Applebee's And IHOP's New Strategies Will Refresh Customer Experience

Key Takeaways

• Remodeling restaurants and adopting dual branding aim to attract new customers and boost revenue through enhanced franchise appeal.
  
• Innovation in marketing and loyalty programs at Applebee's and IHOP's breakfast focus are expected to drive sales and improve margins.
  
• Leadership changes and declining sales, combined with macroeconomic pressures and rising costs, threaten Dine Brands' stability, revenue growth, and profit margins.

Catalysts

Owns, franchises, and operates restaurants in the United States and internationally.

• Dine Brands plans to remodel 30 Applebee's restaurants and convert 5 to a dual brand concept, enhancing revenue potential by capitalizing on new customer appeal and improving the franchise base.
  
• Investments in dynamic marketing strategies and an upgraded loyalty program at Applebee's are expected to increase traffic and sales, positively impacting revenue and earnings.
  
• IHOP's focus on strengthening its core breakfast and value offerings, combined with operational simplifications to enhance franchisee margins, is likely to drive sales growth and improve net margins.
  
• The continued success of the dual-brand concept, internationally and domestically, is anticipated to enhance unit economics and significantly boost revenues.
  
• Strategic refranchising of company-owned restaurants, after optimizing their operations and performance, is projected to unlock value and contribute to earnings growth.

Dine Brands Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dine Brands Global's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.8% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $67.2 million (and earnings per share of $4.78) by about March 2028, up from $63.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, up from 6.1x today. This future PE is lower than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Dine Brands Global Future Earnings Per Share Growth

Risks

• The departure of Applebee's President and leadership changes at Dine Brands could create instability or disrupt existing strategies, potentially impacting execution and resulting in lower revenue growth and net margins.
  
• A decline in comp sales for both Applebee's and IHOP, with Applebee's down 4.2% for the full year and IHOP's full year comp sales declining 2%, indicates potential challenges in retaining customer traffic, which could further impact revenues and earnings.
  
• Ongoing macroeconomic pressures, such as those affecting consumer spending among households earning less than $75,000, pose a risk to maintaining or growing existing customer base, possibly leading to decreased revenue.
  
• Increased commodity costs, particularly driven by the avian influenza outbreak affecting egg pricing, alongside inflationary pressures on other menu items, could reduce profit margins and impact net earnings.
  
• Execution risks associated with the strategy to take over and remodel 47 Applebee's restaurants, and the dual brand concept roll-out could lead to higher short-term costs and potential failure to achieve projected revenue gains.

Valuation

• The analysts have a consensus price target of $29.857 for Dine Brands Global based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $879.9 million, earnings will come to $67.2 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 11.4%.
• Given the current share price of $25.33, the analyst price target of $29.86 is 15.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.