According to consensus estimates, the market is forecasting 2021 revenues to reach $828 million, up 20% year over year while EPS recovers towards $4.67. Looking ahead, revenue growth is expected to moderate closer to 5% per year between 2022 and 2023. EPS growth should benefit from the ongoing benefits of cost-savings and the streamlined operation including a greater mix towards off-premise dining. Our take is that these estimates may end up being conservative as the Applebee's brand and IHOP are well-positioned to benefit from pent-up demand and strong consumer spending this year.
In terms of valuation, the metrics we're looking at include a forward P/E ratio of 17x based on the consensus EPS estimate which appears reasonable. For context, Brinker International Inc (EAT) which owns Applebee's competitor "Chili's" trades at a higher multiple of 27x. Similarly, Denny's Corp (DENN) which is a competitor to the IHOP brand trades are a wider multiple of 44x on year-ahead earnings. While there are key differences between each company with a different business model, we see Dine Brands Global as still a value pick in the full-service casual dining industry. The diversification between the two major brands is also a strong point for the investment profile.
Balancing our favorable view of the outlook against what has been a strong rally already this year, we expect shares of DIN to have a more modest climb through 2021 as some of the positives in the outlook are likely already priced in. We rate shares of DIN as a buy with a price target of $90 representing 12% upside from the current level and a 19x multiple on 2021 consensus EPS.
Looking ahead, the market is likely to focus more on financial metrics related to margins and cash flow generation. The risk to watch here the outlook on the pandemic as any setback in the implied timetable for governments to begin rolling back restrictions would likely pressure sales across the Applebee's and IHOP restaurants. Weaker than expected results in the upcoming quarters would likely force a reassessment of the long-term earnings outlook.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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