The Ghost of Christmas (Just) Past
Implications:
1) Retailers are going into extended period of struggling to survive
2) Consumer credit, the primary spending mechanism for mid and big ticket items, is broken
3) "Trading Down" is the consumer trend for 2009
This analysis was written for Gerson Lerhman Group and published Jan 2, 2009
Source Article: Retailers' holiday sales drop at least 5.5 percent www.msnbc.msn.com (view article)
Analysis:
With a wink and a nod to the esteemed Charles Dickens...
The dismal sales numbers are starting to leak out from Christmas Season 2008, and once the numbers from the major retailers are announced on the 8th, it will be official: The "ghost" of this Christmas just past will be haunting retailers for a long, long time.
There is going to be excess inventory of high-end goods no one will purchase right now, regardless of how desirable they are. Cashmere sweaters are being pushed at a Buy one, get TWO free deal at the Off 5th Saks(NYSE:SKS) Outlets. What do you do to recoup your inventory investment in luxury goods when no one wants them?
Marginal store locations are going to be become cash flow drains on retailers with viable and previously successful business plans. Using Circuit City(NYS:CC) and Office Depot(NYSE:ODP) as examples of this, as the store count comes down, their corporate overhead gets split over fewer and fewer locations, increasing the pressure on each remaining unit to perform while cutting potential ability to advertise and market against their healthier competitors, in these specific cases, Best Buy(NYSE:BBY) and Staples.Pulling out of markets is a short-term and drastic solution if you aspire to be (or continue to be) a nationwide leader in your category. This solution doesn't address how they ended up at a competitive disadvantage to begin with, another "Ghost" that has to have a reckoning with some upper management at various firms.
Linens N Things(NYS:LIN), Mervyns; they are just the beginning of the shake out in retailing specialty and Department store chains. If you aren't nimble and financially strong enough to be able to both pick "Hot" value slanted goods and then price them right, you are in for rocky times with the consumer moving forward in the near term. This next year plus is going to be a "Survival of the Fittest" scenario for retail across the board. Consumers are wary of spending on anything but necessities, and will be until the housing and credit market meltdowns are on the way to being solved, and unemployment, a lag indicator, starts to improve.
Retail won't see things loosen up until the consumer credit mechanism is repaired in a way that allows people to be confident in their ability to spend more than is in the checkbook. Anecdotally, we saw Costco(NAS:COST) cut the price on a 60' Sharp(BSE:523449) LCD HDTV, featured at $3,999 at the beginning of December, to $3,499 the week before Christmas. Under normal circumstances, the $3,999 was a great, almost unbelievable, buy.
Electronics retailers have to be sweating, most people are thinking that 2 year old laptop isn't quite as in need of replacement as they thought it was.
Trading Down is going to be the consumer trend of 2009. Getting the car fixed instead of looking for a new one. If you need a vital appliance like a stove or washer that breaks, maybe taking a "Short-term" contract from a "Rent-to-own" company instead of hitting the local appliance store or Sears.
People are so unsure of the economic climate going forward, even a great retail concept with non-vital goods to market is going to need to work extra hard. Wal-Mart(NYSE:WMT) may be the king for quite some time to come.
Like Jacob Marley warning Scrooge he needs to change his ways, let's hope this season of despair leads to a fresh way of thinking about and solving the challenges ahead for the retail sector.
,
,
Friday, January 2, 2009
Thursday, December 11, 2008
Fuel prices - the secondary market for most consumers second-most valuable property
A condensed version of this analysis was originally done for Gerson Lehrman News and posted 12/11/08
Original Article: Advertising Age http://adage.com/article?article_id=133072
Implications:
1) After a home, the auto is the second most expensive item most people own.
2) The up and down volatility in fuel prices is lowering demand, regardless of price
3) Fuel prices do impact mid and lower-mid income earners most dramatically
Analysis:
On October 20th the EIA (Energy Information Agency) listed the average retail price for regular unleaded at $2.914/gallon, and it had been on a downward trend for 6 weeks or so at the time.
In it's report released on December 8th, the average price was $1.699/gal. In 49 reporting days, (7 weeks) the price went down $1.215/Gal, or 41.6%, and it wasn't even a primary economic headline.
