The smell of breakfast will be here soon. Tomorrow morning, IHOP (NYSE:IHP) announces earnings for the second quarter. The company did quite well last quarter and reported growing traffic for the second quarter. The earnings report might very well be delicious.

What analysts say:

  • Buy, sell, or waffle? The seven analysts with ratings on IHOP are just about evenly split. Four say buy, and three say hold.
  • Revenues. Three estimates average out to $86.77 million, about 5% above last year.
  • Earnings. Five estimates here, coming to a consensus of $0.63 EPS, just above last year's $0.62 EPS result.

What management says:
In the release announcing the second quarter's traffic growth, Julia A. Stewart, IHOP's president, chairman, and chief executive officer, said, "We demonstrated our ability to generate sustained sales momentum throughout the IHOP system and produced a 3.1% increase in same-store sales growth. We accomplished this by offering appealing, limited-time promotions that motivated guests to visit our restaurants and by delivering an attractive price/value relationship that kept guests coming back to IHOP. ... We are particularly pleased that we were able to drive this level of growth in the face of a difficult consumer spending environment and at a time when our closest competitors are experiencing weaker sales results."

Here's an interesting tidbit showing that the company appears to be doing stuff right. While their Waikiki location did not contribute to same-store sales growth, being open only one month, it certainly did not hurt overall revenues, either. This location brought in the third-highest sales for the entire chain for that month. The tourists and locals surely enjoy their big breakfasts.

What management does:
Management uses a mystery diner program to continuously evaluate its locations on an "A" to "F" grading system. Last quarter, they said that 87% of their stores had been rated "A" or "B" on this scale, a large improvement over the previous year. Good ratings should lead to higher traffic, as people are more willing to come back to places with pleasant experiences. This bodes well for the company as it continues to attract new franchising opportunities. Fortunately for shareholders, operating and net margins continue to increase.

Margins %*

12/04

3/05

6/05

9/05

12/05

3/06

Franchise**

51.1

50.9

51.8

51.8

52.9

53.5

Rental**

27.6

27

26.8

26.8

25.2

25.5

Operating

15.1

15

18.7

20.4

20.4

21.3

Net

9.3

9.2

11.5

12.5

12.6

13.2

Sales Growth %***

(8.1)

(6.6)

(3.8)

5.5

(6.8)

3.1
*Trailing-12-month data for quarter ending in month indicated. **Franchise and rental margins are defined as segment revenue less respective costs compared to segment revenue. ***Year-over-year comparison for quarter ending in month indicated. All data from relevant company 10-K and 10-Q filings.

One Fool says:
Even though the company sells lunch and dinner, it's the breakfast menu it's best known for. When many restaurant companies, including competitors CBRL Group (NASDAQ:CBRL) and Denny's (NASDAQ:DENN), are suffering from slowing or declining same-store sales and traffic growth, concentrating on what you're best at is sound strategy. Promotions highlighting this are good, such as the current one featuring funnel cake. (Check out the picture on their website -- mouthwatering.) This draws customers in. Then you can wow them with your "A" or "B" rated stores.

There's one concern I have -- the concentration of several titles in one person. Stewart, already president and CEO, was recently named chairman of the board of directors. A 34-year veteran of the restaurant biz, she has been the CEO for the last four years. The company has done fairly well under her leadership, but adding the title of chairman last May lights a warning in my mind labeled "corporate governance." Ideally, the board of directors is supposed to oversee management, not be led by them. Keep an eye on this, fellow Fools, while browsing the company's menu.

Competitors:|

  • Bob Evans Farms (NASDAQ:BOBE)
  • CBRL Group
  • Denny's

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Fool contributor Jim Mueller does not own shares in any company mentioned.