As DineEquity Digests Applebee's, Earnings Look Iffy
DineEquity Inc. (DIN) has been struggling with a high debt burden since the owner of International House of Pancakes bought Applebee's in November 2007, and signs of accounting trouble are brewing in the company’s financial statements.
Insiders have collectively sold 41,330 DineEquity shares in the past six months, or 8.8% of their holdings. Jean M. Birch, president of the IHOP business unit, recently announced her plan to quit on August 27.
To be sure, the stock surged in the winter and has gained more than 32% in the year to date to trade at around $55.82 per share intraday Wednesday, significantly outperforming benchmark indices. And DineEquity has managed to reduce its debt burden to $1.6 billion as of June 30 from above $2 billion as of December 2010, which is an improvement, albeit not a solution to having above 7.5 times more debt than equity.
Some of the company’s earnings numbers seem iffy. After buying Applebee’s, DineEquity said it paid $730.7 million more for its acquisition than it was worth on the books and acquired more than $1 billion of intangible assets such as brands; as a result, more than 45% of its total assets consisted of these estimations. The company revised its goodwill and intangible estimates downward in 2008, at the same time warning in February 2009 that the financial crisis made “it extremely difficult for us to accurately forecast and plan future business activities” and could result in lower estimated values. As of June 30 DineEquity’s goodwill amounted to $697.5 million and its intangibles $815.6 million, or more than 60% of assets as the total declined.
There are other examples. DineEquity said that the money it was owed within a year (related to things such as payments due from franchisees or credit cards) amounted to an average $83.8 million, or nearly 9% of sales as of June 30. That’s up from $78.4 million, or nearly 7% of sales during the same period of the previous year. Meanwhile, the industry median has stayed at around 4% of sales the whole time.
In 2007 DineEquity had planned to save on Applebee’s overhead by turning its company-owned restaurants into franchises. This July the company finally announced a deal that will complete its multiyear effort to sell them off – by moving to a 99% franchised restaurant system.
As the management continue to steer the new combined entity ahead, their financial statements are losing quality. The data in DineEquity’s results gives it an AGR ® score of 5, indicating higher accounting and governance risk than 95% of comparable companies. The score has trended downward since December 2009, when it had reflected average risk.
Judging from the recent insider sales, some seem to have lost the faith.
Region: North America
Country: United States
Sector: Cyclical Consumer Goods / Services
Market Cap: $ 1,015.8 mm (Mid Cap)
ESG Rating: D
AGR Rating: Very Aggressive (5)