It must also be noted that DineEquity Inc (NYSE:DIN) and other casual-dining chains have been and will continue to be disproportionately affected by the Affordable Care Act. Public companies like Papa John’s Int’l, Inc. (NASDAQ:PZZA) have adopted various strategies to deal with the coverage mandate for full-time employees, including price increases and working-hour cuts. Papa John’s strategy could lower unit sales due to the higher prices and increase training costs since more workers will need to be hired to fill the cut hours of many workers. While it is unclear if the new law will harm food service companies to the extent that many management teams have claimed, DineEquity’s decision to franchise the bulk of its locations will allow it to avoid adopting any new healthcare-related structural costs. Under the company’s new franchise model, its franchisees will be financially responsible for providing healthcare coverage for their hourly “full-time” employees.
Potential Complications and Long-Term Outlook
There are few established precedents for DineEquity’s new franchising strategy. It will certainly be one of the largest publicly-traded restaurant companies ever to adopt an all-franchise model for one of its core concepts. While there are plenty of privately-held food service corporations that maintain lean corporate structures and derive the bulk of their revenues from royalties and franchise fees, it will be interesting to see whether or not DineEquity can remain competitive as a public franchisor.
At the moment, there is no reason to doubt the company’s strategy. Although DineEquity’s most recent quarterly report had plenty of encouraging attributes, the company also reported a decline in revenue and customer traffic at both of its concepts.
While a lot of the revenue decrease can be attributed to the company’s ongoing operational divestiture, the organic component of the decline provides clear evidence that the company’s franchising strategy is prudent. In the future, DineEquity’s franchisees will be forced to absorb the lion’s share of such decreases. Of course, they will also be responsible for making the investments and capital improvements necessary to drive the chain’s organic growth. As such, DineEquity will be able to eliminate a significant drain on its bottom line by slimming down its centralized corporate structure.
In sum, DineEquity Inc (NYSE:DIN) is embarking upon an interesting experiment that may allow it to shrink its overall revenues while returning a significant amount of capital to its shareholders. It will be insulated from the volatility that characterizes the American casual-dining industry and rely on franchisees to drive its growth. As such, it may serve as a compelling component of consumer-focused investors’ medium-term and long-term portfolios.
The article Restructuring Could Lead to a Large Payoff originally appeared on Fool.com and is written by Mike Thiessen.
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