* Q3 EPS $0.47 before items, tops view of $0.17 loss
* Says to reduce debt, financing obligations by $113 mln
* Applebee’s operating margins 11.4 pct vs 9.2 pct year ago
* Reiterates full-year same-store sales outlook
* Shares surge 54 percent (Adds analyst comments, updates share movement)
By Lisa Baertlein and Ben Klayman
LOS ANGELES/CHICAGO, Oct 27 (Reuters) - DineEquity Inc (DIN.N) posted better-than-expected results on Monday and shares soared after it made progress selling underperforming restaurants and reducing debt.
The company, formerly named IHOP, bought Applebee’s in a leveraged buyout about a year ago, before global credit markets melted down and the U.S. economy weakened further.
Shares rose on relief that the company avoided expectations for poor results. Raymond James analyst Bryan Elliott said short sellers were betting that DineEquity would deliver negative news that would have sent shares lower.
“The strategy to manage all the debt that they took on has not been blown up by the recession and credit crunch, and the shorts believed that it would be,” Elliott said. He expects DineEquity to have free cash flow of $4 per share in 2009.
“We expect to remain in compliance with our debt covenants,” Chief Executive Julia Stewart told analysts on a conference call.
DineEquity expects to reduce debt and financing obligations by $113 million with deals to sell a total of 110 company-operated Applebee’s restaurants.
The company, which is running ahead of schedule with its plan to sell company-owned stores, on Monday announced that it had struck deals to sell 66 company-operated Applebee’s in all-cash deals. Stewart had previously referred to those underperforming restaurants, located in Houston, Dallas and Albuquerque, as “dogs.”
DineEquity also said it closed the sale of 15 Applebee’s restaurants in Nevada.
Morningstar analyst John Owens pointed to the sale of company-operated restaurants as positive news given how beaten down the stock has been this year.
“This stock has been absolutely pummeled here in this market downturn,” he said. “The company has lots of debt. They’re also trying to refranchise restaurants in this challenging credit market.”
DineEquity shares surged more than 100 percent to $11.90 early in the session, and were still up $3.19, or 54 percent, at $9.16 on the New York Stock Exchange. Despite the rebound, shares are still off from a year high of more than $64.59 last October.
APPLEBEE‘S MARGINS IMPROVE
Sit-down restaurant chains like IHOP and Applebee’s have been particularly hard-hit by the economic downturn as consumers slash discretionary spending to adjust to falling home prices, a credit crunch and higher food and fuel costs.
DineEquity said its third-quarter net loss increased to $16.4 million, or 98 cents per share, from a loss of $11.6 million, or 69 cents per share, a year earlier.
Excluding charges related to the Applebee’s deal, the company earned 47 cents per share, compared with the loss of 17 cents analysts polled by Reuters Estimates had expected.
Applebee’s third-quarter operating margin rose to 11.4 percent from 9.2 percent, helped by menu price increases, lower labor costs and other items, while segment profits rose nearly 14 percent to $30 million.
Elliott said margins at company-operated Applebee’s restaurants were up 90 basis points during the quarter versus his expectation for a decline of 40 basis points.
Total revenue rose to $391.2 million from $91.4 million a year ago, due to the addition of sales from Applebee‘s.
Same-store sales at IHOP restaurants rose 0.2 percent, while Applebee’s systemwide domestic same-store sales fell 3.1 percent.
DineEquity still expects same-store sales in fiscal 2008 to be at the lower end of the 2 to 4 percent range for IHOP and in the range of a decline of 1 to 2 percent for Applebee‘s.
DineEquity reduced its forecast for fiscal 2008 consolidated cash from operations to a range of $85 million to $95 million due to lower than expected results from company-operated Applebee’s restaurants. It had previously forecast a range of $95 million to $100 million.
The Glendale, California-based company said sales of the Texas restaurants were slated to close in the fourth quarter, while the Albuquerque deal was expected to close in the first quarter.
Including earlier deals, the company has sold or is selling 110 locations, and it expects about $63 million in after-tax cash proceeds from the sales. (Additional reporting by Michele Gershberg in New York; Editing by Edward Tobin and Matthew Lewis)