One Bad Applebee's

Applebee's (Nasdaq: APPB) first-quarter numbers don't make for the most comforting reading, but word of a new menu might help its investors -- and customers.

The income statement released Wednesday with the earnings report showed that higher cost of sales and a $1.6 million impairment charge for store closings took a big bite out of operating margins, which dropped to 12.4% from 15.9%. The addition of stock-based compensation expenses was a factor in this decline, as well.

The second problem is with the same-store sales numbers. Overall first-quarter numbers were acceptable, as sales increased 2.6%. On the other hand, the numbers in the most recent monthly breakdown don't look so sweet. Systemwide same-store sales were 1.4% for March and minus 0.1% for April. Based on adjustments due to the timing of Easter, guest traffic in each month declined an abysmal 5.5%.

Management's response was that first-quarter results were generally in line with expectations, and significant improvements were not expected until innovative menu changes were marketed with an evolving advertising campaign. However, I'm not sure what type of improvements can be expected with the new Steakhouse Inspirations menu.

The new fare will be promoted by the same Applebee's Guys who annoyed numerous basketball fans during March Madness with their Shrimp Sensations tales. Can putting these guys in new outfits and using the same basic TV spot format the company has used for years be classified as an advertising evolution? At least when Dave Thomas was in practically every Wendy's (NYSE: WEN) commercial for years, there was something funny or catchy enough for me to pay attention to. My confidence in management's new plan to attract or even retain patrons is falling fast.

The final issue the company faces is its increasing debt load. Long-term debt increased $27 million during the quarter and is now $207.8 million. This raised interest expenses to $2.6 million, from $300,000 last year. But the bottom line is that instead of focusing on growing shareholder value, the company seems content with building as many restaurants as it can in any way possible. A look at recent return on invested capital numbers shows that the company is becoming much less effective in using its capital.

	2004	2005	Q1 2006*
ROIC	18.5%	15.1%	13.2%

* Trailing-12-month returns

Those numbers are starting to come at a cost, and if management isn't careful, it's going to be in the crosshairs of angry shareholders.

For more Fool food talk:

• Panera overindulgence may have gone to my head.
• Yum! Brands has been feeding its growth.
• Is McDonald'sunderdone?
• Will Bill Clinton be made king?
• I may have made reference to Applebee's in this piece.

Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.