Restaurant chain Applebee’s International Inc. said on Tuesday it is exploring strategic alternatives, including the possible sale of the company, sending its share price up sharply.
The move comes amid pressure to make changes from Breeden Capital Management LLC, a hedge fund run by former Securities and Exchange Commission Chairman Richard Breeden.
Applebee’s has been hurt by a pullback in consumer spending and increased competition from other bar-and-grill style restaurants. Its shares have substantially underperformed the Standard & Poor’s restaurant index this year.
Breeden Capital has said it wants the company to reduce capital expenditures, boost cash returned to shareholders, and sell more restaurants to franchisees. The fund said last month that it held 3.9 million Applebee’s shares, or just over 5 percent of the total outstanding.
In December the fund nominated four candidates to the Applebee’s board.
Applebee’s, announcing the strategic review, said it had hired Citigroup and Banc of America Securities LLC as financial advisers.
Shares of Applebee’s rose on the New York Stock Exchange, lifting the company’s market capitalization to almost $2 billion, based on the number of shares outstanding reported by Applebee’s when it posted third-quarter earnings in October.
The announcement on Tuesday led Bear Stearns restaurant analyst Joe Buckley to raise his rating on Applebee’s to “peer perform” from “underperform.”
“Our prior underperform rating was premised on an expectation that Applebee’s long-term plans would be focused on executing a turnaround,” Buckley said in a research note. ”Today’s announcement obviously moves the company in a very different direction than we expected.”
But some analysts were skeptical about the stock.
“While shareholder activism may provide some support for valuation, we believe current levels may reflect more success on those measures than may be reasonable in the near-term,” Bob Derrington, restaurant analyst at Morgan Keegan, said in a research note. “At the end of the day, operating margins need to improve, in our opinion, to support share price gains.”
Like many casual restaurant chains, Applebee’s has been struggling with a pullback in consumer spending as higher gasoline prices have cut into Americans’ willingness to spend money on meals outside the home. The company has also said higher food and labor costs will hurt profits.
Applebee’s has been developing several new menu items with celebrity chef Tyler Florence to try to attract customers.
Most recently, severe winter storms cut into January sales. the company said on Jan. 31 that systemwide sales fell 5.8 percent in the four weeks ended Jan. 28 at restaurants open at least 18 months.