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In 3Q08 DIN reduced guidance for the low end of the operating cash flow range by $10 million. At the same time the company reported a 13% increase in the operating profit at the Applebee’s chain. How can this be?

For the past three quarters DIN has seen an incremental benefit from direct and occupancy costs. In 3Q08 this accounted for 170 basis points of the 220 basis point improvement in margins. In the press release, management attributes the change to “purchase price accounting.” That is nothing more than saying that they changed the depreciation schedules on the Applebee’s business after they bought the chain.

Importantly, it’s a non cash event so it does not help to improve the cash flow of the company. Any way you look at it, this is a clear example of the company struggling to make the operations look better than reality.