Can Applebee's and IHOP Return to Casual Dining's Summit?
The leaders of Applebee’s and IHOP will be the first to admit the company’s challenges can’t be solved with a name change. DineEquity Inc. is now Dine Brands Global, Inc. The switch was, in some ways, the visible manifestation of changes that have been churning for months—fixes necessary to reroute the largest casual dining brands in America. In early March, Dine Brands held a presentation for investors to explain some of these rolling initiatives in detail, and provide a window into what the future might actually look like for Applebee’s and IHOP amid a rapidly changing landscape.
First, let’s examine where Dine Brands was when it flipped the branding switch. Applebee’s domestic same-store sales rose 1.3 percent in the fourth quarter versus the prior-year period. IHOP’s domestic comps dropped 0.4 percent. For fiscal 2017, same-store sales declined 5.3 percent at Applebee’s, while IHOP saw a 1.3 percent fall.
Positive comps are great, of course. And even with the fact that prior-year period was a 7.2 percent decline, year-over-year, it’s promising to see Applebee’s replace the red ink.
Here’s what the past eight quarters have looked like:
- Q4 2017: 1.3 percent
- Q3 2017: -7.7 percent
- Q2 2017: -6.2 percent
- Q1 2017: -7.9 percent
- Q4 2016: -7.2 percent
- Q3 2016: -5.2 percent
- Q2 2016: -4.2 percent
- Q1 2016: -3.7 percent
If you look back from December 31, 2017, Applebee’s compound annual growth rate has shown a 6.6 percent decline in revenue. It’s also worth viewing those comps in regards to a changing system. Applebee’s had 2,016 total restaurants at the beginning of the 12-month period that ended December 31, 2017. That fiscal year saw 99 restaurants close (86 domestic)—a net reduction of 80 units. There were 1,936 Applebee’s as of December 31, 2017 (there are 1,782 domestic stores currently across 35 franchisees). The company expects to close another 60–80 in fiscal 2018. Dine Brands said it’s hoping to return to traditional and non-traditional development by 2020 and have about 1,750 Applebee’s at that time. Also, 92 percent of restaurants were remodeled between 2012–2015.
By country, Dine Brands operates 3,453 locations in the U.S. Otherwise the portfolio is as follows: Canada 44; Mexico 98; Dominican Republic 3; Guatemala 7; Costa Rica 3; Panama 4; Chile 1; Brazil 9; Egypt 1; Puerto Rico 10; Lebanon 1; Kuwait 13; Bahrain 3; Qatar 8; UAE 16; India 1; Thailand 1; Guam and North Mariana Islands 4; Saudi Arabia 35; Indonesia 2. Key target markets include: Mexico, Canada, and the Middle East.
Looking internationally, there are growth opportunities. Applebee’s ballooned from 206 to 269 restaurants from 2013 to 2017. From 2018 to 2022, Applebee’s expects to ramp that rate to 200 additional restaurants.
So what’s going to change? It starts at the top. Applebee’s president John Cywinski joined the brand in March, leaving his post as executive vice president of Brinker International, the parent company of Chili’s and Maggiano’s Little Italy. Dine Brands CEO Stephen Joyce, the former chief executive officer of Choice Hotels, stepped into his role in September. He was a member of the company’s board of directors for the past five years and arrived with almost 40 years of experience in the hospitality and food and beverage industries.
In fact there are 10 major executive changes, including: Greg Bever as SVP and chief people officer; Steve Levigne as VP consumer insights; Joel Yashinsky as SVP, chief marketing officer; Kevin Carroll as SVP, operations; Stephen Bulgarelli as chief culinary officer; Brad Haley as CMO of IHOP; Carrie Stojack as VP consumer insights; and Nevielle Panthaky as chief culinary officer.
A turnaround story
Here were some highlights Dine Brands stressed as key points to begin:
- Significant Scale in the U.S.
- Expanding International Presence
- Favorable Guest Dynamics
- 100 Percent Franchised Model with Strong and Improving Franchisee Base (Applebee’s has 60 franchisees globally and franchisees operate an average of 32 units. At IHOP, there are 321 franchisees globally, with franchisees operating an average of five units).
