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Soft Sales & High Costs to Hit DineEquity (DIN) Q4 Earnings?

Zacks

DineEquity, Inc. DIN will report fourth-quarter 2017 results before the opening bell on Feb 20.

Shares of the company have declined 19.6% in the past year against the industry’s 12.4% gain. A challenging operating environment in the U.S. restaurants space has been affecting the company. Revenues, comps and earnings per share also declined in the same time period.

Unfortunately, the situation is expected to remain unchanged in the to-be-reported quarter as well. Let’s find out why.


Tough Sales Environment Likely to Continue

DineEquity operates under the Applebee's Neighborhood Grill & Bar and International House of Pancakes (IHOP) brands.

A continuing choppy sales environment in the overall restaurant space along with weak comps at both the brands might limit revenue growth. In fact, the consensus estimate for the quarter’s revenues of $148 million projects a decline of 3.9% when compared with the year-ago figure. Last quarter, total revenues of $144.7 million missed the consensus mark and decreased 7.3% year over year.

DineEquity, Inc Revenue (TTM)

Comps to Stay Under Pressure

Currently, Applebee’s casual dining restaurants are facing stiff competition from fast-food and quick service restaurants. As a result, despite various efforts to reinvigorate the brand, its comps remained weak for quite some time.

Meanwhile, steps taken to revitalize the brand via increased focus on food and culinary innovation, consumer satisfaction and marketing are expected to drive comps over the long term, with an improvement likely 2018 onwards. Hence, given that 2017 was a transitional year for the brand, comps are very much likely to remain pressurized in the fourth quarter as well. Notably, the consensus estimate for Applebee's domestic system-wide comps shows a decline of 2%. Comps fell 7.7% in the previous quarter.

Furthermore, comps at the IHOP brand have not been showing improvement over the last five reported quarters. Though initiatives to improve guest satisfaction via remodeling program, online ordering as well delivery services and IHOP mobile application are expected to create improved revenue channels, the results are likely to take time. For the quarter, the Zacks Consensus Estimate for IHOP's domestic system-wide comps are expected to remain unchanged. In the preceding quarter comps fell 3.2%.

Rise in Sales Initiative Expenses to Hurt Bottom line

An increase in expenses related to sales initiatives might dent the quarter’s profits. Also, incremental investments in marketing programs and promotional activity to combat competition are expected to weigh on margins. In fact, the consensus estimate for fourth-quarter earnings of 64 cents reflects a year-over-year decline of a massive 53.3%. In the third quarter, earnings of 91 cents per share surpassed the consensus mark but declined 37.8% year over year.

What Does the Zacks Model Unveil?

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Conversely, a Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if these have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

DineEquity has a Zacks Rank #2 and an Earnings ESP of -4.69%, a combination that suggests that the company is unlikely to beat estimates this time around.

Other Stocks to Consider

Here are a few stocks that investors may consider, as our model shows that they have the right combination of elements to post some earnings beat this quarter:

Choice Hotels CHH has an Earnings ESP of +1.84% and a Zacks Rank #2. The company is scheduled to report its quarterly numbers on Feb 20. You can see the complete list of today’s Zacks #1 Rank stocks here.

Domino's Pizza DPZ has an Earnings ESP of +1.06% and a Zacks Rank #2. The company is scheduled to report its quarterly numbers on Feb 20.

MGM Resorts International MGM has an Earnings ESP of +42.50% and a Zacks Rank of 2. The company is scheduled to report its quarterly numbers on Feb 20.

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