Applebee's Reports Best Run in 25 Years
Headed into 2018, Applebee’s revamped leadership set a goal to become the most improved restaurant brand in America. The target was ambitious for a few reasons. First the obvious one: To that point, nearly every headline about the chain fell into a series of painful categories. Either Applebee’s was closing more stores, reporting high-single-digit sales declines, or was being ripped to cultural shreds by publications saying it no longer fit in today’s restaurant landscape. Eater even penned a story labeled “Applebee’s Deserves to Die.”
So while an 1,800-unit chain seeking a most-improved honor might feel like the most-popular kid in school trying to make a splash at their 10-year reunion, it was really anything but. Because, truthfully, Applebee’s entered 2018 with no shortage of brand equity, sure, but very little positive sentiment, either. The opposite actually. And the sales momentum wasn’t anything to sell critics on.
Applebee’s president John Cywinski referred to that bold, internal discussion in Dine Brand’s fourth-quarter review on February 21. And then he said this: “We absolutely delivered on that goal.”
How much so writes one of the most memorable comeback stories in recent restaurant history. The chain’s domestic systemwide same-store sales gains of 5 percent for the year represented the best annual performance in 25 years. Many of the writers predicting Applebee’s demise weren’t even born yet.
Dine Brands, which also operates IHOP, saw its stock pop more than 12 percent Thursday following the Wall Street-busting results to a three-and-half year high. Earnings per share of $1.70 beat consensus estimates by 13 cents and revenue of $214 million came ahead of expert calls by 17 million.
In the fourth quarter, same-store sales lifted 3.5 percent, marking the fifth consecutive quarter of sales growth for Applebee’s. There are some other results that support the turnaround and likely buoyed investor trading: Dine Brands’ gross margin jumped by more than 6 percentage points to 45.9 percent, as higher revenue and tight cost controls provided the company with operating leverage. For the year, systemwide sales of both brands combined to hit $7.6 billion, an improvement of 3 percent over 2017. Applebee’s strategy of shuttering underperforming locations took it down 5.1 percent to 1,837 units (1,693 domestic). IHOP, meanwhile, expanded 2.5 percent, year-over-year, to 1,831 (1,705 domestic) stores.
The other note is that Dine Brands provided healthy full-year earnings guidance for 2019. It expects same-store sales growth of 2–4 percent at IHOP and Applebee’s, which answers a question of whether or not Dine Brands could stack positive results on top of each other, as opposed to just spiking performance off weak quarters from the previous year (like it did in the middle of 2018). Dine Brands is also calling for net income between $104 million and $113 million, with diluted EPS between $6.15 and $6.45. That midpoint would showcase a significant improvement of 44 percent over the $4.37 in diluted EPS earned in 2018.
If Applebee’s posted another full year of positive sales, it would continue an upward trend, as seen below.
- Q1 2016: –3.7 percent
- Q2 2016: –4.2 percent
- Q3 2016: –5.2 percent
- Q4 2016: –7.2 percent
- Q1 2017: –7.9 percent
- Q2 2017: –6.2 percent
- Q3 2017: –7.7 percent
- Q4 2017: 1.3 percent
- Q1 2018: 3.3 percent
- Q2 2018: 5.7 percent
- Q3 2018: 7.7 percent
- Q4 2018: 3.5 percent
Applebee’s Q4 2018 run represented the first comp measured against a positive quarter. And the brand was still able to push forward on the top-line. Providing guidance that suggests the same throughout 2019 is a promising sign. Another telling change: ad fund and royalty delinquencies, which represented a significant challenge the past two years, have essentially disappeared in 2019.
What’s going right?
Beyond the general brand drift plot line, what was really wrong with Applebee’s a couple of years ago? One major thing was the variability in execution and what that meant for customer satification. Cywinski said, when he rejoined the brand from Brinker in 2017, there was an alarming gap between Applebee’s bottom and top performers. And the drag on the entire system was significant. Not just from a sales standpoint, but also how it affected the chain’s standing in the court of pubic opinion. There weren’t a few bad restaurants here and there; there were hundreds. Deliver one bad experience in today’s flooded marketplace and you’ve likely lost the customer for good, unless you lure them back with deep discounting that stresses franchisee profitability.
At the end of fiscal 2017, Applebee’s had 1,936 restaurants (all franchised). Now, there are 1,837 (69 company run). It plans to record a net closure of another 20–30 Applebee’s in 2019.
Cywinski said the split between high and low performers “tightened dramatically” this past year through those shutterings. The chain’s percentage of guests experiencing a problem, which Applebee’s quantifies on a daily basis, shifted south to the point where it’s at about 4 percent, he said. And as this improved, Applebee’s placed a premium on guest satisfaction and value for the money, not just value for the sake of value seekers. Abundance (all-you-can eat riblets and the 3-Course Meal Deal for $11.99, for example) leading the way.
