DIN - Masking the Truth – Part 2

DIN CEO Julia Stewart said today on the company’s Q4 earnings call that despite the difficult environment that the company’s fiscal 2008 results were in line with management’s key targets, particularly as it relates to its Applebee’s refranchising goals. This statement is a little deceiving because although the company did complete the sale of 103 company-operated Applebee’s to franchisees in FY08 (in line with management’s initial guidance of 100), the after-tax proceeds generated from these 103 sales and 5 subsequent sales in 1Q09 of $61 million fell significantly short of the company’s initial 2008 expectations of $90 million to $100 million and revised guidance of $70 million to $80 million.

DIN initially set out to refranchise a substantial majority of the Applebee’s company-operated restaurants to realize significant costs savings. In reaching its goal of refranchising over 100 units in 2008, the company is on track to reducing costs. In this environment, however, there is more risk associated with having such a leveraged balance sheet, and according to the company, DIN ended the year with a Debt/TTM EBITDAR ratio of 6.77x (relative to the average casual dining company at below 4x at the end of 3Q08). The 2008 refranchising proceeds which came in 32%-39% below plan were integral to allowing the company to pay down more of its debt and yet, Ms. Stewart maintains that the company achieved all of its key targets in 2008. This is just not a true statement relative to the after-tax proceeds the company set out to achieve at the beginning of 2008.

The final number on average proceeds per unit for the 108 restaurants refranchised thus far is $565K. Again, this compares to management’s initial guidance of $900K to $1 million per unit given in February 2008, the revised estimate of $700K to $800K per unit provided in July 2008 and the implied $573K per unit given in the company’s 3Q08 earnings release. We know the first 26 restaurants sold for about $1.04 million per unit, which implies that the remaining 82 units sold on average for about $415K each.

Going forward, DIN expects to refranchise an additional 200 units in 2009. Management did not provide any guidance as to how much these sales should generate in after-tax cash proceeds, but said it will disclose more details once the company has entered into purchase agreements. Apparently, management does not want to get caught having to continually revise down expectations as it did in 2008.

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