Applebee's unappetizing to activist shareholder

Casual dining chain Applebee's International Inc. (NASDAQ: APPB) continues to have problems with a proposal by large shareholder hedge fund Breeden Partners LP to put four of its choices on Applebee's board of directors. Breeden has rejected Applebee's seat offer for two of the directors and now the company has advised shareholders not to vote in favor of the proposal at the annual meeting. This fight has come about because of unimpressive results from Applebee's in 2005 and 2006, coupled with perceived boorish behavior on the part of Applebee's execs who were using the company jets for personal business while claiming to be restructuring the company to be more cost effective.

Applebee's is struggling with a decline in sales and an inability to establish a strong brand in the midst of its competitors in the casual dining sector. Applebee's management has targeted 24 underperforming company-owned restaurants for closure in 2007. Breeden Partners LP wants the company to sell all 528 of its company-owned locations and retain only the approximately 1500 franchise locations. While there is no denying Applebee's management needs to turn operations around, the proposal to sell all the company-owned locations does not make immediate sense either.

According to 4Q 2006 figures, net income was down 10% to $18.5 million for the quarter, approximately $0.25 per share. Revenues increased 6.8% but same-store sales decreased just over 1%. Debt decreased 3% to $175 million, but free cash flow generation was off 37% compared to FY 2005. At its latest quarterly conference call, Applebee's management did not provide a Q&A session, nor did the press release for 4Q earnings include a balance sheet or cash flow statement.