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Thursday, Nov 30, 2023

Change in Strategy Helping IHOP Improve Performance

Change in Strategy Helping IHOP Improve Performance CORPORATE FOCUS By CARLOS MARTINEZ Staff Reporter Changing business models is never easy, but for Glendale-based IHOP Corp., the change has been particularly slow and difficult. IHOP, the parent company of the International House of Pancakes chain of family restaurants, is reporting improved revenue and income numbers nearly a year after it began phasing out its program of financing franchisees’ new restaurants. IHOP had been charging franchisees $250,000 for the service which included selecting a site, buying land and funding the construction of new restaurants. It also loaned money to the franchisees for the development of the sites. But that model was extremely cash intensive and tied up too many company resources. “Nobody does business like that anymore and the company was slow in realizing that,” said Dennis Joe, an analyst for New York-based Sidoti & Co. For the fourth quarter ending Dec. 30, the company reported net income of $12 million or $0.56 per share on revenue of $107.4 million compared with net income of $11.6 million or $0.55 per share on revenue of $90.4 million. The quarterly numbers showed an upturn, but the company’s annual profits were decidedly flat as the company reconfigured its business model. For the year, IHOP reported net income of $40.8 million profit or $1.92 per share on revenue of $365.9 million, compared with net income of $40.3 million or $1.94 per share on revenue of $324.4 million. Although IHOP’s revenue is up over year-ago numbers, same store sales an important measure of the company’s real performance dropped 1 percent during the quarter while gaining 0.7 percent during 2002. Earlier this month, the company announced that its top executives, including president and chief executive Julia A. Stewart and new chief financial officer Thomas G. Conforti and four others, would not receive bonuses for missing profit targets. Stewart was paid $441,667 in salary last year. She also received $244,409 in forgiven loans. Former chief executive Richard K. Herzer, who left the company in May, was paid $738,690 in salary last year and was given stock options to buy 30,000 shares. “2002 was a year of building the foundation for our company by investing in branding, operations and corporate infrastructure,” said Stewart, who was brought in as president and chief executive in fall 2001. Heavy competition Softening sales and heavy competition for franchise dollars from other chains forced the company to hire industry veteran Stewart who is known for turning around fellow family restaurant chain Applebee’s. As part of Stewart’s strategy, the company ended its decades-long practice of financing its franchisees’ construction of new restaurants. The action was hailed by investors who saw the revenue from the potential sale of the company’s $200 million in loans as a way to buy back company stock and bolster its value. But the company last month decided against selling the loans, saying a sale would result in the company violating certain debt terms. The action was immediately felt when the stock had a one-day drop of $1.17 to $23.97 on March 24. The stock’s 52-week high is $36.46, reached on April 30, 2002, and its 52-week low is $20.98, reached on Feb. 13. The stock closed Thursday at $24.51. At about the same time, the company announced that it would declare a 25 cent cash dividend on May 19 instead of using the cash for repurchasing more shares of its stock. Sidoti & Co.’s Joe has rated the company neutral since January 2001. “The company hasn’t generated much cash flow but it should start to do so next year,” he said. Last year, the company spent $141.7 million in capital expenditures, due mostly to the development of new restaurants. IHOP plans to develop and open between 75 and 85 restaurants with about 55 to 60 restaurants to be developed by the company in the next two years. In 2005, franchisees will develop 65 to 85 restaurants, effectively eliminating the company’s capital expenditures. The company’s growth, however, may be tied to its efforts to find multiple franchisees, or those who wish to operate more than one restaurant, Joe said. “But the problem is that that’s the same thing other chains are doing and it’s competitive out there,” Joe said.

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