By Lisa Baertlein
LOS ANGELES, Dec 11 (Reuters) - The debt-laden parent of Applebee's and IHOP restaurants suspended common stock dividends on Thursday, saying the $17 million that would have paid its annual dividend will instead go to pay down debt.
The news sent shares of the company, DineEquity Inc , down 14.4 percent.
'Our reason for taking this action is not because of a liquidity issue but rather because the company is seeking additional flexibility and to opportunistically reduce our debt,' Lucy Neugart, a company spokeswoman, told Reuters.
Glendale, California-based DineEquity has been working to decrease debt and stay in compliance with lender agreements amid an economic downturn that has forced diners to cut back on visits to full-service restaurants like those it operates.
The company, formerly named IHOP, acquired Applebee's Neighborhood Grill & Bar in a leveraged buyout about a year ago, before global credit markets melted down and the U.S. economy fell into recession.
Research Edge restaurant analyst Howard Penney said the company should have stopped paying a dividend earlier. Earlier on Thursday, before Neugart's comment, he called the suspension 'a clear sign of a liquidity issue .... They don't have the money to pay it.'
As of Sept, 30, DineEquity had $1.92 billion of long-term debt. And with leverage at seven times cash flow, it has less financial flexibility than many of its peers.
'We don't think they have a lot of wiggle room,' said Carla Norfleet Taylor, a director at Fitch Ratings. When it comes to refinancing, she said, the company has 'very limited' options.
DineEquity, which hopes to raise cash by selling more restaurants to franchisees, also has been cutting costs by doing things like trimming employee bonuses and vacations.
DineEquity Chairman and Chief Executive Officer Julia Stewart said on Oct. 27 that she expected it 'to remain in compliance with our debt covenants based on current plans. However, our margin of error is expected to be tighter than we would like next year.'
On Thursday, Neugart said: 'As detailed in our most recent earnings announcement, our base plan allows us to meet our covenants.'
DineEquity's chief financial officer resigned in September and has adopted what Penney has dubbed 'aggressive' accounting.
With credit and consumer-spending trends working against the company, Penney said there is a potential that DineEquity could default by spring.
'If they can't sell assets the risk goes up significantly,' he said.
Sales at full-service restaurants like IHOP and Applebee's have been hard-hit as cash-strapped consumers look for ways to save money and reduce personal debt.
There seems to be no relief in sight as banks reel in lending on all levels and consumers -- hard-hit by the housing meltdown and hefty job losses -- hunker down.
RBC Capital Markets analyst Larry Miller said in a note that results from two consumer surveys suggest that 'anemic' restaurant spending could continue for several more months.
Analysts are keeping close tabs on other restaurant operators that are grappling with debt. Those include Ruby Tuesday Inc, Domino's Pizza Inc, O'Charley's Inc and privately held OSI Restaurant Partners -- owner of chains like Outback Steakhouse and Bonefish Grill.
Shares of DineEquity fell $2.18 to close at $12.97 on the New York Stock Exchange, off an earlier low of $12.73. The stock hit a 12-month high of $55.75 on Jan. 31.
Ruby Tuesday shares dropped 20.7 percent, while Domino's Pizza was down 1.4 percent and O'Charley's shares lost 10.1 percent.
(Additional reporting by Dan Wilchins in New York; editing by John Wallace, Matthew Lewis, Richard Chang) Keywords: DINEEQUITY/ (lisa.baertlein@thomsonreuters.com; + 1 213 955 6742; Reuters Messaging: lisa.baertlein.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
LOS ANGELES, Dec 11 (Reuters) - The debt-laden parent of Applebee's and IHOP restaurants suspended common stock dividends on Thursday, saying the $17 million that would have paid its annual dividend will instead go to pay down debt.
The news sent shares of the company, DineEquity Inc , down 14.4 percent.
'Our reason for taking this action is not because of a liquidity issue but rather because the company is seeking additional flexibility and to opportunistically reduce our debt,' Lucy Neugart, a company spokeswoman, told Reuters.
Glendale, California-based DineEquity has been working to decrease debt and stay in compliance with lender agreements amid an economic downturn that has forced diners to cut back on visits to full-service restaurants like those it operates.
The company, formerly named IHOP, acquired Applebee's Neighborhood Grill & Bar in a leveraged buyout about a year ago, before global credit markets melted down and the U.S. economy fell into recession.
Research Edge restaurant analyst Howard Penney said the company should have stopped paying a dividend earlier. Earlier on Thursday, before Neugart's comment, he called the suspension 'a clear sign of a liquidity issue .... They don't have the money to pay it.'
As of Sept, 30, DineEquity had $1.92 billion of long-term debt. And with leverage at seven times cash flow, it has less financial flexibility than many of its peers.
'We don't think they have a lot of wiggle room,' said Carla Norfleet Taylor, a director at Fitch Ratings. When it comes to refinancing, she said, the company has 'very limited' options.
DineEquity, which hopes to raise cash by selling more restaurants to franchisees, also has been cutting costs by doing things like trimming employee bonuses and vacations.
DineEquity Chairman and Chief Executive Officer Julia Stewart said on Oct. 27 that she expected it 'to remain in compliance with our debt covenants based on current plans. However, our margin of error is expected to be tighter than we would like next year.'
On Thursday, Neugart said: 'As detailed in our most recent earnings announcement, our base plan allows us to meet our covenants.'
DineEquity's chief financial officer resigned in September and has adopted what Penney has dubbed 'aggressive' accounting.
With credit and consumer-spending trends working against the company, Penney said there is a potential that DineEquity could default by spring.
'If they can't sell assets the risk goes up significantly,' he said.
Sales at full-service restaurants like IHOP and Applebee's have been hard-hit as cash-strapped consumers look for ways to save money and reduce personal debt.
There seems to be no relief in sight as banks reel in lending on all levels and consumers -- hard-hit by the housing meltdown and hefty job losses -- hunker down.
RBC Capital Markets analyst Larry Miller said in a note that results from two consumer surveys suggest that 'anemic' restaurant spending could continue for several more months.
Analysts are keeping close tabs on other restaurant operators that are grappling with debt. Those include Ruby Tuesday Inc, Domino's Pizza Inc, O'Charley's Inc and privately held OSI Restaurant Partners -- owner of chains like Outback Steakhouse and Bonefish Grill.
Shares of DineEquity fell $2.18 to close at $12.97 on the New York Stock Exchange, off an earlier low of $12.73. The stock hit a 12-month high of $55.75 on Jan. 31.
Ruby Tuesday shares dropped 20.7 percent, while Domino's Pizza was down 1.4 percent and O'Charley's shares lost 10.1 percent.
(Additional reporting by Dan Wilchins in New York; editing by John Wallace, Matthew Lewis, Richard Chang) Keywords: DINEEQUITY/ (lisa.baertlein@thomsonreuters.com; + 1 213 955 6742; Reuters Messaging: lisa.baertlein.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.