Despite struggling sales at DineEquity Inc.’s IHOP and Applebee’s brands, Wall Street appears to be cautiously optimistic about the future of the Glendale restaurant group. The company’s stock has traded higher since it disclosed its second-quarter financial results on Aug. 10, the same day it announced it had replaced former chief executive Julia Stewart with hospitality industry veteran and longtime DineEquity board member Stephen Joyce. Unlike the first quarter, DineEquity outperformed Wall Street expectations in the second quarter. The company reported adjusted earnings of $23 million ($1.30 a share); analysts on average had anticipated earnings of $1.17 a share, according to Thomson Financial Network. Revenue for the period was $155 million, roughly in line with Wall Street estimates. Shares closed Aug. 16 at $39.66, down 48 percent year-to-date. DineEquity is confident that Joyce will be good for creating shareholder value. He joined Choice Hotels International Inc. as president in 2008, and is credited with successfully navigating the 6,500-unit hotel franchise through the Great Recession. By the time he was promoted to chief executive of Choice in 2016, the company’s stock price had doubled past its pre-2006 high of more than $60 a share. “(Joyce) is excellent with franchisees, turning around assets, building culture, and catalyzing growth in the hospitality business.” Interim Chief Executive Richard Dahl said in a conference call with investors. “Importantly, his skill in dealing with challenged businesses fits our current situation.” One of Joyce’s first tasks will be overseeing the closure of underperforming restaurants. DineEquity increased the number of U.S. restaurants it will shutter this year to as many as 135 Applebee’s and 25 IHOPs, up from earlier estimates of 60 Applebee’s and 18 IHOP locations. At the same time, franchisees are expected to open 20 to 30 new Applebee’s locations – mostly internationally – and between 80 and 95 new IHOPs, mainly in the U.S. “We are long overdue in rationalizing the size of our system and closing poorly performing restaurants,” Dahl said in the call. Same-restaurant sales at Applebee’s locations declined 6.2 percent during the most recent quarter and are now expected to range between -6 and -8 percent for fiscal 2017, the company said. Comparable sales at IHOP fell 2.6 percent, prompting DineEquity to lower its guidance for the year to declines between 1 and 3 percent. DineEquity is working with franchisees to close restaurants that are in dying retail areas as well as those that have been “brand-damaging,” Applebee’s President John Cywinski said. Low sales volume at these locations will mean the revenue losses incurred by closure will likely be small, he added. “This should have taken place probably in the normal course of business,” Cywinski told investors. DineEquity’s eagerness to downsize should give investors confidence in its future, noted Seeking Alpha blogger MaxValueInvesting, an individual investor who is long on the company. “By right-sizing the company, it realigns the supply with demand,” the investor wrote on Aug. 10. “That enables the company to be profitable and stable moving forward.”
