Shifting Consumer Tastes And Rising Costs Will Challenge Legacy Outlets

Key Takeaways

• Shifting consumer preferences and increased competition are undermining Dine Brands' legacy brands, threatening same-store sales and long-term revenue growth.
  
• Rising labor, real estate, and operational costs are compressing margins and weakening franchisee and company profitability.
  
• Shifting consumer preferences, digital engagement, franchised growth, menu innovation, and strong franchisee confidence position Dine Brands for sustainable revenue growth and improved profitability.

Catalysts

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

• Demographic changes and shifting consumer preferences toward fast-casual, healthier eating, and diverse culinary experiences will likely continue to erode the traditional customer base for IHOP and Applebee's, resulting in long-term declines in same-store sales and stalling revenue growth.
  
• Heavy reliance on the two legacy brands, limited diversification, and slow international penetration will leave Dine Brands especially vulnerable to brand fatigue and competitive encroachment, putting persistent downward pressure on franchise revenue and overall earnings.
  
• Labor cost inflation and tightening labor markets are expected to drive up wage and benefits expenses for franchisees, and with operating margins already declining, continued cost inflation will squeeze net margins and dampen earnings growth for both company-operated and franchised units.
  
• The rapid acceleration of digital transformation and new delivery models, including ghost kitchens and third-party platforms, is empowering new entrants and established competitors, threatening Dine Brands' market share and eroding its pricing power, ultimately constraining traffic and compressing system-wide margins.
  
• Rising real estate and occupancy costs, particularly as Dine Brands attempts to revitalize and remodel aging store bases, will increase franchisee overhead, limit new unit expansion, and weigh on rental and royalty revenues, undermining long-term topline and profitability improvement.

Dine Brands Global Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Dine Brands Global compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Dine Brands Global's revenue will grow by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.6% today to 6.3% in 3 years time.
• The bearish analysts expect earnings to reach $59.0 million (and earnings per share of $4.4) by about July 2028, up from $53.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Hospitality industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Dine Brands Global Future Earnings Per Share Growth

Risks

• The continued growth in off-premise dining, as demonstrated by increasing off-premise sales at both Applebee's and IHOP, supports higher sales volumes and offers a long-term avenue for revenue growth as consumer preferences shift toward convenience.
  
• Rapid adoption of digital technologies and loyalty programs-such as the robust growth in Club Applebee's membership and the evolution of IHOP's digital and loyalty platforms-positions Dine Brands to capitalize on personalized marketing, repeat visits, and customer retention, which can boost transaction frequency and topline sales.
  
• The asset-light, franchised business model enables Dine Brands to maintain scalability with lower capital investment, allowing for attractive net margins and improved return on invested capital as franchisees continue to invest in renovations, remodels, and new concepts.
  
• Menu innovation and brand revitalization efforts-including frequent new food offerings, value-based menus like 2 for $25 and House Faves, and successful marketing activations-are driving improved customer traffic trends and have led to recent sales and traffic momentum, which can mitigate long-term risks to same-store sales and support earnings recovery.
  
• Strong franchisee engagement and growing interest in expanding or converting restaurants to dual-brand formats domestically and internationally reflect confidence in the brands and their strategies, indicating potential for accelerated unit growth and greater revenue diversification over the long term.

Valuation

• The assumed bearish price target for Dine Brands Global is $21.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Dine Brands Global's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $930.9 million, earnings will come to $59.0 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 11.6%.
• Given the current share price of $25.93, the bearish analyst price target of $21.0 is 23.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.