Q3 2024 Earnings Summary
- The company is launching new promotional campaigns and value offerings at both Applebee's and IHOP, such as the Big Meal Deal at Applebee's and House Faves at IHOP, designed to drive positive comparable sales in Q4 and beyond, indicating potential for improved sales and profitability.
- Applebee's is developing a new prototype aimed at reducing build costs by 30%, which could stimulate unit growth and improve franchisee returns, supporting long-term expansion. The new design received high marks from consumers and is expected to be introduced early in 2025.
- The company's plan to expand dual-brand locations (combining Applebee's and IHOP) is expected to drive growth, with dual-brand units generating 1.5x to 2x the revenue of single-brand locations. They have opened 13 internationally and are on track to open a dozen plus domestically next year, providing significant upside potential.
- Same-restaurant sales declined significantly in Q3, with Applebee's reporting negative 5.9% and IHOP at negative 2.1%, indicating challenges in driving sales growth amid consistent pressure across brands and into early Q4.
- Franchisee EBITDA margins are under pressure due to top-line challenges, even as cost pressures ease, potentially impacting franchisee health and leading to closures, which may negatively affect future revenues.
- The company acknowledges operational inconsistencies and a need to improve consistency in operations, service, and quality of food, suggesting underlying issues affecting traffic and guest satisfaction that may not be easily resolved within the franchise model.
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Value Messaging and Promotions
Q: How will value messaging drive sales growth?
A: Management plans to launch a new integrated value platform and a comprehensive campaign next week to drive traffic and sales growth. They aim to improve comps, similar to previous successful promotions, by delivering more compelling and consistent value messaging to meet guest expectations. -
Operational Adjustments and Franchise Model
Q: Do you need operational changes like peers?
A: Management believes operational metrics like guest satisfaction scores are up, and the issue lies in inconsistent marketing and value messaging. They are focusing on more compelling promotions rather than significant operational overhauls, and see their asset-light franchise model as the right strategy moving forward. -
Off-Premise Opportunity
Q: What is the plan for off-premise sales growth?
A: Applebee's enhanced off-premise sales by offering dine-in promotions to off-premise guests, adjusting marketing strategies, and improving operational efficiency, seeing room for further improvement. IHOP is rolling out call center solutions to improve phone order execution and aims to increase off-premise sales beyond the stable 19% mix. -
Net Unit Growth and Closures
Q: How will you drive unit growth in 2025?
A: Management is confident in IHOP's consistent openings and is developing a new Applebee's prototype aimed at reducing build costs by 30%. The dual-brand model, combining Applebee's and IHOP, is expected to fuel growth and mitigate closures, with new domestic openings planned next year. -
Franchisee Health and Margins
Q: How are franchisee profits and margins?
A: Franchisee EBITDA dollars remain steady, but margins are pressured due to top-line challenges. Cost pressures are easing with stabilizing inflation and labor costs, and system-wide initiatives have yielded $42 million in annualized savings to support franchisee profitability. -
Pricing Strategy and Mix
Q: How is pricing affecting sales?
A: In Q3, Applebee's took 2.7% pricing with flat mix, while IHOP had 6% pricing with slight negative mix. Both brands expect pricing to normalize to low-single-digits going forward, balancing value promotions with full-priced items to manage margins. -
Innovation and Menu Changes
Q: What role does innovation play now?
A: Innovation remains crucial. Applebee's has developed 14 new products to integrate into its value platform, aiming to drive additional transactions. IHOP introduced House Faves for everyday value and continues to balance value offerings with new full-priced innovations to enhance its barbell strategy. -
G&A Savings Sustainability
Q: Are G&A savings sustainable?
A: G&A savings result from reduced incentive compensation and cost efficiencies. While some expenses may return with improved performance, other savings from concluded initiatives and ongoing cost management are expected to be sustainable, setting the current G&A as a baseline for future budgeting.