Casual dining restaurant Applebee's (NASDAQ:APPB) will announce earnings for the second quarter after the market closes tomorrow. The earnings call will be held the next morning. Will revenues be up and earnings down, as projected, or will there be some surprises? Read on, then wait with bated breath.

What analysts say:

  • Buy, sell, or waffle? Of the 20 analysts with ratings, only six call for a buy, while the rest circle the wagons on a hold.
  • Revenues. The average estimate calls for $331.32 million, up about 8% from a year ago.
  • Earnings. The consensus is $0.29 per share, down $0.05 from last year, despite there being fewer shares outstanding.

What management says:
In last quarter's earnings announcement, Lloyd Hill, Applebee's chairman and chief executive officer, said, "Our first-quarter results, while not consistent with our long-term goals, were generally in line with our expectations. We did not expect to see significant improvement in our results early in the year, because the majority of our key initiatives for 2006 are just now rolling out. We are optimistic that our future results will benefit from the implementation of these initiatives."

While I have tasted the triple prime burger at rival Ruby Tuesday (NYSE:RI), I haven't had a chance to test the new menu at Applebee's, nor seen any of the other key initiatives. Are those initiatives working? While Hill says it's still too early to tell, there have been declines in same-store sales for each month of the quarter, cutting into the growth experienced in the first quarter. No wonder he's anxious to see the results.

What management does:
While food and drink costs have held steady as a percentage of company-owned store revenue, other costs, such as occupancy, labor, and overhead, have not. They have risen faster than revenue in many of the past several quarters. As such, gross margins have held steady, but both operating and net margins have shown a worrisome decline, especially given the healthy revenue growth year over year.

Margins % *

12/04

3/05

6/05

9/05

12/05

3/06

Gross **

73.5

73.4

73.4

73.5

73.5

73.5

Operating

14.9

14.8

14.4

13.5

13.0

12.1

Net

10.0

9.9

9.6

8.9

8.4

7.7

Sales Growth % ***

9.4

9.8

8.8

8.6

10.7

13.1

* Trailing-12-month data for quarter ended in month indicated
** Based on gross profit defined as sales less cost of food, without revenue from franchisees
*** Year-over-year comparison for quarter ended in month indicated
All data from relevant company 10-Q and 10-K filings

One Fool says:
Over the past six months or more, consumers have seen higher gasoline prices and rising interest rates. While many argue that this is affecting businesses such as the casual dining sector, one could make a case that the impact, if any, is not as large as one thinks. Not every company is being affected the same way. For instance, some restaurant companies such as Ruby Tuesday and Darden Restaurants (NYSE:DRI) have experienced increases in same-store sales in recent months. Others, such as Applebee's, have not.

That difference could be explained by the normal ebb and flow of consumer demand. As different restaurants try different ways of differentiating themselves, and as consumer tastes change, one would expect that sometimes one restaurant chain will be up and another down.

Applebee's first-quarter results certainly did not impress fellow Fool John Bluis. It will be interesting to see what happens this quarter, and to hear what management says about it. Stay tuned.

Competitors:

  • Brinker International (NYSE:EAT), which operates Chili's, among others
  • Cheesecake Factory (NASDAQ:CAKE)
  • Darden Restaurants (NYSE:DRI), owner of Olive Garden and Red Lobster
  • OSI Restaurant Partners (NYSE:OSI), a.k.a. Outback Steakhouse
  • Ruby Tuesday

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Fool contributor Jim Mueller owns shares in Cheesecake Factory, but does not own shares in any of the other companies mentioned. The Fool's disclosure policy comes with your choice of fries, onion rings, baked potato, or a side salad.