Applebee's parent's stock slides 5% after Truist downgrades on worry about slowing sales

By Ciara Linnane

Card data shows Applebee's is not keeping up with the rest of the restaurant sector

Dine Brands Global Inc.'s stock was down 5% Friday, after Truist downgraded the Applebee's parent's stock to hold from buy and almost halved its price target, citing concerns that sales are slowing even as industry trends improve.

"Potentially severe Applebee's same-store sales underperformance vs. peers (based on Truist Card Data) shakes our confidence that improving same-store sales will be a near-term catalyst for the shares," analyst Jake Bartlett wrote in a note to clients.

Bartlett cut his price target to $37 from $66 and said Truist Card Data is signaling a decline in same-store sales in August and September, despite the launch of an "All You Can Eat Boneless Wings" promotion launched at the end of July, and a new partnership with the NFL launched Sept. 3 with a 50-cent boneless-wing promotion and national-ad campaign.

Many restaurants are offering limited-time-only promotions and discounts and value meals in an effort to draw in consumers wary of spending after a long period of high inflation and interest rates.

"If the data prove accurate, this performance would be particularly disappointing given improving restaurant sales trends in August and September, as noted by Darden (DRI) and Black-Box Intelligence," the analyst wrote.

If Applebee's promotions are not resonating with customers, it's unlikely that same-store sales will pick up much in the next few quarters, despite other promotions, including a boneless wing 'Pick 6" NFL-related deal and the "Dollar Zombie" drink announced on Oct. 1, said the analyst.

The drink is a rum-based cocktail with passion fruit, pineapple, cherry, lime, that's garnished with a gummi brain and priced at just $1.

Bartlett lowered his third-quarter same-store sales forecast to down 5% from a prior forecast of down 2.5%, below the consensus of down 2.7%. He lowered his fourth-quarter estimate to down 3.5% from down 1.0% previously, also below the consensus of down 2.2%.

On a brighter note, the company's other franchise, IHOP, has continued to outperform Applebee's, although Truist is expecting a slight third-quarter earnings miss.

"The Truist Card Data suggests that IHOP's sales trajectory was more encouraging than Applebee's, but still points to a slight sales miss (we are lowering our IHOP third-quarter same-store sales estimate to -2.0%, from -1.5%, below cons. of -1.3%)," said the note.

Sales appeared to get a boost in August and September from the return of the "$5 All-You-Can-Eat Pancakes" promotion, which ran for two weeks longer than last year at the same time.

Truist views IHOP as being in a stronger competitive position than Applebee's thanks to a "disciplined barbell menu strategy" that includes premium priced "Anytime Tacos" that were added mid-September as part of a refresh, as well as "$6 Faves Menu" launched Oct. 1. The company also has a growing loyalty program that stood at 10 million members at the end of the second quarter, up from 6.5 million in the year-earlier period.

Truist is not expecting a meaningful reduction in general & administrative costs, although Bartlett believes investors would welcome it. The analyst expects store count contraction to continue through at least 2025.

"We do not expect pressured sales at Applebee's and IHOP to drive significant franchisee distress (muted operating cost inflation has helped), but we do anticipate increased hesitancy to develop new stores and continued elevated store closures," he wrote.

Dine Global's stock (DIN) has fallen 32% in the year to date, while the S&P 500 SPX has gained 19.5%.

-Ciara Linnane

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10-04-24 1020ET

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