Food costs eat into DineEquity's profits

Glendale-based DineEquity Inc., the parent of the IHOP and Applebee’s restaurants, on Thursday reported a continued drop in the number of customers at both chains and warned that the rising price of food staples may make for a challenging 2011.

While the company still managed to turn a $9 million profit for 2010, DineEquity’s $299 million in fourth- quarter revenue was down 16% from $355 million during the same period a year earlier. The company also reported a net loss of $58 million for the quarter, compared to a $48-million loss in the last quarter of 2009. Executives attributed the loss to aggressive debt repayment and refinancing.

Like Nestle, the food giant with North American headquarters a few blocks from DineEquity’s Brand Boulevard office, DineEquity expects a spike in cost for staples, including coffee, dairy products and seafood.

Chief Executive Julia Stewart told investors in a conference call Thursday that the hikes are likely to again result in higher menu prices, but said the reputations of IHOP and Applebee’s as inexpensive dining options will allow them to handle the changes.

Stewart said 2010 “was a tale of two halves,” with same-store sales picking up at Applebee’s and IHOP in the second half of the year as the overall economy stabilized. While both chains saw a drop-off in customer traffic compared to the prior year, the loss of revenue was more than offset by higher menu prices.

“In the second half, both brands’ same-restaurant performances turned positive,” she said.

But challenges remain, especially for IHOP. Stewart said revenues are down by “the low single digits” in the first two months of 2011, and she predicted the chain’s performance for the year would be flat.

Applebee’s sales will grow by 1% to 3%, she predicted. Late-night dining and alcohol sales are contributing more to the bottom line, she said, with more than 80% of Applebee’s now open until at least midnight.

Stewart said the company remains committed to selling Applebee’s restaurants to franchisees in order to pay down debt from the $2-billion acquisition of the chain in 2007.

Stewart said DineEquity sold nearly 150 Applebee’s since October, and still has 220 company-owned restaurants for sale. The company plans to keep 23 restaurants in Kansas City as a test market. There are more than 2,000 Applebee’s restaurants worldwide.

Lingering trouble from the recession will set the tone for the year, with high unemployment and low consumer confidence, continuing to be a major challenge, Stewart added.