3 Reasons to Sell DineEquity | $DIN

 

Our Restaurants analyst Howard Penney recently added DineEquity (DIN) to his Best Ideas list as a SHORT. DineEquity is the $1.5 billion parent company of restaurant chains Applebee's and IHOP. It operates more than 3,700 restaurants in 19 countries.

Penney recently wrote that the company "reeks of desperation." He will explain why during a live black book presentation Tuesday, December 6, 2016 at 11AM ET when he outlines his short thesis. 

KEY POINTS TO OUR SHORT THESIS

1. Business Fundamentals Are Deteriorating: The issues with the casual dining space are well documented.  That being said, there are some brands in casual dining that are doing well and there are those that are failing.  Applebee's is one of the old line brands that is failing and its food offering is stale and uncompetitive in the marketplace.  Significant market share losses, little re-investment in the brand, strategic operational errors and vacant executive positions are only some of the issues the company faces.  We believe the company's ability to fix these issues are limited and it will be expensive to execute.
2. Franchisees Are Struggling: The heart and soul of the DIN business model is the health of the Applebee's franchisees.  To this end, there are significant issues and a number of franchisees are rumored to be in significant trouble.  Years of market share losses and mismanagement have finally taken its toll on the company.  Franchise profitability has been declining for years and the latest decline in same-store sales could be the tipping point for some franchisees.
3. Financials Are Strained/Significant Balance Sheet Liabilities: Today, DIN finds itself in a precarious financial position.  Given the decline in the profitability of the franchisees, the company needs to invest in the business, but it had limited financial resources to do so.  The company’s significant leverage, off balance sheet liabilities and 62% dividend payout ratio are only the start of the issues.  As franchisee profitability continues to decline and the need for incremental investment grows, the pressure on the company's financials will be significant.    

Penney will also take a closer look at why current financial trends are unsustainable, including:

1. Applebee’s market share trends
2. Franchisee profitability
3. Income statement stress points
4. Cash flow sustainability issues
5. Balance sheet/Off balance sheet items
6. Valuation
7. Sentiment 

ATTENDANCE ON THIS CONFERENCE CALL IS LIMITED. 

Ping sales@hedgeye.com for more information.