DineEquity Inc (DIN.N), the owner of Applebee's and IHOP restaurants, reported a better-than-expected quarterly profit as the company's shift to a franchise model reduced costs.
The company sold most of its remaining Applebee's restaurants to independent operators over the past year, moving to a 99-percent franchise model. Most IHOP restaurants are also run by franchisees.
Shares of the company rose as much as 3 percent to $72.38 in early trading on Thursday.
Raymond James analyst Bryan Elliott said the company's story now is more of a free cash flow one after it completed its transition to a 99-percent franchise model late last year.
"Over time (free cash flow) should grow a bit faster than revenue, and this should drive increasing cash flow to shareholders in the form of rising dividends and share repurchases," Elliott wrote in a client note.
The company reported a free cash flow of $59 million in the first quarter, compared with about $44 million a year earlier.
Revenue fell 34 percent to $163.2 million, mostly because of the sale of company-owned restaurants, and was in line with market expectations.
Systemwide sales at established U.S. restaurants fell 1.3 percent at Applebee's and 0.5 percent at IHOP as fewer diners visited the company's restaurants.
"These comp sales results, while still slightly negative, are good news in our view, as they demonstrate that the company's brands are holding share (Applebee's) or gaining share (IHOP) despite the tough environment," Elliott said.
Chains such as McDonald's Corp (MCD.N), Olive Garden owner Darden Restaurants Inc (DRI.N) and Chili's Grill & Bar parent Brinker International Inc (EAT.N) are struggling to grow profits amid intense competition.
DineEquity, like most other restaurant chain operators, struggled to attract diners who curbed spending in the quarter due to an increase in payroll taxes and a delay in tax refunds.
Net income fell to $17.9 million, or 93 cents per share, from $29.9 million, or $1.64 per share, a year earlier.
Excluding items, the company earned $1.14 per share, beating the average analyst estimate of $1.00 per share, according to Thomson Reuters I/B/E/S.
Total operating expenses, excluding general and administrative costs, halved to $68.75 million in the quarter.
DineEquity reiterated its full-year forecast for U.S. same-restaurant sales at Applebee's and IHOP, saying both would range between a fall of 1.5 percent and a rise of 1.5 percent.
The Glendale, California-based company's stock, which has risen about 35 percent in one year, was up 1.7 percent at $71.63 on the New York Stock Exchange.
(Reporting by Arpita Mukherjee in Bangalore; Editing by Saumyadeb Chakrabarty)