In a conference call with investors, company officials said that the restaurant company expects to add 61 to 66 new franchise units to the IHOP system for this fiscal year. On the second expansion front, the company is proceeding with steps to complete its acquisition of Applebee's, whose shareholders are scheduled to vote on the deal on Oct. 30. IHOP expects to fund the acquisition through a securitization of Applebee's as well as additional debt expected to be raised from the existing IHOP securitization.
The company expects to close the transaction by Nov. 29, but its third-quarter earnings announcement on Tuesday noted that the recent weakening of the credit markets and, specifically, conditions in the asset-backed securities market "have become more challenging due to a reduction in the overall buyer universe and a widening of risk spreads.
While these conditions could potentially increase the difficulty of successfully placing the securitized notes, IHOP believes that it can successfully fund the acquisition through the planned securitizations. In the event it becomes necessary, IHOP has a commitment for bridge financing from Lehman Bros. to finance the transaction until the securitization can be completed.
The expansion via franchises is a part of a strategic transition from company-financed restaurant development to a franchise development model that IHOP has been pursuing for several years. The 1,328-restaurant chain estimates that franchisees have the potential to develop 300 to 700 new IHOP locations in the US, some 400 of which are already committed to being developed by franchisees.
IHOP, which opened 14 new franchised restaurants in third quarter, produced its 19th consecutive quarter of same-store sales growth, an increase of 2%, which was driven by higher guest check averages.
IHOP reported a decrease in net income to a loss of $11.6 million, and a decrease in diluted net income per share to a loss of 69 cents for the third quarter, but it said that the decreases resulted from the recognition of a non-cash, pre-tax expense of $35.6 million related to an interest-rate swap transaction that it entered into during the third quarter in connection with the financing of the Applebee's acquisition. The $11.6 million quarterly loss compared with a profit of $11.3 million and 62 cents per share in last year's third quarter.
Along with the acquisition itself, IHOP is working on a plan to switch the majority of Applebee's company-operated locations to franchises. It is also working to arrange for the sale-leaseback of nearly all Applebee's owned real estate, or approximately 200 locations.
Julia A. Stewart, IHOP's chairman and CEO, said that the company was "pleased with our third quarter and year-to-date 2007 pro forma financial performance," excluding the non-cash expenses associated with the acquisition. "The IHOP brand continues to perform well as we work to optimize our franchise model, moderate annual G&A expense growth and experience the annualized benefit of past share repurchase activities." The company's quarterly sales climbed to $48.million, up from last year's $45.9 million in the third quarter.
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