Applebee's International Inc.

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Applebee's International Inc.

founded: 1988

Contact Information:

headquarters: 4551 w. 107th st., ste. 100
overland park, ks 66207 phone: (913)967-4000 fax: (913)341-1694

OVERVIEW

Headquartered in Overland Park, Kansas, Applebee's International Inc. develops, franchises, and operates close to 1,100 casual dining restaurants in 48 states and 5 countries. As of early June 1998, Applebee's opened its 1,000th Applebee's Neighborhood Grill & Bar brand restaurant. In addition, it operated about 60 Rio Bravo Cantina brand restaurants, making Applebee's International the largest casual dining restaurant chain in the world. Of the 1,000-plus Applebee's brand restaurants, about 200 are company owned—the remainder are franchised. The company owns about 35 of the Rio Brava Cantina brand restaurants; the rest are franchised.

Further sharp increases in the company's number of restaurants are expected as Applebee's continues to expand aggressively. More than 500 restaurants were added between December 1994 and April 1998. The company opened its 1,000th Applebee's brand restaurant in Aurora, Colorado, on June 9, 1998, the first casual-dining restaurant chain to hit that milestone. The closest casual-dining restaurant competitor has about 700 outlets, according to industry data.

Announcing the company's first quarter 1998 results in late April 1998, CEO Lloyd L. Hill said the company was running well ahead of its target for the period. He said reductions in labor costs and improvements in other controllable expenses during the first quarter resulted in a higher level of earnings than had been expected at the end of last year. "This quarter's performance gives us added confidence that we are well positioned to continue delivering improved results as we move through the balance of 1998."

COMPANY FINANCES

Applebee's International posted net earnings of $45.1 million on revenue of $515.8 million in 1997, compared with a net of $38.0 million on revenue of $413.1 million in 1996. Company-owned restaurants accounted for $452.2 million, or 88 percent of total revenue in 1997. Franchised operations produced $63.6 million, or 12 percent of total revenue. The company reported net income of $12.0 million on revenue of $146.6 million for the first quarter of 1998, compared with net earnings of $10.9 million on revenue of $116.3 million in the first quarter of 1997. Applebee's posted net income of $27.5 million on revenue of $343.6 million in 1995, compared with net earnings of $16.9 million on revenue of $208.5 million in 1994.

ANALYSTS' OPINIONS

The investment community seemed to be bullish on Applebee's International during the first half of 1998, with a number of analysts and fund managers putting the company's stock high on their "buy" list. Stevin Hoover, chairman and CEO of Hoover Capital Management of Boston, told Worth Magazine that the company, "has a few great things going for it. First it serves the right demographic group, the 24- to 55-year-old segment, which makes up almost 40 percent of the U.S. population, and is still growing. This group spends more than $60 billion a year on 'home-meal replacement," the new buzzword for eating out. Its preference is for middle-level casual dining, as opposed to fast-food or high-end restaurants. Second, Applebee's is perhaps the only restaurant in this niche to successfully franchise its name—approximately 80 percent of Applebee's restaurants are franchises, an annuity-style business that has offered the company steady and rising free cash flow." Hoover went on to say that, although Applebee's growth outside the United States had not yet taken off in a big way, he sees enormous potential for such expansion in both Europe and Canada.

Hoover's upbeat view of Applebee's prospects were echoed in early 1998 by analyst John Dorfman of Bloomberg News. He said he was impressed by Applebee's growth and management. Dorfman's friend, Jeff Omohundro, a restaurant analyst with Wheat First Union, concurred with Dorfman. He said that the company would have been his number one pick had it not been for the Apple South defections, which he felt raised the risk level in the stock a bit. In June 1998, analyst Eric Wold, of Van Kasper & Co. in Princeton, New Jersey, also added Applebee's to his "buy" list.

HISTORY

Partners John Hambra and Abe Gustin acquired an Applebee's franchise from a subsidiary of W.R. Grace in 1986. Two years later, the two bought out the Applebee's franchisor and formed Applebee's International Inc. Under new management, the franchisor launched into a period of rapid expansion. It grew from just over 50 restaurants in the late 1980s to about 500 by 1994. That same year, one of the company's largest franchisees, Tom DuPree of Apple South, mounted an unsuccessful attempt to take over the parent company.

In 1995 Applebee's acquired Innovative Restaurant Concepts, the company that had developed a small chain of Mexican food restaurants called Rio Bravo Cantinas. By adding a second restaurant brand, Applebee's executives hoped to create an avenue for even greater expansion.