Along these same lines, Dine Brands new leadership, which revamped the executive team nearly across the board over the past two years, brought with it a heightened sense of accountability and tougher standards, Cywinski said. “We hold our franchisees accountable. And interestingly, they want to be held accountable,” he said. “They applauded the actions that we've taken over the past two years to encourage underperforming units and underperforming operators to exit the system.”
Stephen Joyce, the former CEO of Choice Hotels, joined Dine Brands in September 2017. He called his first year at the helmed a “transformative” 12 months. Much to contrary earlier opinion, about 40 percent of Applebee’s customers are 34 and under, and that reality has shaped the chain’s menu and message. “Not only do we think we've got a brand with a history that people love, and we've returned to its roots, which is what people wanted us to do, but we've also got a strong youth component to our demographics that leads to a very favorable long-term future,” Joyce said.
Part of that boiled down to creating a new voice (get back to the neighborhood positioning) and then distributing it to the right channels. Dine Brands contributed $30 million to Applebee’s national advertising fund. Nearly all of the chain’s franchisees agreed to temporarily increase their advertising contribution rate by 75 basis points to 4.25 percent, Joyce said.
Take it away
Applebee’s latest marketing campaign, a “Runaround Sue,” themed spot, gave to-go a starring role. There’s a good reason why. The chain’s to-go business grew at a rate of about 30 percent in 2018. Applebee’s off-premises comp sales hiked 32 percent in 2018, driven mainly by double-digit traffic growth.
As the campaign reflected, to-go remains the top off-premises priority for Applebee’s. But delivery and catering are growing, too. To-go represents 11 percent of the chain’s current business. In the next three years, expect that number to get to 20 percent, Cywinski said.
Currently, close to 1,100 Applebee’s offer delivery (most are on DoorDash, but this includes some local partners). He said Applebee’s anticipates covering 1,500 units eventually, or basically the entire system.
Cywinski added that catering remains “very low-hanging fruit for a brand that is fundamentally a value- and variety-based brand.”
The off-premises whitespace is a leading reason why Dine Brands provided such positive guidance for 2019. “We've got, we think, leading ways of delivering our product with integrity into people's homes and offices and catering and other opportunities because we invested in the containers that we shipped in,” Joyce said. “So our product not only is being available electronically, it's also available in a way that you could receive it in store, in restaurant.”
“We haven't even really scratched the surface of the catering opportunity in both brands,” he added.
Inside the restaurant, Applebee’s continues to invest significant dollars in platforms that address customer friction points. Things like no-wait options, bring-your-own device services, and server tablet options.
A third brand?
Joyce has shared Dine Brands’ plans for a restaurant acquisition several times over the past year. He divulged some addition details in the call.
Dine Brands is looking to purchase a chain in the next 18 months, he said. Not a major acquisition, but something in the sub-$100 million range. This means a concept with 40–80 units that is immediately accretive, Joyce said.
It will come with a management team that is self-contained so Dine Brands doesn’t distract itself from IHOP and Applebee’s. And the chain will also have a founder and team that want to grow the concept nationally.
“What we provide is franchising expertise, capital and, obviously, franchisees. So the other part of that picture is we're only going to look at a brand that our franchisees want to build. So we've got a built-in audience,” he said.
“Franchise business is all about scale,” he added. “The more we can add to the scale, the better off we'll be, the better our margins will be, the better our franchisees' margins will be because our procurement will be better.”
With all that’s going on, Joyce said franchisee profitability can vary based on operating labor costs and the other cost burdens that come with inflation, as well as some of the initiatives Applebee’s rolled out. Even in the face of fairly steep labor cost increases, however, Joyce said, franchisees are seeing, in most cases, margin improvement due to the changes operators made in their operations models as well as the simplification work Dine Brands is doing in the kitchen. Franchise revenue rose more than 21 percent and gross margins improved by 670 basis points this past quarter.
“We're actually expecting our product cost to decline slightly this year, which will be a real boost for us. We've talked before about we've done an internal study and now made it permanent in terms of looking at ways to reduce cost and improve operations, both in the kitchen and in front of the house that are bearing fruit,” he said.
He said that could be worth, over the next several years, as much as 300 basis points in potential profitability improvement. And that’s going to be needed to offset labor costs as the market tightens.
“Those people going back to work are our customers. So there is benefit as well as cost and the higher labor pressure and that, obviously, is exacerbated in some markets versus some others,” Joyce said.