Dine Brands (DIN)

Casual restaurant chain Dine Brands (NYSE:DIN) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 4.1% year on year to $214.8 million. Its non-GAAP profit of $1.03 per share was 16.7% below analysts’ consensus estimates.

Company Overview

Operating a franchise model, Dine Brands (NYSE:DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

Multi-brand full-service restaurant competitors include Darden (NYSE:DRI), Brinker International (NYSE:EAT), Bloomin’ Brands (NASDAQ:BLMN), and The Cheesecake Factory (NASDAQ:CAKE).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $820.9 million in revenue over the past 12 months, Dine Brands is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, Dine Brands struggled to increase demand as its $820.9 million of sales for the trailing 12 months was close to its revenue six years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because it didn’t open many new restaurants and observed lower sales at existing, established dining locations.

This quarter, Dine Brands grew its revenue by 4.1% year on year, and its $214.8 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months. While this projection indicates its newer menu offerings will spur better top-line performance, it is still below average for the sector.

Number of Restaurants

A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.

Dine Brands operated 3,408 locations in the latest quarter, and over the last two years, has kept its restaurant count flat while other restaurant businesses have opted for growth.

When a chain doesn’t open many new restaurants, it usually means there’s stable demand for its meals and it’s focused on improving operational efficiency to increase profitability.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Dine Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 1.8% annual declines. This performance isn’t ideal, and we’d be concerned if Dine Brands starts opening new restaurants to artificially boost revenue growth.

Note that Dine Brands reports its same-store sales intermittently, so some data points are missing in the chart below.

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Dine Brands has best-in-class unit economics for a restaurant company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 46.3% gross margin over the last two years. That means Dine Brands only paid its suppliers $53.71 for every $100 in revenue.

In Q1, Dine Brands produced a 42% gross profit margin, down 5.3 percentage points year on year. Dine Brands’s full-year margin has also been trending down over the past 12 months, decreasing by 2.7 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as ingredients and transportation expenses).

Dine Brands has been a well-oiled machine over the last two years. It demonstrated elite profitability for a restaurant business, boasting an average operating margin of 22.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Dine Brands’s operating margin decreased by 2.2 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see Dine Brands become more profitable in the future.

This quarter, Dine Brands generated an operating profit margin of 18.1%, down 3.8 percentage points year on year. Since Dine Brands’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, and administrative overhead expenses.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Dine Brands has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors. The company’s free cash flow margin averaged 12.3% over the last two years, quite impressive for a restaurant business.

Taking a step back, we can see that Dine Brands’s margin dropped by 4.8 percentage points over the last year. This decrease warrants extra caution because Dine Brands failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new restaurants.

Dine Brands’s free cash flow clocked in at $14.63 million in Q1, equivalent to a 6.8% margin. The company’s cash profitability regressed as it was 6.4 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Dine Brands hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 17.6%, splendid for a restaurant business.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Dine Brands’s $1.64 billion of debt exceeds the $186.5 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $233.7 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Dine Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Dine Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

It was encouraging to see Dine Brands’s full-year EBITDA guidance beat analysts’ expectations. On the other hand, both its EBITDA and EPS fell short of Wall Street’s estimates due to weaker profitability, as revenue was in line. Overall, this was a mixed quarter. The stock remained flat at $19.95 immediately following the results.

Updated: July 9, 2025 at 10:50 PM EDT

Before deciding whether to buy Dine Brands or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We see the value of companies helping consumers, but in the case of Dine Brands, we’re out. First off, its revenue has declined over the last six years. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining EPS over the last six years makes it a less attractive asset to the public markets. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Dine Brands’s P/E ratio based on the next 12 months is 4.9x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $24 on the company (compared to the current share price of $25.35).