Get your checkbook ready if you’ve always wanted to own an Applebee’s. In late November, IHOP Corp. completed its acquisition of Applebee’s, borrowing a total of $2.039 billion to come up with the cash to close the deal. Now IHOP chairman/c.e.o. Julia Stewart plans to repay that debt by selling franchise rights to 475 of Applebee’s 510 company-owned stores (the remainder of the chain’s 1,955 stores were already franchised) and also selling much of the real estate on which those stores sit.
It won’t be a fire sale, however. Stewart’s timetable calls for these transactions to be completed by the end of 2010. But she’ll need plenty of cash to pay off the complex securitization package (four classes of fixed rate notes; two classes of variable funding notes) that provide the money for the deal. The weighted average interest rate on these borrowings is 7.1799 percent, exclusive of the amortization of fees and expenses. Add in those fees and expenses, however, and the effective rate jumps to 8.4571 percent. Generating sufficient cash to make interest payments at the end of every quarter will be a challenge, even for a company the size of the new IHOP (3,250 restaurants; annual sales of $6.8 billion).
Take the plunge, however, and you’ll also be getting an invigorated top management team at Applebee’s, courtesy of Stewart, who has already engineered the departure of eight of the company’s top executives. She plans to return Applebee’s to its position as a casual dining market leader.
“In addition to my role as c.e.o. of our parent company (IHOP), over the next several months, I plan to devote a substantial portion of my time to the day-to-day management of the Applebee’s business unit as I work with our new leadership team to reenergize and differentiate the Applebee’s brand,” she says.
Stewart will have her work cut out for her. Over the last few years, Applebee’s has been an efficiently run company whose balance sheet and financial results have been solid, thanks to a steady diet of menu price increases. What the company hasn’t been as good at is attracting new customers, or even keeping the ones it already had.
The magnitude of the company’s shrinking customer base came to light early last fall in a report issued by Goldman Sachs restaurant analyst Steven Kron. As RH first reported in an October e-newsletter, Kron noticed that Applebee’s August 2007 numbers showed a decline in customer counts of six-plus percent from August 2006. August 2006’s customer count had itself been about three percent lower than that of August 2005, which in turn had been off four-plus percent from August 2004. And that 2004 number had been off 1.5 percent from August 2003. Add these small losses together and you find that Applebee’s August customer traffic was down a cumulative 15 percent over the past four years.
Looking further, Kron found that guest counts at Applebee’s had fallen in 34 of the past 37 months. No wonder IHOP thought it could take over a much-larger competitor—the Applebee’s deal quadruples the company’s sales—and turn it around. Applebee’s reported its guest traffic fell between 3 and 3.5 percent in November, so Stewart and her new team already know where they have to start to stop the bleeding.
Then again, they’ve got a lot to work with. Applebee’s has great real estate and a marketing budget that enables it to conduct national ad campaigns. And Stewart and company have already executed a dramatic turnaround at IHOP, which was an underperforming full-service chain when they came on the scene.
Can they pull off the same trick at Applebee’s? We’ll see.