The CSP Daily News is reporting as of December 9th that the savings at the pump aren't translating to dramatically increased inside sales at the convenience store portions of the fuel outlets. What is going on with the consumer?
Wal-Mart (NYS:WMT) may very well be getting those savings as increased holiday sales. In late summer, when $4.00/gal fuel was being sold, the discussion being had about people needing to trade down from SUV's and minivans to hybrids and smaller vehicles was a laughable argument. Most families purchase their vehicles with consumer credit, and if you were 2 years into a 5 year loan on a SUV or pickup truck, you couldn't just adjust what vehicle you chose to drive on a daily basis.
The secondary market of vehicle costs, fuel prices, is much more volatile than the vehicle market itself. That’s why demand didn’t decrease more than it did; people were forced to drive what they owned, regardless of the cost to operate it. And having seen the automaker bailout play out over the last two weeks, there wasn’t enough alternative and hybrid production to accommodate that vehicle demand, in any case.
Fuel demand is going to adjust lower, as people have been shocked into realizing how vulnerable to energy costs their personal finances and their lifestyle actually are.
Credit was already tightening up, and the average mid-level consumer felt we were in a serious economic slowdown, even if they weren't saying it. You just bit the bullet, filled the tank to keep your transportation means on the road, and hoped prices would eventually come down. Well, now they have.
Fuel prices do impact the mid-level and lower earner most dramatically, and they are using the “savings” to 1) try and recoup some of the budget damage done to them this summer, and 2) get through the holidays without accruing too much additional debt.
The average consumer is worried about the direction of the economy as a whole. "Flash for Cash" is so last year! Wal-Mart shopping was never a stigma for the average consumer, and people "trading down" are learning what lots and lots of people have known for years. Value never goes out of style.
Original Article: Advertising Age http://adage.com/article?article_id=133072
Implications:
1) After a home, the auto is the second most expensive item most people own.
2) The up and down volatility in fuel prices is lowering demand, regardless of price
3) Fuel prices do impact mid and lower-mid income earners most dramatically
Analysis:
On October 20th the EIA (Energy Information Agency) listed the average retail price for regular unleaded at $2.914/gallon, and it had been on a downward trend for 6 weeks or so at the time.
In it's report released on December 8th, the average price was $1.699/gal. In 49 reporting days, (7 weeks) the price went down $1.215/Gal, or 41.6%, and it wasn't even a primary economic headline.
The CSP Daily News is reporting as of December 9th that the savings at the pump aren't translating to dramatically increased inside sales at the convenience store portions of the fuel outlets. What is going on with the consumer?
Wal-Mart (NYS:WMT) may very well be getting those savings as increased holiday sales. In late summer, when $4.00/gal fuel was being sold, the discussion being had about people needing to trade down from SUV's and minivans to hybrids and smaller vehicles was a laughable argument. Most families purchase their vehicles with consumer credit, and if you were 2 years into a 5 year loan on a SUV or pickup truck, you couldn't just adjust what vehicle you chose to drive on a daily basis.
The secondary market of vehicle costs, fuel prices, is much more volatile than the vehicle market itself. That’s why demand didn’t decrease more than it did; people were forced to drive what they owned, regardless of the cost to operate it. And having seen the automaker bailout play out over the last two weeks, there wasn’t enough alternative and hybrid production to accommodate that vehicle demand, in any case.
Fuel demand is going to adjust lower, as people have been shocked into realizing how vulnerable to energy costs their personal finances and their lifestyle actually are.
Credit was already tightening up, and the average mid-level consumer felt we were in a serious economic slowdown, even if they weren't saying it. You just bit the bullet, filled the tank to keep your transportation means on the road, and hoped prices would eventually come down. Well, now they have.
Fuel prices do impact the mid-level and lower earner most dramatically, and they are using the “savings” to 1) try and recoup some of the budget damage done to them this summer, and 2) get through the holidays without accruing too much additional debt.
The average consumer is worried about the direction of the economy as a whole. "Flash for Cash" is so last year! Wal-Mart shopping was never a stigma for the average consumer, and people "trading down" are learning what lots and lots of people have known for years. Value never goes out of style.
Friday, December 5, 2008
November retail sales drop shouldn't be a surprise to most retailers.
This analysis was written for Gerson Lehrman News and published December 5
Implications:
1) Credit restrictions are going to inevitably lead to lower retail sales.