- Leader in U.S. Family and Casual Dining
- Robust EBITDA Margins
- Substantial Cash Flow Generation
- History of Significant Capital Return
- New Strategy, Culture, and Philosophy
Courting the (right customer)
Much has been said about Applebee’s inability to chase down millennial and younger diners. But how accurate is that sentiment? Dine Brands’ breakdown of its actual audience tells a slightly more complex tale.
Currently, this is how business is breaking down:
- Late-night: 14 percent
- Afternoon: 15 percent
- Lunch: 23 percent
- Dinner: 48 percent
It’s also interesting to look at Applebee’s traffic by guest age demographic, which might surprise some people.
- 27 percent of guests are 55-plus
- 28 percent are 34–35
- 30 percent are 18–34
- 15 percent at under 18
That equates to 45 percent of guests being ages 34 and below.
By generation traffic looks like this:
- Gen Z: 15 percent
- Millennial: 29 percent
- Gen X: 28.3 percent
- Baby Boomers: 26.4 percent
Applebee’s said it is targeting guests who prefer casual-dining chains, those willing to pay more, are more loyal, typically loyal, and value seekers. These guests typically jump from casual chain to casual chain looking for the best deal, not a specific menu item. Think the Dollarita, Dollar Long Island Iced Tea, Dollar Bahama Mama, and other promotions Applebee’s has unveiled in recent months. Alcohol accounts for 15 percent of sales presently, and is helping attract those younger customers.
This leads into the technology changes Applebee’s plans to make, including server tablets, tableside payments, and WiFi. Online ordering is now available nationwide and Applebee’s said it is currently testing delivery in select markets. Just last week, Applebee’s announced an enhanced to-go platform highlighted by a redesigned mobile app and online ordering setup.
“Applebee's To Go has undergone a makeover aimed at better serving guests, with updates to the mobile app and website, the introduction of new To Go packaging and an elevated focus on operational execution, all done to improve the guest experience," said Scott Gladstone, vice president, strategy and off-premise at Applebee's, in a statement.
This includes carside arrival notification and carside hand-held transacting.
Off-premise business accounts for 9 percent of total sales at Applebee’s. The company expects to double that by 2022.
Back to the balance
A lot of this comes down to the numbers.
In fiscal 2017, Applebee’s had domestic systemwide sales of $4.1 billion and franchise revenue of $169 million.
By 2022, Applebee’s is predicting CAGR revenue to grow 3 percent and for profitability to go from 82 percent to 98 percent, taking a dip in 2018 before rising to that number.
The chain also wants to increase its average-unit volumes by $300,000 by 2022. Applebee’s has seen this number declined to $2.3 million in 2017 versus $2.5 million in 2015.
Here’s what Dine Brands says needs to change to achieve its 2020 vision:
- Significant Investment in Existing Brands
- Continued Partnership with Franchisees
- Greater Emphasis on Data and Analytics
- New Technology to Enable Future Growth
- G&A Expense Discipline
- Shifting Capital Allocation Priorities
- Scalable Platform for New Opportunities
- Strong Projected Financial Performance
From an investment standpoint:
- Remodels and culinary innovation
- Enhanced traditional & digital marketing
- Dedicated training and operations
- Technology to enable greater guest access
- New growth platforms (e.g., To-Go, new formats)
- Data insights and advanced analytics
- Reassigning key functions to create greater efficiency for both brands
Can Applebee’s get there? There are some significant dollar changes that need to take place.
Follow the cash flow
Applebee’s had $63 million of adjusted free cash flow in 2017. In 2018, the brand expects $94–$114 million, including $30 million in corporate ad fund contribution. By 2022: $175 million-plus.
From now until 2022, Applebee’s hopes for low-single digit growth of 3 percent in revenue (2 percent of IHOP and 15 percent international). Dine Brands predicts EBITDA to go from $224 to $315-plus at mid-single digit growth and 46 percent margin to expand to 56 percent. Adjusted earnings per share to increase in the high teens to $10-plus from $4.15.
The equation for shareholders: adjusted EPS growth of high teens plus 4.7 percent divided yield equals expected total shareholder return of 20 percent.
