Daily Double
October 7, 1999
By
Ticker: (Nasdaq: APPB)
Phone: 913-967-4035
Website: www.applebees.com
Price (10/6/99): $33 7/8
How Did it Double?
Equity pickers, take note. Applebee's is ripe, delicious, and back in season. It's always been an unpredictable harvest with Applebee's. The world's largest casual dining concept has seen its shares rocked hard in the spring of 1994 and early in 1996. As fickle patrons wander elsewhere, the comps fall, the franchisees as questions, and the shareholders suffer.
Two years ago, as the company was getting back on track yet again, its largest franchisee announced it wanted out. Apple South, today reorganized as Avado Brands (Nasdaq: AVDO), made the announcement in December 1997 and fiscal dessert orders went uneaten.
Morale was sure to be low, specifically at the many Apple South locations, until the transitions were complete. With the price of Applebee's shares in the teens well into 1998, would the company bounce back?
You know it. The Apple South divestiture was completed much earlier than analysts expected. Despite the turmoil, earnings per share rose 17% last year -- exceeding the company's 15% annual growth target.
This year brought even better tidings. A successful $17 million ad campaign has helped same-store sales climb higher this year. In April, Applebee's got into the spring cleaning act by selling its non-Applebee's restaurants, including the once-promising but now struggling Rio Bravo Cantina.
Investors are back at the table, ordering up shares with a side order of optimism. Applebee's is more than willing to serve up the gains.
Business Description
With 1,106 company-owned and franchised namesake eateries, Applebee's rules the roost in the realm of casual dining. Its menu features mainstream bistro fare. The company's first restaurant opened in Atlanta in 1980 as T.J. Applebee's Edibles and Elixirs.
Two years later the company opened and second unit and was acquired by W. R. Grace & Co. (NYSE: GRA) in 1983. Five years and a name change to Applebee's Neighborhood Grill & Bar later, Grace sold the chain to its Kansas City franchisees.
With just 54 units in tow, the new company went public a year later. Last year, Applebee's became the first concept with 1000 locations and $2 billion in systemwide sales.
Financial Facts
Income Statement
12-month sales: $677.8 million
12-month income: $47.5 million
12-month EPS: $1.60
Profit Margin: 7.0%
Market Cap: $992.5 million
Balance Sheet
Cash: $6.5 million
Current Assets: $36.0 million
Current Liabilities: $64.8 million
Long-term Debt: $99.8 million
Ratios
Price-to-earnings: 21.2
Price-to-sales: 1.5
How Could You Have Found This Double?
Hungry diners might not care much for surprises, but Wall Street certainly appreciates them. This year Applebee's has surpassed analyst earnings estimates every single quarter. When analysts can't keep up with surging fundamentals, it's worth noting.
Then again, Applebee's hasn't been able to keep up with itself either. After a stellar second quarter, complete with record-breaking profitability, the company announced that it expected earnings to come in at $1.90 to $1.92 a share for the full year. Two weeks ago the company upped the ante to $1.94 to $1.95 per share.
The concept is now on fire, but a Double seeker didn't need to wait this long to figure it out. Last year, Apple South left with a bang. The units were being sold faster than anticipated, and for a sum that was $50 million more than initially projected.
What was the lesson here? The new franchisees were clearly in a better position to analyze the company than the bearish public. They were bidding up Apple South's units while Wall Street was bidding down the stock. Sensible? Not really. The insiders knew. Applebee's was also conducting a $100 million stock buyback. Again, the insiders knew.
Where to From Here?
Given the handsome returns from this year's TV ad campaign, the advertising budget will more than double next year. And with the strong unit-level performance taking place, the franchisees probably won't mind that the national ad fund will be rising to 2.1% of total sales.
For a company on a roll, and with a well-communicated goal to achieve 15% bottom-line growth every year, it's interesting to note that analysts expect earnings of just $2.20 a share next year -- that's just a 13% spike. Are the analysts setting themselves up for another year of upside surprises?
Probably. With more than a 100 units set to open over the next year, most of those franchised, it will only take a few ticks of improvement at the restaurant level to push actual results a few pennies higher.
Considering the $37 million marketing campaign for next year, and an ongoing share buyback that has bought back 1.3 million shares over the first half of this year (at an average price of $28 1/2 per share), it seems to be only a matter of time before the analysts begin revising estimates closer to $2.25-$2.30 per share come next year. That's when the fiscal dessert gets eaten.
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