2) Economic news and what they experience has consumers nervous
3) Sales made at discount prices reduce top-line revenues, and"Super-Specials" on Black Friday create expectations of better sales.
Analysis:
The news is brutal everyday...Country in recession since beginning of 2008. (That wasn't news to the average person). General Motors(NYS:GM) looking at bankruptcy protection. Circuit City(NYS:CC) and Linens N Things in bankruptcy. Auto dealers closing all over the country. Foreclosure crisis. Global Economic slowdown.
Even the breathtaking decline in energy prices and commodities in general are a sideshow to the unrelenting economic gloom.
The US government seems to making up the "Bailout" or "Recovery Package" as they go along, as each measure they enact seems to have negligible effect on the overall problem of a severe economic slowdown.
While we're all sure that everyone at Treasury, Commerce, the Fed and all the worldwide authorities are doing their best, the overall impression to most people I know is the world governments and agencies don't have a clue as to how wide and deep the problems are.
That being said, the fact that overall sales in US retail are down in only single digits should be a positive, not a negative, sign that the US economy is more resilient and the US consumer tougher and less risk-averse than the institutions that are the causing the pain.
If there's no consumer credit, car sales will suffer. Even more importantly, if the credit score criteria for getting an auto loan stay the same going forward, the ready pool of automobile buyers will be smaller, leading to a smaller new car market.
Each and every step of this process shouldn't be reported as a fresh "disaster". It's a systemic problem.
If the average consumer can't get credit readily, home furnishing and large-ticket electronics purchases are going to fall. It's not a problem with the retailers or offerings, it's a matter of the mechanism most people use to purchase larger-ticket household items is broken. As much as US homeowners love flat-screen TV's, they love eating and caring for their families more.
So, when earnings for furniture retailers and manufacturers come out, it's not a new story of another category falling apart; it's just a continuation of the consumer credit crisis, same as the auto sales drop.
Jewelry companies are reporting lower sales, again, no surprise, just another manifestation of shrinking consumer credit. So when strip centers and malls start losing retail tenants and commercial mortgages become the next crisis, it's still the same story.
The US consumer should be congratulated for what they've been able to accomplish, even in this very tough economic time. They are trading Macy's( :M) for Wal-Mart(NYS:WMT), auto parts chains should be picking up business while the dealers starve, the "Rent-to-Own" businesses (Aarons, Rent-a-Center) will be busier than the Rooms-To-Go or the Ethan Allen(NYS:ETH) store.
The consumer will adapt and survive, but it's time for a real, comprehensive program that people can have confidence in.
Implications:
1) Credit restrictions are going to inevitably lead to lower retail sales.
2) Economic news and what they experience has consumers nervous
3) Sales made at discount prices reduce top-line revenues, and"Super-Specials" on Black Friday create expectations of better sales.
Analysis:
The news is brutal everyday...Country in recession since beginning of 2008. (That wasn't news to the average person). General Motors(NYS:GM) looking at bankruptcy protection. Circuit City(NYS:CC) and Linens N Things in bankruptcy. Auto dealers closing all over the country. Foreclosure crisis. Global Economic slowdown.
Even the breathtaking decline in energy prices and commodities in general are a sideshow to the unrelenting economic gloom.
The US government seems to making up the "Bailout" or "Recovery Package" as they go along, as each measure they enact seems to have negligible effect on the overall problem of a severe economic slowdown.
While we're all sure that everyone at Treasury, Commerce, the Fed and all the worldwide authorities are doing their best, the overall impression to most people I know is the world governments and agencies don't have a clue as to how wide and deep the problems are.
That being said, the fact that overall sales in US retail are down in only single digits should be a positive, not a negative, sign that the US economy is more resilient and the US consumer tougher and less risk-averse than the institutions that are the causing the pain.
If there's no consumer credit, car sales will suffer. Even more importantly, if the credit score criteria for getting an auto loan stay the same going forward, the ready pool of automobile buyers will be smaller, leading to a smaller new car market.
Each and every step of this process shouldn't be reported as a fresh "disaster". It's a systemic problem.
If the average consumer can't get credit readily, home furnishing and large-ticket electronics purchases are going to fall. It's not a problem with the retailers or offerings, it's a matter of the mechanism most people use to purchase larger-ticket household items is broken. As much as US homeowners love flat-screen TV's, they love eating and caring for their families more.