In addition to its restaurants throughout the United States, Applebee's has franchised operations in a handful of foreign countries, including Canada, Curacao, Germany, Greece, the Netherlands, and Sweden. The company hopes to add further franchised operations abroad in the future.

In 1997 Applebee's management tangled again with its biggest franchisee, Apple South, which announced a plan to sell its more than 250 Applebee's brand restaurants. This was due to the franchisor having refused to expand Apple South's franchise territory. In December of 1997 Applebee's announced it had reached an agreement with Apple South. Under this agreement Applebee's would acquire 32 Applebee's restaurants in Virginia from Apple South for $93.4 million in cash. At the same time Apple South announced three letters of intent to sell 61 additional Applebee's restaurants to two existing and one new Applebee's franchisees. The 61 restaurants are in the Washington, D.C., metropolitan area, Mississippi, and Tennessee.

The agreement between the two companies calls for Apple South to divest all of its other Applebee's restaurants as soon as it's practical. Should Apple South fail to sell all of its Applebee's franchises by the end of 1999, the agreement gives Applebee's an option to acquire them according to a pre-determined pricing formula. Under the divestment agreement between the two companies, Apple South will be released from any noncompetition obligations. However, they will be restricted from negotiating with, or acquiring certain competing restaurant concepts for up to a year.

In announcing the divestment agreement with Apple South, Applebee's Chairperson Abe J. Gustin said, "We believe this important agreement reached by Applebee's International and Apple South allows both companies to move forward with their respective long-term strategies. Apple South has been a valued franchisee and an integral part of the success of the Applebee's system throughout the evolution of the concept." He said the plan would allow new and existing franchisees to acquire "strategically important restaurants and territories."

STRATEGY

Applebee's International launched an aggressive expansion strategy in the late 1980s. This increased its chain of Applebee's Neighborhood Grill & Bar restaurants from 55 in 1988 to more than 500 by 1994. That expansion was continuing unabated in the latter half of the 1990s. On June 9, 1998, the company opened its 1,000th Applebee's brand eatery in Aurora, Colorado.

Applebee's acquired another vehicle for expansion in 1995 when it bought Innovative Restaurant Concepts, developer of the Rio Bravo Cantina chain. In 1997 alone, the company opened 145 new Applebee's restaurants and added 26 restaurants to its Rio Bravo Cantina chain. Plans for 1998 called for the opening of 21 additional Rio Bravo Cantina restaurants. The company acknowledged that its Rio Bravo Cantina restaurants had failed to perform as well as anticipated. Still, corporate strategy calls for continuing expansion of the Tex-Mex chain.

FAST FACTS: About Applebee's International Inc.

Ownership: Applebee's International is a publicly owned company traded on NASDAQ.

Ticker symbol: APPB

Officers: Abe J. Gustin Jr., Chmn., 63, $610,000; Lloyd L. Hill, Pres., CEO, & COO, 53, $510,000; George D. Shadid, Exec. VP, CFO, & Treasurer, 43, $405,000; Steven K. Lumkin, Sr. VP, Strategic Development, 43, $285,000

Employees: 18,000

Principal Subsidiary Companies: In addition to more than 1,000 Applebee's Neighborhood Grill & Bar locations, the company operates close to 60 Rio Bravo Cantina Tex-Mex restaurants.

Chief Competitors: Applebee's principal competitors include: Bob Evans; Boston Market; Cracker Barrel; Family Restaurants; IHOP; Lone Star Steak-house; Luby's; Morrison Restaurants; Outback Steakhouse; Quality Dining; Ruby Tuesday; Taco Cabana; and Unique Casual Restaurants.

INFLUENCES

The growing appetite among young adults for casual dining at reasonable prices has been a crucial factor in the company's success. The company has captialized on this burgeoning market with aggressive expansion, adding more than 500 restaurants between the end of 1994 and mid-1998. As of year-end 1997, Applebee's owned approximately 5 percent of the $36-billion casual-dining market, and nearly 20 percent of the $10-billion "bar and grill" segment of the market, according to Lloyd Hill, the company's CEO. Hill predicted that systemwide sales, which totaled about $1.8 billion in 1997, would exceed $2.0 billion in 1998.

Speaking at the opening of the company's 1,000th Applebee's-brand restaurant in Aurora, Colorado, on June 9, 1998, Hill said, "We've succeeded in growing to 1,000 neighborhoods through a combination of excellence in menu, neighborhood location, management, overall execution, and dedication of our franchisees and employees, who strive to ensure that every dining experience is a positive one for our guests."

