New Restaurants Serve Up a Higher Profit for IHOP

Many fast-food chains have been disappointing investors with poor earnings, but IHOP Corp. on Wednesday reported a 3% rise in its fourth-quarter profit on a 19% jump in sales.

New restaurants helped boost quarterly profit at Glendale-based IHOP to $12 million, or 56 cents a share, from $11.6 million profit, or 55 cents, a year ago, the company said.

But company executives warned that they expect to see earnings per share drop by 20% in 2003 as they shift the financing of new restaurants to franchisees, which will reduce revenue the company now gets for underwriting development costs.

IHOP, parent of the International House of Pancakes chain, said an 8% increase in the number of stores over the year-ago period -- to 1,103 restaurants -- helped boost profit for the fourth quarter ended Dec. 31.

Fourth-quarter revenue grew to $107.4 million from $90.4 million.

Wall Street, which has cut the company’s share price almost in half in the last year, found good news in Wednesday’s report, boosting shares by 43 cents, or about 2%, to $22.01 on the New York Stock Exchange.

For the year, IHOP reported a 1% bump in net income, to $40.85 million, or $1.92 a share, up from $40.29 million in 2001, or $1.94. (The 2001 per share figure is higher than 2002 because of the difference in the share count.)

Annual revenue last year was $365.9 million, up 13% from 2001.

Same-store sales, a key measure of a chain’s financial health, dipped 1% in the fourth quarter and gained 0.7% for the year, the company said.

During a conference call with analysts, executives said they expect earnings to drop to $1.55 to $1.70 a share for 2003 because of the policy requiring franchisees to finance restaurant construction.

The new plan, announced last month, will substantially reduce debt and cash needed for capital investments.

On the other hand, it also means that the company will lose the more than $200,000 per store that it charged the franchisees for new-restaurant development.

“I like the new business model, but over the next two, three years, I think things are going to look kind of ugly because of the transition from the old business model to the new one,” said Dennis Joe, with New York-based Sidoti & Co.

IHOP President and Chief Executive Julia A. Stewart told analysts that 2003 would be a “transition year” for the company, which is best known for breakfast entrees, but is attempting to gain ground in the lunch and dinner markets.

Stewart also said the company would decide soon whether it would launch a stock buy-back program or offer cash dividends.