Expect a Breakout in 2019 for Dine Brands Global

Managing Director, Nick Setyan recently initiated coverage of Dine Brands Global, Inc. (DIN). His coverage was also added to our best ideas list.

We expect continued SSS growth momentum at both Applebee’s and IHOP to drive margin upside and improvement in net unit growth, resulting in upward revisions in expectations and valuation expansion towards franchised multiples. Therefore, we are initiating at OUTPERFORM and adding to the Wedbush Best Ideas List (BIL).

  • Q4 checks point to potential upside at both Applebee’s and IHOP. Our inaugural checks incorporating 10% of Applebee’s and IHOP domestic locations, respectively, point to Q4 system SSS growth in-line to slightly above 3.2% and 1.3% consensus, respectively. Strength was primarily attributed to local and national advertising, promotions and specials, and third-party delivery.
  • Believe drivers of resurgent SSS growth at Applebee’s poised to deliver even as compares get tougher in 2019. While we understand that one- and two-year compares get progressively tougher through Q3:19, we also point to Applebee’s ability to deliver accelerating one- and two-year comps since Q3:17, with Q4:18 poised for the largest step-up (480 bps in our model) in 2-year SSS growth since Q4:17. We view the current momentum as ongoing. Drivers include 1) the successful focus on value and menu/beverage innovation, 2) another year of ad spend growth to communicate the above to customers, and the 3) continued growth in off-premise. We also believe Darden’s decision to refocus on margins through somewhat less emphasis on value could help Applebee’s sustain relative category outperformance in the near-term within the overall context of a healthy target customer demographic.
  • Believe 2019 IHOP SSS growth expectations are realistic. Drivers include 1) continued menu innovation, including a focus on IHOP’s lunch and dinner dayparts, 2) remodels, and 3) continued growth in off-premise.
  • A now-stable Applebee’s franchise base means visibility into comp flowthrough is as high as any other primarily franchised peer, in addition to a number of 2019 margin drivers. We estimate each 1% of Applebee’s SSS growth equates to $0.8-1.4 million in EBITDA and $0.03-0.06 in EPS and FCF/share, and a similar contribution from each 1% of IHOP SSS growth. In addition, we believe the recently acquired 69 franchisee units are accretive to EBITDA in 2019. Lastly, the $30 million catch-up ad fund contribution in 2018 was final.
  • Net unit growth set to accelerate as Applebee’s net closures come to an end in 2019. IHOP’s consistent net unit growth of ~3% has been obfuscated by the strategic net closures of Applebee’s. We currently model ~50 net closures in 2019 at Applebee’s, largely in the first half, with the second half posting positive net unit openings. We would expect 2020 to see Applebee’s post net openings, with net openings of >1% across both brands, trending towards 2% over time.
  • Our price target of $120 is a based on a combination of our sum of the parts analysis and FCF yield comparables.

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