For those who haven't followed the IHOP story over the last couple of years, the company has essentially shifted strategies from the company-owned restaurant business to the franchising business. While I'm usually very skeptical of strategy shifts, this one actually makes tremendous sense because the franchising business is very lucrative and much less capital-intensive than the ownership business. In recent years, the company has trimmed its exposure to company-owned restaurants down to less than 1% of IHOPs. IHOP has been doing well implementing this plan and I believe it will be able to shift the Applebee's strategy successfully.
According to an AP article on the story, same-store sales are down more significantly at company-owned Applebee's than they are for franchisee-owned stores. This indicates that IHOP is correct in planning on franchising company owned stores because franchisers are more successfully running the restaurants than the company was able to.
In franchising company-owned stores, IHOP stands to increase cash flow over time for several reasons. First and most importantly, the shift to a franchising-based business model will increase cash flow and decrease capital expenditures, in my opinion. In addition, general and administrative expenses will drop because much of that was attributable to the ownership (not franchising) business. Lastly, IHOP will be able to generate cash by selling off Applebee's-owned real estate.
The company plans on using this increased cash flow to first pay down debt associated with the buyout. After the debt levels are reduced, IHOP plans on using the extra cash flow, in conjunction with cash flow from the IHOP unit, to help shareholders through share repurchases.
This is a very interesting scenario because I'm a huge believer in shifting from the company-owned to franchising model and I think IHOP has the ability to successfully perform this strategy change and the market agrees - IHOP is up more than 8% on the day.
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Reader Comments (Page 1 of 1)
7-16-2007 @ 11:35PM
James said...
It probably doesn't hurt that IHOP's CEO/Chairperson previously held a top position at Applebee's as president of its domestic division (See NewsVisual's relationship map: http://www.newsvisual.com)
Hopefully, this will make for a smooth transition and perhaps get Applebee's out of its slump. A $155 million aquisition of debt is pretty gutsy on IHOP's part.