Buffalo Wild Wings and dineEquity are both being built for the long run

Title: Buffalo Wild Wings and dineEquity are both being built for the long run, but with different operating models.

Ramifications:

1) dineEquity is 6 times larger in location count than Buffalo Wild Wings

2) The two companies aspire to grow earnings in different ways.

3) dineEquity can market across the whole daypart with the brands they own.



dineEquity (DIN) and Buffalo Wild Wings (BWLD) both released third quarter results on October 27th. dineEquity posted a .47/share profit verses a .09/share expected loss, and Buffalo Wild Wings posted .25/share profit, missing the projected earnings by .06/share. We used the two firms Quarterly reports as the basis for our comments

The two companies are not similar in size or makeup, and while they are competitors where Applebee’s and Buffalo Wild Wings restaurants compete in the same market for casual dining dollars, they really market to two separate demographics. The differences are more marked than the similarities.

dineEquity is still consolidating Applebee’s into their operating system, having purchased an entity in Applebee’s that was larger than IHOP. While the wisdom of a massive expansion could be questioned in light of current market conditions, even the most conservative of forecasts missed the magnitude and speed of the slowdown in consumer spending and the dive in consumer confidence that has occurred.

Applebee’s experienced a decrease in same-store revenues, and the company acknowledged that their new value offerings didn’t perform. That’s a marketing/advertising, not an operational or management issue, and can be easily corrected.

IHOP, with several years of brand revitalization under its belt, is a much more capable competitor than they were when the exercise in refranchising and repositioning started. There is no reason to think Applebee’s won’t eventually get down the same track and move dineEquity towards its goal of being 100% franchisee locations. I believe that dineEquity’s management is building a firm for the long run, and will benefit favorably from lower interest rates as their debt instruments mature and are replaced with lower-cost debt. If dineEquity conservatively manages their financial side and continues to retire debt with free cash flows, the outlook continues to get better and better. dineEquity is out to be a marketing and franchisee management firm, creating their earnings through franchise and licensing fees.

Buffalo Wild Wings, on the other hand, experienced excellent same store sales growth, and is buying back franchisee properties as part of a program to expand company revenues and earnings. They obviously feel that their way to increased profits is to become a full line owner and operator, while still actively franchising where the deals make sense.

This is why comparing these stocks requires understanding that while it looks like they share a common operating model within the same consumer space; they are heading in opposite directions in operating structure and philosophy.

dineEquity has a very large unit count, and as it becomes more focused as franchisor/marketer on driving top-line revenues, with the advantage of having the two brands identified with different dayparts for less cannibalism of consumer marketing focus, they are building a system that will allow for ever more efficient use of capital as the Applebee’s company restaurants get moved out to franchisees.

Buffalo Wild Wings is taking the tried and true approach of picking a specific consumer segment and being the best competitor within it. Their management believing they can run restaurants as company ops more profitably than they can as being the franchisor has lead to the “Buy–back” of franchisee units.

Buffalo Wild Wings and dineEquity are two dissimilarly sized firms with completely opposite philosophies of how best to grow their specific companies. In economics, the example of bad analysis is comparing apples to oranges; in this case it would be comparing Applebee’s to Wings.