IHOP's (NYSE:IHP) earnings per share skyrocketed higher than a caffeinated customer eating chocolate-chip pancakes with syrup and whipped cream -- over 46% compared to the prior year, to $0.82. This trounced Wall Street expectations of $0.59.
Revenues rose 5% to $89.5 million for the second quarter. While the figure could be considered light, I think it's respectable for the current difficult casual dining environment. Opening 15 new franchises helped, and so did a 2.5% rise in same-store sales. To deal with higher food and gas prices, management raised prices more than enough to offset a decrease in customer traffic. Promotions used to draw customers include kids eating free on Fridays and character promotions. I for one don't mind characters coming to my table if it'll make my kids sit and eat.
IHOP also cut costs, which is no small feat in this period of rising costs for energy and food ingredients. General and administrative expenses fell by about $1 million compared to a year ago, allowing the pre-tax margin to expand by over two percentage points to 22.6%. Denny's (NASDAQ:DENN) reports results next week, but it expects margins to come under pressure as it deals with higher commodity costs. Competitor Friendly Ice Cream (AMEX:FRN) lost $6 million and sales fell 2.5% in its latest quarter.
Management reiterated its guidance for the IHOP business. Same-store sales are forecast to rise 2%-4% for this year, and the company expects to add 61-66 new restaurants. But it did not give an updated profit outlook, since it must include the effect of Applebee's (NASDAQ:APPB).
Regarding the Applebee's deal, a new twist has been added. Sardar Biglari, CEO of the Lion Fund and Chairman of Western Sizzlin, owner of 1 million shares (or 1.4% of the company), announced he will vote no to the acquisition. Given the scant 4.5% premium offered to shareholders, he could have a point. If his voice resonates with other shareholders, another suitor could come along, and IHOP may be forced to raise its bid. Conversely, it may lose the deal or walk away. Investors should watch to see how these developments unfold.
While the Applebee's deal may turn into a distraction, IHOP is doing just fine on its own. Its franchise model seems to be working, and the results are bearing this out. Even if the difficult environment continues, IHOP will continue to thrive while others fall by the griddle.
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Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned. Friendly Ice Cream is a Motley Fool Hidden Gems Pay Dirt selection.
