IHOP's Short Stack

The earnings IHOP (NYSE: IHP  ) reported yesterday weren't as delicious as Wall Street had hoped.

Excluding stock-based compensation, earnings per share (EPS) were flat year over year at $0.60, though net income fell 13.6% to $10.31 million. Share buybacks saved the EPS figure's bacon, but it still disappointed analysts who had ordered $0.63 per share. And when you account for stock-based compensation, those earnings slip to $0.56 per share. On the other hand, earnings for the first half of the year are up 12.7% year over year, and the company still expects to meet full-year EPS targets.

Revenue of $85.07 million also missed expectations, but year-over-year same-store sales growth was a respectable 3.1% for the quarter, driven by increased traffic. Promotions such as the Cinn-A-Stack definitely appear to be working for IHOP, and the company has three more planned for the year, including the current funnel cake-related campaign.

As fellow Fool John Bluis pointed out after last quarter, revenue growth remains IHOP's weak spot. Last quarter it was 3%, and this quarter it fell to 2.6%. Franchise growth over the next several years will help boost these numbers; the company is expanding into Mexico and the U.S. Virgin Islands while continuing to grow in the U.S. and Canada.

IHOP does keep a few company-owned restaurants, all in the Cincinnati, OH market, where it tests out new promotions, concepts, and other changes -- even silverware design -- which it might want to adopt systemwide. The company just opened its seventh store in Cincinnati, and has plans for three more by the end of the year.

Foolish investors who follow cash flow should note one final fact. There will probably be a one-time improvement of $14 million-$15 million in cash flow from operations in the third quarter, thanks to an acceleration in the depreciation of certain fixed assets. This will also affect net income on a GAAP basis.

As chairman, president, and CEO Julia Stewart reminded listeners to the conference call, it's better to focus on the longer-term annual results rather than go quarter by quarter. So far this year, IHOP seems to be doing fairly well in a tough competitive environment. Both quarters saw increases in same-store sales and traffic, and the company continues to focus on its core strengths and bring in more customers through promotions. Given these improving metrics, IHOP may be worth a closer look to see if it would make a tasty investment.

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Fool contributor Jim Mueller says he's going to have to try IHOP's promotional breakfast menu items. Just don't blame us if he stays there too long. He does not own shares in any company mentioned. The Fool is investors writing for investors.

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