Two of the most iconic restaurant chains in the United States today are Applebee’s Neighborhood Grill + Bar and International House of Pancakes (also known as IHOP). At the heart of these two firms is a company called Dine Brands Global (NYSE: DIN). This operator, owner, franchise and exploitation of these restaurant concepts, is a very important player in the food space. However, the financial performance of the company has been quite erratic in recent years. On the positive side, the company is trading at levels that should be considered attractive. But if you keep in mind that there are other players in the market who are probably in better shape than there are, I can’t be so excited. After all, I’ve decided to value the business as a “hold-back” because while I don’t think it’s a bad opportunity, I certainly don’t think it’s great.
A dinner game outside
As I mentioned, Dine Brands Global is the owner, franchisor, and operator of Applebee’s and IHOP restaurant concepts. In all, the company’s system has 3,426 locations, most of which are located on the domestic market. Currently, the vast majority of these locations are franchises. For example, at the end of the last quarter, the company owned 1,675 Applebee’s restaurants, and only 69 of these were owned and operated by the company. Meanwhile, the company’s system includes 1,751 IHOP locations, none of which are owned and operated by the company. Most of these are franchised, while others are licensed.
These days, Dine Brands Global generates revenue from four key sources. Much of its revenue comes from the franchise rates associated with the thousands of restaurants in its network. The company also generates rental income from lease or sublease agreements covering 598 IHOP franchised restaurants and two Applebee franchise restaurants. A modest amount of income, mainly in the form of interest, comes from accounts receivable for equipment rentals and franchise commission notes. And the company also generates some revenue from the 69 restaurants managed by Applebee in its system.
The recent financial performance of Dine Brands Global has been quite varied. If we looked at the general trend from an income perspective, the picture would generally be positive. Revenue increased steadily year-over-year, from $ 731.7 million in 2017 to $ 910.2 million in 2019. The COVID-19 pandemic really affected, and reduced revenue to $ 689.3. million dollars in 2020. However, the company saw a drastic improvement in 2021, and revenues recovered mostly. to $ 896.2 million for this year. Much of the improvement in sales over the years has been as a result of positive comparable in-store sales. Under the IHOP brand, comparable store sales were positive in two of the three years prior to the COVID-19 pandemic. Then, in 2020, these sales plummeted by 32.8%. The good news for investors is that this fall was short-lived. In 2021, store sales comparable to this brand increased by 40.2%. The image has been less friendly when it comes to the Applebee brand. In two of the three years prior to the pandemic, store sales comparable to its system were negative, and the COVID-19 pandemic saw sales fall 22.4%. But as was the case with IHOP, comparable store sales improved significantly in 2021, up 38.2% year-over-year.
What has been disconcerting is the fact that the number of locations the company has in its system has only dropped in recent years. For example, the number of Applebee restaurants dropped from 1,936 in late 2017 to 1,680 in late 2021 before dropping to 1,675 that are open today. The image for IHOP has been more favorable. In fact, the number of units in its system increased between 2017 and 2019, from 1,786 to 1,841. But then, in 2020, the company saw the number of units drop to 1,772 before falling to the 1,751 that are in operation today. Management has said it plans to close between 5 and 15 clean restaurants this year. Thus, although revenue may have increased in recent years, this has been due to fewer restaurants. This trend is unsustainable.
From the point of view of profitability, the picture has been quite interesting. These revenues have been all over the map in recent years, from a low of $ 336 million negative to a high of $ 100.8 million. Operating cash flow has generally increased from $ 65.7 million to $ 195.8 million. During this same time window, EBITDA has followed a similar trajectory. Finally, it went from $ 193.7 million in 2017 to $ 250.8 million in 2019. In 2020, it only reached $ 135.9 million, while in 2021 it recovered mostly to 238.1 millions of dollars. Although the number of restaurants the company has in its system decreased, comparable store sales improved. For the Applebee’s brand, in-store sales grew 14.3%. And under the IHOP brand, we saw comparable store sales up 18.1%.
When it comes to the current fiscal year, the picture looks pretty mixed. Revenue is highest in the first quarter of 2022, reaching $ 236.4 million. This compares to the $ 204.2 million generated at the same time a year earlier. On the other hand, the company’s net income fell modestly from $ 25.1 million to $ 24.9 million. Operating cash flow also worsened, from $ 30.6 million to $ 7.8 million negative. Meanwhile, EBITDA is the only profit metric that has improved, from $ 52.7 million to $ 58.3 million.
When it comes to fiscal year 2022, the only direction given by management was EBITDA. They said that should be between $ 235 million and $ 250 million. At the midpoint, that would translate into a $ 242.5 million reading. If we apply the same year-over-year change to operating cash flow, that metric should add up to about $ 199.4 million this year. With this data, we can easily value the company. For the 2022 estimates, the price in multiples of operating cash flow should be 5.6. This compares with the 5.7 reading we get if we use the results of 2021. In the meantime, the multiple EV in EBITDA should be 8.8. This compares with the 8.9 we get if we use the data for 2021. To put the company’s price in perspective, I decided to compare it with five similar companies. In terms of the price of operating cash flow, these companies ranged from a low of 3.6 to a high of 10.1. And using the EV approach to EBITDA, the range was 4.3 to 10.8. In both cases, three of the five companies were cheaper than we thought.
|Company||Price / Operating cash flow||EV / EBITDA|
|Dine Brands Global||5.7||8.9|
|Brinker International (EAT)||3.6||5.2|
|Jack in the Box||10.1||10.8|
|Bloomin ‘Brands (BLMN)||4.3||4.3|
|The Cheesecake Factory (CAKE)||6.2||9.2|
|Arcs Daurats Holdings (ARC)||8.3||7.5|
From the data provided, I will say that I absolutely like the cheap shares of Dine Brands Global. At the same time, stocks seem to be more or less valued compared to similar companies. Add to that the fact that the company has a difficult history from the point of view of restaurant counting and, under the Applebee’s brand, has experienced some pretty rocky comparable store sales, and I find this to be an opportunity. hard to go back. While some profitability metrics have increased in recent years, this is not enough to become a buyer. In fact, at this point, I decided to rate the business as “retention.”