So, when earnings for furniture retailers and manufacturers come out, it's not a new story of another category falling apart; it's just a continuation of the consumer credit crisis, same as the auto sales drop.
Jewelry companies are reporting lower sales, again, no surprise, just another manifestation of shrinking consumer credit. So when strip centers and malls start losing retail tenants and commercial mortgages become the next crisis, it's still the same story.
The US consumer should be congratulated for what they've been able to accomplish, even in this very tough economic time. They are trading Macy's( :M) for Wal-Mart(NYS:WMT), auto parts chains should be picking up business while the dealers starve, the "Rent-to-Own" businesses (Aarons, Rent-a-Center) will be busier than the Rooms-To-Go or the Ethan Allen(NYS:ETH) store.
The consumer will adapt and survive, but it's time for a real, comprehensive program that people can have confidence in.
Monday, December 1, 2008
Sell More Gasoline !!!
Well, here it is…Unleaded Regular under 2.00/gal in most of the country, diesel back under 3.00/gal, the rapid drop in prices as unexpected as the rapid run up to the 4.00/gal.+ range over the spring and summer. As I write this on the afternoon of December 1, 2008, I see Crude oil under $50.00/bbl, and NYMEX RBOB under $1.12/gal. What year is it, anyway? The last time the benchmark WTI crude was priced at this level was in the third quarter of 2004. Ahhh, the good old days!
Most of the operational and management employees at firms we’ve either operated directly or consulted for know the three words we’ve driven to success in the past…”Sell More Gasoline!” (Fuel).
It’s hard to be pumping good gallonage and not do well on inside sales, you have to do a notably bad job of convenience retailing in order to not have the corollary of “Increased Gallons pumped = increased inside sales” not ring true.
As we have designed and operated units and chains over the years, this has been our guiding principle:”To use the strength of the constant traffic flow that a petroleum outlet provides to drive the enhanced revenue flow and operating margins that a Convenience store (and/or fast food outlet) outlet achieves.”
This simple philosophy is the reason that gasoline retailers have sold additional items since before Standard Oil was broken up. While we’re not advocating any “price wars” breaking out on hotly competitive corners, we certainly believe that fuel pricing can again become a major driver behind store merchandise and foodservice volumes and subsequently, increased location profitability.
Condevco has an affordable solution that services your individual sites, and that allows for fuel pricing that drives traffic to your site, while still maintaining competitive and better margins on fuel. Contact us for details.
Most of the operational and management employees at firms we’ve either operated directly or consulted for know the three words we’ve driven to success in the past…”Sell More Gasoline!” (Fuel).
It’s hard to be pumping good gallonage and not do well on inside sales, you have to do a notably bad job of convenience retailing in order to not have the corollary of “Increased Gallons pumped = increased inside sales” not ring true.
As we have designed and operated units and chains over the years, this has been our guiding principle:”To use the strength of the constant traffic flow that a petroleum outlet provides to drive the enhanced revenue flow and operating margins that a Convenience store (and/or fast food outlet) outlet achieves.”
This simple philosophy is the reason that gasoline retailers have sold additional items since before Standard Oil was broken up. While we’re not advocating any “price wars” breaking out on hotly competitive corners, we certainly believe that fuel pricing can again become a major driver behind store merchandise and foodservice volumes and subsequently, increased location profitability.
Condevco has an affordable solution that services your individual sites, and that allows for fuel pricing that drives traffic to your site, while still maintaining competitive and better margins on fuel. Contact us for details.
Monday, November 10, 2008
Circuit City Retrenchment delaying the inevitable
NOTE: This was written and turned into Gerson Lehrman News last Friday Nov 7, and published Yesterday, before the Bankruptcy filing of this morning.
Implications:
1) Pulling out of Major markets a bad idea for long run outlook.
2) Last store remodel/refit wasn't successful
3)Tried to become like Best Buy(NYS:BBY), but didn't try to better them
Analysis:
The news the Circuit City was closing 155 stores and pulling out of major metropolitan areas came as no surprise to industry watchers.
The seeds for this were sown during the last major store remodel/refit, when the Circuit City stores were converted to essentially an imitation of Best Buy, eliminating any chance for Circuit City to differentiate itself in any way but price and advertising spend. Commission plans were eliminated from the sales floor, so the face-to-face knowledge and expertise of the customer service staff disappeared.