Diving deeper, Dine Brands explained its shifting capital allocation priorities. The company reported quarterly cash dividend of 63 cents per share in Q1 2018 (so far) or $2.52 per share annualized with a payout ratio of about 44 percent (based on an approximate mid-point of 2018 guidance for adjusted free cash flow of $104 million). Dine Brands said this represents an opportunity for meaningful share repurchases.
“We believe the change in our quarterly dividend to a more appropriate dividend yield will result in a favorable capital allocation framework and provide us the opportunity for meaningful share repurchases, investments in our brands as well as opportunities to scale our business,” Joyce said in a statement.
The company’s dividend yield, assuming a common stock price of $54, remains top of class at 4.7 percent when measured against a peer category of 2 percent that includes Darden, Cracker Barrel, Brinker, Texas Roadhouse, Bloomin’ Brands, Cheesecake Factory, Buffalo Wild Wings, BJ’s Restaurants, and Red Robin.
There 1,671 domestic IHOPs across 301 franchisees. The brand had fiscal 2017 systemwide sales of $3.3 billion to go along with franchise revenue of $185 million.
Naturally, IHOP’s traffic kind of flips Applebee’s.
- Late night: 7 percent
- Dinner: 16 percent
- Lunch: 28 percent
- Breakfast: 49 percent
IHOP said this breakfast traffic is growing as well. In the past three years it has risen by 4 percent in 2015, 2 percent in 2016, and 1 percent in 2017.
The chain said this audience is loyal. Eight in 10 consumers surveyed said they love the brand; 63 percent said IHOP is always coming up with something new; 51 percent said it’s cool and up to date; 43 percent said it’s on its way up; and 42 percent said IHOP is not afraid to take risks. Clearly, IHOP has some runway for innovation. Its core is appreciated and admired, but it could use to shake the offerings and message up.
The brand came up with a consumer insights team to achieve just that.
By demographic, IHOP’s traffic looks like this:
- 25 percent are 55-plus
- 26 percent are 34–35
- 29 percent are 18–34
- 20 percent are under 18.
Meaning, half of the chain’s guest are younger than 35.
To bolster this, IHOP has a new marketing campaign driven by celebrated agency Droga5 that focuses on “Pancakes, Pancakes, Pancakes,” and was introduced to kick off the brand’s 60th anniversary and free pancake promotion. Read more about the marketing change here. There are plenty of commercials and digital media in the works for 2018 as IHOP looks to elevate its relevance across all social and digital channels.
Some quick results: IHOP had 42,376 social mentions of “home” in IHOP conversation last year.
Remodel and go
IHOP’s average unit volumes have stayed relatively steady at $1.9 million in 2017. They were $2 million in 2015. This could be on the upswing thanks to a Rise N’ Shine Remodel program that completed 620 units since 2016—about 37 percent of the total domestic system. These units have seen low single-digit sales improvement.
As for development, IHOP expects to have 1,900 or so restaurants by 2022, including the development of non-traditional restaurant formats, like it’s airport locations in Dallas/Fort Worth (its first post-security airport location) and Hartsfield-Jackson Atlanta International Airport.
Convenience is key
IHOP launched its to-go platform nationwide in mid-November. The IHOP ‘N GO platform includes online ordering, a mobile app, and delivery in some markets. It’s live across the system. IHOP has seen strong check lift from off-premise. In Q3 2017, from call-in orders, IHOP was reporting average check of $15.22. Online orders were $20.43. In Q4 those numbers were $15.36 and $22.12, respectively.
The final story
IHOP hopes to grow its CAGR segment revenue on the franchise side 4 percent by 2022 and rental and financing revenue 2 percent. Segment profit it hopes to increase 3 percent to $225 million-plus.
With all of this said, can Dine Brands right the ship? Casual dining as a whole is a complicated field but it's ripe with opportunity. Off-premise and technology are tools that were in their infancy a couple of years back when the segment slipped into alarming territory. A lot of chains are turning the corner, especially in regards to traffic, and especially this past quarter. Much of that can be attributed to a savvy view of the current customer and the ability to evolve with technology as the company’s guardrail. Applebee's and IHOP possess strong brand value and have significant buying power. It comes down to whether or not leadership figures out how to leverage these strengths to the best potential and figures out how to meet customers—today and in the future—at the intersection of innovation and loyalty. And it all starts now.