IHOP Refines New Model

The bottom line for 2005 is that IHOP expects earnings per diluted share to range between $2.02 and $2.12, with same-store sales growth of 2% to 4%, along with the addition of 62 to 72 new restaurants, most of them to be opened by franchisees. Getting to that bottom line will depend on a combination of the new development model and other measures IHOP has put in place to help franchisees operate more efficiently, Stewart explained.

The IHOP CEO pointed out that, during the last two years, IHOP has "changed our company's formula for growth from a company-led development approach to a franchisee-led development effort." The new restaurants slated to open in 2005, for example, will include 55 to 60 that are expected to be developed by franchisees, five to eight restaurants developed by IHOP's area licensee in Florida, and two to four that will be developed by IHOP Corp. in Cincinnati. The majority of the new restaurants are expected to open in the second half of the year.

Increasing the number of IHOP locations is one of a number of strategic priorities that Stewart outlined in Thursday's call. Among the steps Stewart outlined for 2005 were a fourth flight of national advertising, a "strong line-up of promotional products," and a new, more contemporary menu that is scheduled to be introduced in May. The strategic initiatives also will include programs to improve the performance of the chain's restaurants, which the company evaluates on an A-to-F ratings system. Since the chain includes only a few D and F stores, Stewart said, "Now, our focus shifts to C operators because I believe that no one wakes up in the morning and says, 'I want to be average.'" The company has previously made it clear that a franchisee must be an A or a B operator to develop IHOP restaurants under its new model and now, Stewart says, "We are taking it a step further: IHOP will not renew leases for any franchisee consistently rated as a C operator."

The expansion that Stewart outlined for this year traces back to January 2003, when IHOP announced that it would switch from company-financed restaurant development to what it calls the "new model," in which franchisees finance, develop and operate their new restaurants. With its push to recruit new and existing franchisees to develop restaurants, IHOP has signed development agreements and options covering 287 new restaurants as of the end of 2004, and is pursuing additional multistore and single-store development agreements for 41 more restaurants. Those locations are in addition to the 48 new restaurants that IHOP franchisees have opened in the past two years under its new model.

Said Stewart, "We now have a new business model that is ready to perform the way we envisioned it."