They never compensated for that loss of product knowledge to the consumer with the better POP informational regime that Best Buy has always employed.
Unfortunately for Circuit City, Best Buy is better at being themselves than Circuit City was at imitating them.
Implications:
1) Pulling out of Major markets a bad idea for long run outlook.
2) Last store remodel/refit wasn't successful
3)Tried to become like Best Buy(NYS:BBY), but didn't try to better them
Analysis:
The news the Circuit City was closing 155 stores and pulling out of major metropolitan areas came as no surprise to industry watchers.
The seeds for this were sown during the last major store remodel/refit, when the Circuit City stores were converted to essentially an imitation of Best Buy, eliminating any chance for Circuit City to differentiate itself in any way but price and advertising spend. Commission plans were eliminated from the sales floor, so the face-to-face knowledge and expertise of the customer service staff disappeared.
They never compensated for that loss of product knowledge to the consumer with the better POP informational regime that Best Buy has always employed.
Unfortunately for Circuit City, Best Buy is better at being themselves than Circuit City was at imitating them.
Saturday, November 8, 2008
Vote "Yes" for Good Customer Service!
In the Convenience Store field, our first name is “Convenience”. Convenience means being in a convenient location, having a selection of merchandise that allows people to fill their needs without additional trips somewhere else (making it convenient to stop there), and having multiple options to allow them to pay. What seems to be missing from many convenience settings is making it convenient to deal with your first-line associates. In other words, how many times has a friend or client with a store or stores had a half-hour discussion with you about how to arrange the cold vault, but shrugs their shoulders and dismisses staffing with “It’s hard to find good people”?
All the care and science that goes into everything from merchandise selection and mix, to how a store is designed and looks, to what fuel brand, if any, to select, can be of little effect if the customer/associate interaction isn’t a positive experience. The level of service in the US, in general, has gotten to the point that good friendly service is the exception rather than the norm. One of the big C-Store publications actually has a column where they talk about the good service they received when THEY are on the road.
That doesn’t mean we shouldn’t strive for a better level of customer assistance.
We don’t believe anecdotal evidence proves a norm or spots a trend, but we all know that, even with the rapid drop in fuel prices, our customers are hurting financially. Inside store merchandise and foodservice (if you have it) sales are the lifeblood of the business. The easiest way to increase inside sales is to concentrate on staffing and training. Raise your expectations of performance for your customer service associates, and reward them when they perform.
Your customers want to be served, promptly and with a smile. My blog is named “The Service Station” for a reason. Think of the category you’re in as “The Service Store” instead of “The Convenience Store” category, and both you and your customers will be much better off. Sales will go up, your associates will be happier and busier, and you’ll be providing a positive “service” to your bottom line in the end.
Condevco offers comprehensive customer service and operations consulting and manuals for your store/chain. The operations we have operated and consulted on have a long history of “famous” customer service. Let us help you.
All the care and science that goes into everything from merchandise selection and mix, to how a store is designed and looks, to what fuel brand, if any, to select, can be of little effect if the customer/associate interaction isn’t a positive experience. The level of service in the US, in general, has gotten to the point that good friendly service is the exception rather than the norm. One of the big C-Store publications actually has a column where they talk about the good service they received when THEY are on the road.
That doesn’t mean we shouldn’t strive for a better level of customer assistance.
We don’t believe anecdotal evidence proves a norm or spots a trend, but we all know that, even with the rapid drop in fuel prices, our customers are hurting financially. Inside store merchandise and foodservice (if you have it) sales are the lifeblood of the business. The easiest way to increase inside sales is to concentrate on staffing and training. Raise your expectations of performance for your customer service associates, and reward them when they perform.
Your customers want to be served, promptly and with a smile. My blog is named “The Service Station” for a reason. Think of the category you’re in as “The Service Store” instead of “The Convenience Store” category, and both you and your customers will be much better off. Sales will go up, your associates will be happier and busier, and you’ll be providing a positive “service” to your bottom line in the end.
Condevco offers comprehensive customer service and operations consulting and manuals for your store/chain. The operations we have operated and consulted on have a long history of “famous” customer service. Let us help you.
Monday, November 3, 2008
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.
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.
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