Our nation's current coronavirus pandemic hit the restaurant industry hard. Economic shutdowns forced businesses to shutter their doors, and most were not equipped to entirely make up for lost sales through delivery and carryout services.
While this recessionary period brought on by the COVID-19 pandemic has been painful, there are indications that it might be relatively short-lived as recessions go. Biotech companies continue to race for a vaccine in record-setting time, and new therapeutics to ease the disease's worst health effects could come even sooner. Our world will eventually overcome this daunting challenge and get back to some sense of normalcy.
When it finally does, restaurant stock Dine Brands Global (DIN 0.86%), the parent company of Applebee's and IHOP restaurant chains, will be there to take advantage. Here are three reasons why this company can succeed again.
Image source: Applebee's.
1. Solid financials
With 75% of Dine Brand's locations across the country still closed to in-store dining, or operating at greatly reduced capacities, sales are way down. Dine Brands' balance sheet is what will allow the company to weather this slowdown. Early in the crisis, CEO Stephen Joyce bolstered his company's liquidity with a successful cash raise in the debt markets. Cash and credit lines will allow the company to endure roughly a 10-quarter cash burn with zero sales. To further bolster liquidity, Dine is temporarily halting both its dividend and common equity repurchase programs.
With some IHOP and Applebee's locations already opening back up and delivery/takeout generating 15% of this company's normalized sales, Dine Brands seems to be coping with COVID-19 well. In both IHOP and Applebee's, the sales hit from the dine-in business was partially offset by strong growth in off-premise sales. From the start of the pandemic, Dine Brand's two chains both boasted triple-digit growth in delivery and take-out sales combined. Net income for the quarter fell nearly 50% with temporary shutdowns. With ample cash on hand and locations opening back up it seems Dine has endured the worst of the shutdowns.
2. Growth prospects
Most investors look at Dine Brands as a value stock, but the company realizes it must also demonstrate it has growth prospects. A new Quick service restaurant chain is how Dine Brands plans to generate growth.
The company is debuting its fast-casual concept called Flip'd later this year. The Flip'd restaurants will borrow from the iconic Chipotle Mexican Grill ordering line method and create pancake ordering lines where customers can pick from savory and sweet toppings provided on a made-to-order basis. Several IHOP favorites will be featured on the menu, and locations will be in dense urban areas like Atlanta and New York City to maximize foot traffic.
Company executives view the quick-service restaurant (QSR) competitive landscape as crowded for lunch and dinner but ripe for disruption in breakfast. Dine's omnipresent IHOP brand should aid in customer awareness while its fresh take on food prep should generate incremental interest from new customers. A convenient kiosk will feature all the digital ordering options Chipotle has brilliantly leveraged to jump-start its growth.
For so many quick-service stocks, this has been the model for success. If done right, it can be the same savior for Dine Brands. QSR competitors like Wingstop and Shake Shack have been leveraging this trendy concept to generate impressive growth and strong investor sentiment that has elevated their stock prices to lofty heights. If Dine can successfully engineer a transition to this dining segment, it's reasonable to think investors will reward it with an earnings multiple more in line with other QSR stocks.
3. A smart decision
Dine's recently completed asset rationalization will be key to expanding profit margins. Joyce's team shuttered 200 (around 15%) of the worst-performing Applebee's locations. By focusing its efforts on stronger locations, Dine Brands helps keep struggling restaurants from weighing down the rest of the portfolio. Freed from the burden of paying fixed costs at challenged locations, Dine can aggregate investments into other initiatives. For example, this gives Dine Brands a better chance to create a winner out of Flip'd.
What this means for investors
The company's stock is currently trading at roughly 46% off its mid-February high. It trades for multiples of 8 times 2019 earnings and 7 times 2019 cash flow. Earnings in 2020 will inevitably be much worse, but those adjusted estimates still place a 14-times-earnings multiple on the company compared with a current S&P 500 earnings multiple approaching 23.
If this recovery continues, Dine Brands has the resources to weather this storm and easily get back on track in 2021. When it does, earnings should recover and the stock price should respond favorably. Even if the rebound disappoints short-term, a partial recovery in long-term earnings would make Dine Brands stock less expensive than the overall market.
The coronavirus halted the hospitality industry and crushed stock valuations: Dine Brands was not spared. While this company remains in fragile condition, it's already recovering, its financials are not stressed, and growth efforts are underway. I believe the brightest days are ahead for the owner of IHOP, Applebee's, and the coming Flip'd. Soon, I will strongly consider taking my first bite as an investor.
