Dine Brands is a holding company for two restaurant franchise chains, IHOP and Applebees. 

 

Dine Brands is a short with downside to $40 a share. 

 

Dine Brands is a declining business as evidenced by a 26% decline in Applebees royalty revenue caused by declining traffic, declining same store sales, steeper competition, and out of fashion dining behavior. The other half of the business IHOP has not grown in the past 3 years. The declining fundamentals of the business coupled with 6x debt to ebitda leverage the stock is vulnerable to considerable downside. 

 

Franchise businesses typically trade at 5-10 multiple premium to individual franchise stores because the market ascribes higher values to the asset-light model that can grow by using the balance sheet of the franchisee and drive marketing/adverstising/operational synergies across a network. However, when the concept/franchisee suffers declining returns the abiility for these franchisees to pay royalty to the franchisor is compromised. There are also significant conflict of interests as franchisors are incentivized to drive traffic/comps without regard to margins as well as a conflict between franchisees that own real estate vs their owned opeartions. A franchisee that has developed a new store is likely to assign higher rents to the stores in order to extract more value from banks looking to lend on the real estate and hence locking the franchisee into a high cost of operations. In addition the franchisee has to service debt at the franchisee level in order to pay for its cost of acquiring the rights to operate. 

 

DIN equity was mistakenly characterized in 2012 by activist funds as having cash flows more stable than tobacco companies. DIN is in a highly competitive market with fierce capable competitiors, changing consumer tastes, and aggressive need for promotions to drive traffic. With high fixed costs in the business, there is high sensitivity to decliing topline. 

 

DIN  is an attractive short as there is no logical buyer for this constrained asset.  DIN is focused on returning capital at all costs and maintaining a dividend and share buyback. This is exactly the opposite strategy a company that is facing extreme competition and wage/labor pressure should be doing. We think an ultimate cut in return of capital has to happen in order to reposition the company for growth. 

 

DINE EQUITY (DINE BRANDS)
	2018	2017	2016	2015
Revenues
Franchise and rest revenues	460	475	501	542
rental revenues	120	121	123	128
financing revenues	8	8	9	11
Total revenues	588	605	633	680
Cost of revenues
Franchise and restaurant expenses	172	171.98	162.8	186.9
Rental expenses	90	90.5	91.5	94.5
Financing expenses	0.5	0.598	0.155	0.52
total costs	325.5	263.078	254.455	281.92
g&a	151	165.6	148.9	155.4
ebit	174.5	176	230	243
interest	76.92	61.7	61.4	63.2
cfo	114	65.7	118	135
capex	10	13.3	5.6	6.64
fcf	104	52.4	112.4	128.36
dividends	45.33	69.7	67.4	66.1
repurhase of stock	30	10	55	70
taxes paid	44	59	69
total fcf	28.6652
debt	1282	1,282.00	5.83
cash	117	117.00
shares	17.99	17.99
price	72.5	$       80.00
equity	1304.275	1,439.44
ev	2469.275	2,604.44
ebitda	230	220
ev/ebitda	10.74	11.84		SHOULD THIS BE WORTH THIS?
fcf	7.97%	3.64%
GUIDANCE 104MM FCF		7.23%
DIVIDEND	3.48%	3.15%	PAYOUT RATIO IS 44%
applebees
SYSTEM SALES		$  4,117.00	$  4,418.00	$  4,711.00
franchise resaurants		1970	2027	2004
restaurant growth		-3%	1%
SSS		-5.30%	-5.00%	0.20%
AVG WEEKLY SALES		43.6	45.3	47.8
ANNUAL VOL		2267.2	2355.6	2485.6
applebees revenue	-0.2681818	161	180	220
segment margin		82%	94%	86%
stores		1782	1858	1878
implied royalty fee		3.91%	4.07%	4.67%
EBITDA		411.70	441.80	471.10
EBITDA PER STORE		$         0.21	$         0.22	$         0.24
IHOP
SYSTEM SALES		$  2,974.00	$  2,939.00	$  2,948.00
Revenue growth		1.19%	-0.31%
ihop area sales		$     280.60	$     282.50	$     280.50
Frachise restaurants		1576	1517	1481
restaurant growth		4%	2%
area license		164	166	166
company		5	10	12
total		1745	1693	1659
frachise revenue		185	184.8	184.3
franchise rev per store		0.1060	0.1092	0.1111
implied royalty fee		6.22%	6.29%	6.25%
SS		-1.90%	-0.10%	4.50%
AVG WEEKLY SALES		36.3	37.3	37.6
ANNUAL VOL		1887.6	1939.6	1955.2
SYSTEMWIDE SALES		7,372	7,640	7,940
FRANCHISE REVENUE AS %		4.11%	4.43%	4.47%
MARKETING COSTS REQUIRED 3.25% AND 0.5% FOR LOCAL FOR APPLEBEES/IHOP. HAVE THE OPPORTUNITY TO DO 5%
margins		11.00%	11.00%	11.00%
ebitda at the stores		810.88	840.35	873.35
ebitda per store		$         0.23	$         0.24	$         0.25