CURRENT TRENDS

Applebee's has tried to use the latest technology to run an efficient operation. In the area of training, the company has utilized a number of cutting-edge technologies, "to employ the most effective training method for a given situation," according to Matt Carpenter, the company's executive director of training.

Video has been widely used by the company in training because it is an efficient way of quickly distributing consistent information from management to a large number of employees, some of whom may be located some distance from corporate headquarters. Applebee's International has developed a library of more than 100 tapes, all of which were scripted internally and produced by an outside contractor. In addition to its program of training tapes, the company sometimes broadcasts live, interactive conferences, most of them occasioned by the roll-out of new products, to its restaurant locations around the world. Many of these sessions are arranged by Hospitality Television, a Louisville, Kentucky-based company that specializes in satellite television and "interactive, distance learning" for food service operators.

Carpenter, touting the advantages of teleconferencing, said that, "unlike video, which is one-way, this validates that transfer of training occurred, with the opportunity for staff to interact with experts." The company's use of new technologies to expedite the training process does not end with video tapes and teleconferencing. Applebee's has developed CD-ROM programs, including full-motion video clips to train staff, some of whom are in remote locations, in how to prepare new additions to the menu. Participants are led through a series of interactive exercises, which bars progress to the next segment until all questions have been answered accurately. The program prevents trainees from logging off until they have reached a score of 90 percent or better. Carpenter says the program allows managers "to evaluate the length of time staff spends with the exercises and how well they perform."

Carpenter said that when the company rolled out a new, computerized system for forecasting sales and scheduling employees to 135 restaurants, Applebee's training costs were cut in half using computer-based training techniques. The computer-based training was supplemented by on-the-job, in-person coaching.

The company's use of new technology to do business faster, better, and smarter isn't limited to training. All of the company's multi-unit managers have notebook computers while in the field, using e-mail to create a virtual office while traveling.

Outlining the rationale for its use of high-tech training techniques, Steve Lumpkin, senior vice-president said, "Substantial investments in infrastructure allow us to send technology, instead of staff, to restaurants for training. With a shrinking labor pool headed into the future, investment in technology now will pay off in staff production and loyalty later. When you effectively train staff to take care of guests, the profits take care of themselves."

PRODUCTS

Applebee's International operates two restaurant brands: Applebee's Neighborhood Grill & Bar eateries, numbering slightly more than 1,000 as of mid-1998; and Rio Bravo Cantina restaurants, which totaled 58 at the end of April 1998.

CHRONOLOGY: Key Dates for Applebee's International Inc.

1980:: The first T.J. Applebee's restaurant opens
1983:: Creative Food N Fun Co. purchases Applebee's
1988:: Abe J. Gustin, Jr. and John Hamra purchase Applebee's and formed Applebee's International Inc.
1995:: Applebee's acquires Innovative Restaurant Concepts
1997:: Applebee's biggest franchise announces plans to sell its 250 restaurants

GLOBAL PRESENCE

In addition to its restaurants across the United States, Applebee's operated 6 franchised restaurants in Canada, 1 in Curacao, 3 in Germany, 1 in Greece, 1 in Sweden, and 4 in the Netherlands in the 1990s.

EMPLOYMENT

Applebee's is always on the lookout for motivated, ambitious individuals who would like to join the company's team, either at its Overland Park, Kansas, headquarters or in one of the approximately 200 company-owned restaurants around the country. Interested parties are encouraged to send inquiries in writing to Human Resources, Applebee's International Inc., 4551 W. 107th St., Ste. 100, Overland Park, KS 66207.

SOURCES OF INFORMATION

Bibliography

"Applebee's Achieves Industry Milestone Opening 1,000th Restaurant in Aurora, Colorado." Business Wire, 8 June 1998.

"Applebee's International Inc." Hoover's Online, 29 June 1998. Available at http://www.hoovers.com.

"Applebee's International Rated New 'Buy' at Van Kasper." Bloomberg Data, 22 June 1998.

"Applebee's International to Acquire 32 Restaurants as Part of Apple South Divestment Plan." Business Wire, 23 December 1997.

"Applebee's Reports Fourth Quarter Earnings of 31 Cents Per Share; Applebee's Concept Exceeds $1.82 Billion in 1997 System-Wide Sales." Business Wire, 8 February 1998.

"Applebee's Reports First Quarter Earnings of 39 Cents Per Share." Business Wire, 29 April 1998.

Dorfman, John. "A Pair of Restaurant Stocks Whet My Appetite." Bloomberg News, 30 June 1998.

Lynch, Peter. "Best of the Best." Worth Magazine, March 1998.