DIN is a melting Ice cube, and we are moving DIN up the SHORT LIST to a top five SHORT, and we will be hosting a Black Book in 10 minutes.
EVENT DETAILS:
|
Dine Brands (DIN) SHORT THESIS:
- THE WRONG STRATEGY: DIN's CEO, John Payton, became CEO in January 2021 and has no skin in the game owning only 63,000 shares, and his total compensation to join the company in 2021 was $10 million. Before joining DIN, Mr. Peyton was president and CEO of Realogy Franchise Group. In March 2022, the CEO presented to the street at an analyst meeting long-term targets for EBITDA and EPS that if accomplished are heroic, but likely unachievable. The message the CEO sends the street about a "longer-term growth agenda" is grounded in assumptions for unit growth and margins that are on unstable ground. The core Applebee's concept store base that has declined 17% over the past seven years, and there is little hope for future growth. A sign the CEO is heading down the wrong path is the departure of John Cywinski (Applebee’s President,) who left the company for a CEO position at Modern Restaurants.
- SECULAR MARGIN DECLINE: EBITDA margins peaked in 2016 at 41.3% and ended 2022 at 26.9%, down 34%. The company peak EBITDA was in 2015 at $275 MM, above 2019 rate of $261 and company will post EBITDA of $243 in FY2022. We would also note that the spread between the (A)EBITDA margin and GAAP EBITDA margin widened significantly last quarter, lowering the quality earnings. We would also not that a better, more productive Chili's is a significant long-term competitive issue for the company.
- HIGHLY LEVERAGED AND NEEDS CASH: If the company's EBITDA margins are below the 2015 peak, we assume the franchised system also feels the pressure of lower margins coming out of the pandemic. How will a recession impact the company's financials if some franchisees need financial assistance in 2023/2024? More importantly, the company balance sheet securitization refinancing overhang will not go away anytime soon. The company's class A-2-I Notes issued ($693 Million) in May 2019 that bear interest at a rate of 4.194% have an expected term of five years or expire in May 2024. With this and trading at 5.6x NTM Debt/EBITDA, the company increased leverage in 2022 to pay a dividend, buy back stock and make an acquisition while knowing it has a re-finacianing around the corner.
