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IHOP to Stop Financing Site Development

The decision not to pay to build franchises is expected to free up cash flow but trim earnings.

January 14, 2003|Karen Robinson-Jacobs | Times Staff Writer

In a strategic shift, IHOP Corp. said Monday that it would stop financing development of franchised restaurants in its International House of Pancakes chain. The move is aimed at lowering company debt but also is expected to reduce revenue from franchising fees and cause earnings to drop by as much as 41 cents a share this year.

IHOP shares fell $1.43, or 5.8%, to close at $23.34 on the New York Stock Exchange. That's a 36% drop from the 52-week high posted in April.

The Glendale-based company currently develops its new restaurants -- selecting the sites, buying the land and funding construction -- then charges franchisees a $250,000 development fee while retaining ownership of the properties.

Analysts said the move brings IHOP, which already franchises more than 90% of its 1,100 restaurants, in line with the development model used by most fast-food operators and by family-dining rival Denny's.

"No one handles restaurant development according to IHOP's old model," said Joe Dennis, who covers IHOP for Sidoti & Co. in New York. "Financing franchisees? No one does that."

Dennis, who has rated the company a "neutral" for more than a year, said the move was prompted at least in part by concerns raised by IHOP's largest shareholder, Southeastern Asset Management. The Memphis-based company, which owns about 17% of IHOP, has long urged the company to find ways to return some cash to shareholders.

Other major shareholders, he said, were concerned the company was taking on too much debt to fund restaurant development. The new initiative, which will free up cash flow and allow the company to pay down debt, addresses both issues, analysts and company officials said.

"We now have an opportunity to reinvest our cash into something other than massive restaurant development," said Julia A. Stewart, IHOP's president and chief executive.

Even so, the loss in franchising fees is expected to result in earnings per share of $1.55 to $1.70 for the current fiscal year, which ends Dec. 31. That's down from the estimate for fiscal 2002 of $1.85 to $1.96 per share, the company said.

Stewart, who was named chief executive last spring, said the plan is the first major initiative under her tenure. In recent weeks, the company also named longtime director Larry Alan Kay as its new chairman and Tom Conforti as its chief financial officer.

Conforti said IHOP plans to spend as much as $140 million this year on new store development. That figure will decline to zero by 2005, he said.

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