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Here’s Why You Should Steer Clear of DineEquity (DIN) Stock

Zacks

Troubles broiling in the U.S. restaurant industry over the last few quarters are known to all by now. In fact, given the dwindling prospects of the restaurant industry, it is unlikely that things will change for some of its players in the near term. Thus, it would be wise for investors to reshuffle their portfolio, and get rid of stocks that may hurt returns.

One such company is CA-based restaurant operator, DineEquity, Inc. DIN. Currently, the company operates under the Applebee's Neighborhood Grill & Bar and International House of Pancakes (IHOP) brands.

Notably, its shares have declined 46.5% year to date, substantially underperforming 6.4% growth of the industry it belongs to.



Moreover, this Zacks Rank #4 (Sell) company has been witnessing downward estimate revisions of late, reflecting analysts’ pessimism on its growth prospects.

Over the last 60 days, the Zacks Consensus Estimate for DineEquity’s current-quarter earnings has slumped 25.4%, reflecting two downward revisions versus none upward. Also, its current-year earnings estimates have moved down 10%, due to two downward revisions versus no upward revision.

This apart, DineEquity has a number of other aspects that make it an unattractive investment option at this point.

Lackluster Earnings & Revenue Growth

DineEquity has historical (3-5 years) earnings per share (EPS) growth rate of 10.2% same as the industry average. Investors should however really focus on its projected growth. Here, the company’s EPS is estimated to plunge 28.1% year over year, comparing unfavorably with the industry average, which calls for EPS growth of 3.7%

Notably, earnings growth is often an indication of strong prospects (and stock price gains) ahead for the company in question and is thus one of the most important factors to consider. Evidently, DineEquity falls weak on this front according to current assessments.

The company’s dreary revenue projections for the year add to the concern. In fiscal 2017, the company’s sales are estimated to witness a decline of 4.2%, as compared to the broader industry’s estimate of nearly 1% growth.

In fact, the company currently has a Growth Score of D on our Zacks Style Score system.

Industry Headwinds

The U.S. restaurant space has not been too enticing for the last few quarters. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out that resulted in low consumption. This is because along with wage growth, inflation is also on the rise that translates to lower real income, and in turn less disposable income. In fact, the situation has taken a worse turn, thanks to higher health care costs and tightened credit availability in the country.

Moreover, as consumers demand high-quality products at lower prices, it is pushing grocery stores to decrease their food prices in order to remain competitive. This, in turn, is resulting in a bigger gap between food-at-home and food-away-from-home indices.

Consequently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the fiscal second quarter marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. Dinequity is no exception to the trend and resultantly, the company’s sales have also come under pressure.

Fiscal 2017 Guidance Slashed

Along with its second-quarter fiscal 2017 results, the company stated that it now expects Applebee's domestic system-wide comps to decrease in the range of 6–8% (a decline of 4% to 8%, expected earlier).

Additionally, IHOP's domestic system-wide comps are expected to be decline in the range of 1% to 3% (earlier, flat to up 3%).

Meanwhile, the company expects capital expenditure to be roughly $14 million in fiscal 2017, up from $12 million, anticipated earlier.

Rising Costs Putting Pressure on Margins

Of late, the company’s profits have been under pressure owing to a rising wage rates scenario. Moreover, an increase in expenses related to sales initiatives are adding to the costs. Incremental investments in marketing programs and promotional activity to combat competition are also expected to continue weigh on margins.

Meanwhile, Dinequity has recorded trailing 12-month net margin of 13.1% compared with the industry average of 15.1%. Given the continual rise in expenses, the trend is not expected to reverse for the company any time soon.

Stocks to Consider

Better-ranked stocks in this sector include Papa John's International, Inc. PZZA, Domino's Pizza, Inc. DPZ and Bravo Brio Restaurant Group, Inc. BBRG, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Papa John's, Domino's and Bravo Brio pulled off an average positive earnings surprise of 5.10%, 6.75% and 28.27%, respectively.

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