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Deal for 66 Applebee's lifts parent firm

October 28, 2008|Jerry Hirsch | Hirsch is a Times staff writer.

The parent company of the Applebee's and IHOP restaurant chains saw its shares rise sharply Monday after the Glendale-based firm said it had agreements to sell 66 company-owned Applebee's restaurants in Texas and New Mexico to franchisees.

The deals helped calm DineEquity Inc. investors' fears that the company was falling behind in cutting the heavy debt load from its $1.9-billion purchase of Applebee's a year ago.

"We have exceeded our 2008 refranchising goal for company-operated Applebee's restaurants, and now have a total of 110 locations that have been sold or are under agreement to be sold," said Julia A. Stewart, DineEquity's chief executive.

Stewart said the deals removed from company ownership "the majority of Applebee's lowest-profit-performing markets," which she said should benefit DineEquity's financial performance.

Concern over the company's debt, amid a tough environment for financing sales of restaurant franchises as banks tighten credit, had pushed DineEquity shares down 91% through Friday from their record high of $68.40 in September 2007.

At the close of trading Monday, the stock rebounded $2.91, or 47%, to $9.06.

Monday's news was encouraging, Bryan Elliot, an analyst at Raymond James & Associates in St. Petersburg, Fla., wrote in a note to investors. The transactions enabled Dine Equity to lower its debt ratio "comfortably" below its loan covenant limits. He said the company was also benefiting from better-than-expected store margins at Applebee's.

DineEquity is doing with Applebee's what it did with IHOP, which is to control the brand but put ownership of individual stores in the hands of the franchisees.

The firm recently completed the sale of 15 company-operated Applebee's restaurants in Nevada. This year it sold 29 stores in Southern California and Delaware.

All told, the sales should reduce DineEquity's debt by $113 million, the company said. The firm's total long-term debt was $1.9 billion as of Sept. 30, down from $2.26 billion at the end of last year.

A big piece of the decline in the company's stock came early last month after the surprise announcement that Chief Financial Officer Thomas G. Conforti had resigned "to pursue other opportunities."

Conforti, with Stewart, engineered DineEquity's gamble to buy the Applebee's chain, dramatically expanding the company from its much smaller base business of franchising IHOP restaurants. With the takeover, DineEquity's revenue surged. The company now owns or franchises 3,300 restaurants nationwide.

Even after proving that it can complete franchise sales, DineEquity still has to deal with the difficult restaurant environment as strapped consumers eat out less often.

In its third-quarter earnings report, also released Monday, DineEquity said the IHOP chain's same-store sales inched up 0.2%, the 23rd consecutive quarter of growth.

But Applebee's same-store sales fell 3.1%, which the company blamed on "declining consumer spending and somewhat disappointing guest response to value promotions."

DineEquity had a net loss of $16.4 million, or 98 cents a share, after paying preferred-stock dividends. That compares with a loss of $11.6 million, or 69 cents, a year earlier.

The company said its latest loss stemmed from a $50.5-million rise in interest expenses related to the Applebee's acquisition and a charge of $28.3 million related to the sale of Applebee's stores in Texas, New Mexico and Nevada.

Revenue jumped to $391.2 million in the quarter from $91.4 million, reflecting the Applebee's purchase.



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