Why Dine Brands Offers Good Value
Dine Brands Global Inc. (NYSE:DIN) could deliver capital growth, in my opinion, after its 12% stock price fall in the past year.
The quick service restaurant that owns Applebee's and IHOP is making changes to its menu, expanding its number of restaurant locations and aiming to reduce costs.
Menu changes
Dine Brands is introducing new products to broaden its appeal to a wider range of consumers. For example, it introduced lower-priced items and a range of discount offers in fiscal 2019. They could improve the company's competitiveness and encourage its customers to visit its restaurants more frequently.
In addition, the business will launch new menu items in fiscal 2020 that have been developed using a large amount of data on the past purchases of its customers. This could help the company to implement products which are more popular among its customers, and which have a greater positive impact on its sales performance.
Restaurant expansion
The company announced two agreements in fiscal 2019 that could catalyze its growth prospects. It will open around 100 new restaurants at Travel Centers of America sites over the next five years. This will broaden its geographic exposure and increase the size of its potential customer base.
Dine Brands will also open a new chain of restaurants called Flip'd. They will seek to address growing consumer demand for fast all-day breakfast options in densely populated city centers. Flip'd will use a significant amount of technology to keep its costs down, which could provide it with a competitive advantage versus its sector peers.
Growth strategy
The business is making changes to its marketing strategy so that it resonates more closely with its customers. For example, it is boosting its investment in online advertising to increase its ability to communicate with younger consumers. They make up over 50% of its guests, and could represent a growth area for the business.
Additionally, Dine Brands has conducted a review into its restaurants. It has increased its investment in the 10% of its restaurants that are among its worst performers, including increasing staff training and improving efficiency. This may to improve its guest satisfaction scores and could lead to a rising level of loyalty among its customers.
Potential challenges
The business faces rising costs over upcoming quarters. A lack of available staff means that its labor costs are likely to increase, which could negatively impact on its margins and profitability. The quick service restaurant industry is also saturated with a range of businesses offering attractive products to consumers. This could limit Dine Brands' growth potential, and may make it more difficult for the company to increase its number of restaurant locations due to them experiencing a high level of competition.
Dine Brands plans to extend its successful cost reduction strategy into a third year in fiscal 2020. Its strategy contributed to a 0.65 percentage point decline in its costs as a proportion of revenue in fiscal 2018, while they fell by a further 1.35 percentage points in fiscal 2019. It is targeting a 0.75 percentage point fall in its costs as a proportion of sales in fiscal 2020. It plans to achieve this aim through reducing its distribution costs and renegotiating the prices it pays for its ingredients with suppliers. This could offset its rising labor costs and increase its competitive position in a saturated restaurant industry.
Outlook
Market analysts forecast that the company will report a 6.1% rise in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 11.4 suggests that it offers good value for the money given the potential impact of its growth strategy.
Disclosure: The author has no position in any stock mentioned.
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This article first appeared on GuruFocus.
