Home > Stock Analysis

IHOP's Griddle Will Sizzle In 2008

Posted: Feb 29, 2008 11:23 AM by Glenn Curtis

Tickers in this Article: EAT, DENN, IHP

On Wednesday before the open of the market, casual dining chain IHOP (NYSE:IHP) reported a fourth quarter loss of $16 million, or 94 cents per share. Despite the double helping of red ink, I think there's little doubt that the stock will be a winner in 2008.

Get Free Stock Analysis By Email

Most of the recent quarter's problems came down to heavy costs from its acquisition of Applebee's. Now that the deal is done, IHOP can get on with the business of making money and possibly pancakes.

Acquisition Indigestion
The most recent quarter was crippled by what is known as swap transaction. A swap contract was entered into to hedge IHOP's interest payments on notes that were issued to facilitate the Applebee's deal, which it acquired in late November 2007. Once the deal was finalized IHOP had to book a $16.1 million expense in the period. (To learn how companies benefit from swaps, check out An Introduction To Swaps.)

Excluding the charge, IHOP actually made one penny per share. That's not a lot, but baked into the bottom line were a mess of general & administrative expenses related to Applebee's and $4.3 million in asset impairment and closure charges. I suspect that the equation will begin to change in 2008, because by year end, Applebee's will be baked into the results for a full 12 months.

The Applebee's Appeal
The Applebee's acquisition gives IHOP a chance to expand its scope beyond the typical breakfast crowd and to compete in earnest for lunch patrons and the lucrative dinner crowd. Remember Applebee's has bars in their locations too; this could translate into big dollars for IHOP.

Perhaps even more importantly IHOP will franchise some Applebee's locations. This move could boost margins going forward and bring in cash. IHOP expects to generate $480-490 million in after-tax cash proceeds with its plans to franchise approximately 100 company-operated Applebee's restaurants and the sale leaseback of approximately 190 company-owned locations. I feel the analyst and the investment communities, which had hoped that IHOP would find a way to capitalize on the transaction, will bid up the stock as the plan moves forward. (To read about the ups and downs of franchise life, see Share The Wealth With Franchises and Is Buying A Franchise Wise? )

Finally, Applebee's adds diversity to IHOP. Pre-acquisition IHOP carried just over 1,300 locations and most of them were located in the U.S, Canada, Mexico and the Virgin Islands. Applebee's adds almost 2,000 locations in 49 states and 17 countries, and its diverse revenue base will also help mitigate risk.

Same-Store Growth on the Move
Another thing that piqued my interest is IHOP's same-store-sales results. In Q4, it posted a respectable same-store-sales increase of 3.7% which shows business is picking up and the new menu items, including barbecue ribs and chicken, are attracting new foot traffic. And looking forward in fiscal 2008, management expects comps for the IHOP system to grow 2-4% with Applebee's expected to show between 1-2% positive comps.

For Applebee's, this represents a departure from the negative 2% comps it saw in the first three quarters of 2007. And for the overall picture this is better than the negative 1-2% same-store results that competitor Denny's (Nadsaq:DENN) expects to generate. It's also better than negative single-digit comps from competing chain, Chili's, operated by Brinker International (NYSE:EAT). IHOP must be confident in its ability to lure foot traffic despite competition and the difficult economy.

Bottom Line
IHOP's Q4 might have appeared a little rough around the edges at first, but with its same-store-sales expected to rise and Applebee's now in the fold I think that 2008 has the potential to be a terrific year for the company.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS