Dine Brands Global's (DIN 0.13%) third-quarter earnings, released on Wednesday, illuminated softness in its Applebee's franchise, as the fast-casual eatery posted a second consecutive quarter of negative comparable sales growth, as well as a systemwide revenue decline. However, the benefit of a business model nearly evenly divided between two strong brands was also on display, as Dine Brands' IHOP chain picked up the slack.

As we sift through the quarter's details, note that all comparable numbers refer to those of the prior-year quarter.

A bird's-eye view of the third quarter

Metric Q3 2019 Q3 2018 Change
Revenue $217.4 million $194.1 million 12%
Net income $23.1 million $22.8 million 1.3%
Diluted earnings per share $1.36 $1.29 5.4%

Data source: Dine Brands Global.

Essential highlights of the earnings report

  • Comparable sales at Applebee's dipped by 1.6%, while IHOP's comps enjoyed their seventh consecutive quarterly increase, albeit with a slight advance of 0.03%. On a systemwide basis, revenue at Applebee's decreased by 3.8%; IHOP's revenue rose by 1.2%.
  • Excluding advertising fees collected from franchisees in both the current and comparable quarter, revenue of nearly $150 million improved by 22%. 
  • Applebee's continued to close underperforming stores during the quarter. The division shuttered nine domestic and two international locations over the past three months, ending the period with 1,804 restaurants. That represents a net decrease of 52 restaurants against the end of the prior-year quarter.
  • IHOP continued its modest but steady pace of unit additions, opening 18 locations and closing 10, for a net increase of eight locations, to 1,836. IHOP's quarter-end tally exceeds the prior-year period's ending total by 22 units.
  • Alongside its earnings release, Dine Brands announced that IHOP has signed its largest development deal ever, an agreement with TravelCenters of America to open up to 94 IHOP restaurants at TA and Petro-branded interstate travel centers across the U.S. over the next five years. Before the announcement, IHOP had placed only four units at TravelCenter locations.
  • Adjusted EBITDA inched up by 2% to $63.4 million.
  • Dine Brands repurchased $42.1 million worth of its own shares during the period, bringing its year-to-date common stock repurchase total to $90.1 million. 
  • Through the first nine months of the year, Dine Brands has realized net income of $77 million, versus $53 million in the comparable 2018 period. Higher net income and better working capital management have contributed to increased cash flow generation. Operating cash flow has expanded by 71% to $106 million during the first nine months of 2019.
A tall stack of pancakes topped with butter and syrup on a plate against a blue background.

Image source: Getty Images.

Management's perspective 

As I discussed earlier this year, comps at Applebee's have weakened in 2019 -- because of tougher comparisons against the prior year, but also from menu execution stumbles and changes to the chain's comparable store base. However, the division's performance is relatively stable following its turnaround over the past two years.

For the time being, then, IHOP is picking up the revenue slack through menu innovation beyond breakfast items, and moderate unit expansion. In the company's earnings press release, CEO Steve Joyce expressed confidence in both of Dine Brands' flagship chains:

We are pleased with our overall performance. Our business model continues to deliver robust margin expansion and generate significant adjusted free cash flow. IHOP achieved its seventh consecutive quarter of positive sales growth. While Applebee's faced a difficult comparison against very strong same-restaurant sales in the third quarter of 2018, we are confident in the brand's strategy that's in place. We are seeing significant unit growth opportunities as demonstrated by the largest multi-unit franchise agreement signed in IHOP's history.

Changes to Dine Brands' full-year guidance

Heading into the final three months of the year, Dine Brands adjusted its full-year comps expectations on Wednesday, lowering the comps growth goal for Applebee's from a range of 0%-1.5% to a new range of negative-1% to 0%. IHOP's comparable sales growth target was tightened from a previous band of 1%-3% down to 1%-2%. 

Dine Brands also narrowed its 2019 earnings per share (EPS) projection from $5.75-$6 to a new span of $5.70-$5.95. Shareholders of the restaurant stock focused as much on IHOP's new unit development potential as they did on comps and earnings adjustments: Shares finished the Wednesday session nearly unchanged from the previous day's close.