Though people don’t only dine at these establishments while on road trips, their strategic locations — often found right off a highway exit — helps their brand exposure in substantial ways. For instance, if you had never eaten at a Denny’s Corporation (NASDAQ:DENN), but you enjoyed it after stopping there during a road trip, then you would be more likely to dine at a Denny’s Corporation (NASDAQ:DENN) near your home. And you might recommend Denny’s to a friend, family member, or acquaintance.
With all three aforementioned companies focused on strategic locations, you might think that they’re all logical investment options. Unfortunately, it’s not that simple.
Best historical stock performance
DineEquity Inc (NYSE:DIN) added Applebee’s in 2007, and it’s now 99% franchised. This is a big plus as it leads to lower costs and stronger cash flow. IHOP restaurants are also mostly franchised. The bad news for DineEquity Inc (NYSE:DIN) is that revenue has been in decline on an annual basis. Therefore, the company’s marketing hasn’t been successful enough to overcome a weak consumer and increased competition.
DineEquity Inc (NYSE:DIN)’s current goals are to significantly increase marketing effectiveness, improve operational performance, and introduce fresh and innovative dishes. DineEquity Inc (NYSE:DIN) is also more focused on the health-conscious consumer than in the past.
Whether or not DineEquity can meet their marks on the above initiatives remains to be seen. While margins are strong, the company owns a debt-to-equity ratio of 4.34, which is considerably higher than the industry average of 1.0. This will impede growth potential, and it could lead to a dividend cut at some point down the road. (DineEquity is currently yielding 4.20%.)
DineEquity Inc (NYSE:DIN) might have the best historical stock performance of the three companies covered in this article, but it would be hard-pressed to continue that trend over the long haul.
More revenue decline
Denny’s Corporation (NASDAQ:DENN) is well-known for its $2, $4, $6, $8 value meals, it’s open 24/7, and debt management has been superb after the divestiture of company-owned locations. Denny’s is also confident enough in its future prospects that it’s opening approximately 50 locations this year. However, revenue has still been in annual decline.
Denny’s Corporation (NASDAQ:DENN) Canada recently made an interesting move, which was to offer a McDenny’s loyalty program and mobile app. The app allows customers to earn points, which can then be turned into dollars available for spending at Denny’s restaurants. What makes this app unique to apps for other restaurant chains is that you can use social networking sites to invite friends and family to a Denny’s Corporation (NASDAQ:DENN) restaurant. You can also transfer points to those friends or family members. Furthermore, if you “Like” Denny’s on Facebook, you can earn a point.
Denny’s is using another fun and interesting promotional tactic. If you check-in to a Denny’s restaurant in all 50 states, then you will will win a prize. The more restaurants you check into, the more the value of that prize increases.
Denny’s is trying hard to increase its brand exposure. And current moves have the potential to be effective. On the other hand, this would still be a risky investment due to fierce competition.
Weak consumer + increased competition = no problem
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) has been mostly unfazed by industry conditions. Revenue and earnings have consistently improved over the past three years. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) even managed to deliver big profits in 2008/2009.
Unlike most restaurant chains, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) has seen increased traffic. The company’s highly strategic locations are a major catalyst. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) also has seasonal offerings (keeps menu fresh), a kid’s menu, a dessert menu, and a retail store. The latter gives Cracker Barrel somewhat of a historical feel, as though it’s an attraction opposed to just a restaurant. This brilliant brand imaging has led to consistent success. And that success should continue, especially considering management recently raised its 2013 comps guidance to 2.5% from 2%, and its 2013 adjusted EPS guidance to $4.75-$4.85 from $4.60-$4.80.
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) currently yields 2.90%, and based on the company’s quality debt management, the dividend looks to be sustainable. It’s also possible that the dividend will continue to grow. To add to the optimism of this story, Cracker Barrel has beat expectations over the last four quarters.
Conclusion
DineEquity and Denny’s Corporation (NASDAQ:DENN) are making moves to increase revenue, but the effectiveness of these moves is still in question. Cracker Barrel offers the most unique dining experience and most strategic locations of the three. This has allowed Cracker Barrel to defy the odds. It’s also these types of unique restaurant chains that will be capable of growing in a saturated industry. Needless to say, Cracker Barrel looks to be the best long-term investment going forward.
The article One Restaurant Company to Consider, Two to Avoid originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Cracker Barrel Old Country Store (NASDAQ:CBRL). Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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