Denny’s Corporation (NASDAQ: DENN) one of America’s largest full-service family restaurant chains, today reported results for its fourth quarter and year ended December 29, 2010.
Full Year Summary
- Completed new management team with the addition of industry veteran John C. Miller as President and CEO.
- Opened 136 new units, including 100 Flying J Travel Center conversion sites and 6 units at university locations. In 2010, Denny’s had the highest number of domestic openings in its history.
- Refinanced debt to a lower cost $300 million credit facility, reduced outstanding debt by $15 million.
- Repurchased one million shares in the fourth quarter.
- Same-store sales decreased 3.6% at company units and 3.7% at franchised units. For the year, same-store guest counts decreased 1.9% at company units, although the last six months of the year increased 1.1%.
- Net income of $22.7 million, or $0.22 per diluted share. Net income was negatively impacted by a reduction of $9.9 million in gains from the sale of 57 fewer restaurants to franchisees as the FGI program continued to wind down, a $4.6 million reduction in workers’ compensation claims development benefit, $4.5 million in expenses related to the refinancing of the Company’s debt, and $2.0 million of expenses related to the proxy contest.
- Adjusted income before taxes* of $27.3 million. Adjusted income was also negatively impacted by the reduction in workers’ compensation claims development benefit noted above.
Fourth Quarter Summary
- Opened 58 new units, including 47 Flying J Travel Center conversion sites.
- Same-store guest counts decreased 0.2% which included an estimated negative impact of 0.5 percentage points from the severe weather across the United States during the fourth quarter.
- Same-store sales decreased 1.6% at company units and 1.4% at franchised units.
- Net income of $2.7 million, or $0.03 per diluted share. Net income was negatively impacted by a reduction of $8.0 million in gains from the sale of restaurants to franchisees, $4.3 million in expenses related to the refinancing of the Company’s debt, and a $3.9 million reduction in workers’ compensation claims development benefit.
- Adjusted income before taxes* of $5.1 million. Adjusted income was also impacted by the reduction in workers’ compensation claims development benefit noted above.
- Subsequent to the fourth quarter: Denny’s Corporation is pursuing an opportunistic re-pricing of its credit facility to take advantage of lower interest rates available in the current senior secured debt market.
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “In 2010, the Company effectively executed its key areas of focus. In the second half of the year we drove positive same-store guest count growth, successfully converted Flying J Travel Centers at an accelerated pace, continued to deliver profitability, refinanced our debt to a lower cost facility, and repurchased shares.”
Mr. Wolfinger concluded, “With the recent addition of John Miller as CEO, our leadership team is now in place to execute on our growth strategy and to strengthen our position as America’s favorite diner. This will include building on the initial success of our everyday affordability strategy and leveraging the record number of new restaurants the Company opened in 2010. We look forward to building upon these successes in 2011.”
Fourth Quarter Results
For the fourth quarter of 2010, Denny’s reported total operating revenue, including company restaurant sales and franchise revenue, of $135.9 million compared with $140.5 million in the prior year quarter. Company restaurant sales decreased $7.6 million primarily due to 17 fewer equivalent company restaurants compared with the prior year quarter. The decrease in restaurants resulted from the sale of company restaurants to franchisees under Denny’s refranchising program.
Company restaurant operating margin (as a percentage of company restaurant sales) was 12.3%, a decrease of 4.0 percentage points compared with the same period last year. The operating margin was negatively impacted by a $3.9 million reduction in workers’ compensation claims development benefit and new store opening expenses related to the opening of 11 company-owned Flying J units.
Product costs increased 1.3 percentage points to 25.0% primarily due to the impact of increased commodity costs and a higher mix of value priced items. Payroll and benefit costs increased 3.3 percentage points to 41.9% primarily due to a $3.9 million reduction in workers’ compensation claims development benefit compared to the prior year. Other operating costs decreased 0.6 percentage points to 14.5% due to corporate investment in media in the prior year quarter, favorable legal claims development, lower utility expenses and lower repairs and maintenance costs. These decreases were partially offset by new store opening expenses associated with the opening of 11 company-owned Flying J units in the fourth quarter and a favorable credit card settlement in the prior year quarter.
Franchise and license revenue increased by $3.0 million to $32.2 million compared with $29.2 million in the prior year quarter. The increase in franchise revenue included a $1.5 million increase in franchise fees and $1.4 million increase in royalties. The franchise fee increase resulted from opening 44 franchise and license units in the fourth quarter of this year, which included 36 Flying J Travel Center conversions, one university location, and one international location. The royalty revenue increase was due to 106 additional equivalent franchise restaurants. In addition to opening 44 franchise units during the fourth quarter, Denny’s franchisees closed 11 restaurants, relocated 2 restaurants, and purchased 13 company restaurants.
Franchise operating margin increased $1.9 million to $20.7 million, primarily due to the $1.5 million increase in franchise fee revenue and an additional 106 equivalent franchise restaurants, partially offset by the effects of lower same-store sales. Franchise operating margin (as a percentage of franchise and license revenue) was 64.3%, a decrease of 0.3 percentage points compared with the same quarter last year. The decrease in margin was primarily driven by temporary overhead costs associated with converting the Flying J sites.
General and administrative expenses increased $1.8 million from the same period last year. This increase was primarily driven by the timing of incentive compensation accruals as general and administrative expenses for the full year decreased $1.7 million compared to 2009.
Depreciation and amortization expense declined by $0.1 million compared with the prior year quarter primarily as a result of the sale of restaurants and real estate over the past year, offset by the addition of 24 new units in 2010. Operating gains, losses and other charges, net, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $5.0 million in the quarter. This decrease resulted from lower gains on the sale of company restaurants and real estate to franchisees, offset by lower severance and other restructuring charges.
Operating income for the quarter decreased $10.3 million from the prior year period to $14.1 million, primarily due to the decrease in gains on the sale of assets and a $4.6 million decrease in total operating revenue attributable to the sale of company restaurants.
Interest expense decreased $1.3 million, or 16.3%, to $6.5 million as a result of the termination of an interest rate swap in late 2009, a $15.4 million reduction in debt from the prior year period, and lower interest rates under the new $300 million credit facility. Other nonoperating expense increased $6.1 million in the quarter primarily due to expenses associated with the refinancing of the Company’s debt.
Denny’s reported net income of $2.7 million for the fourth quarter, or $0.03 per diluted common share, compared with prior year period net income of $17.9 million, or $0.18 per diluted common share. Adjusted income before taxes*, Denny’s metric for earnings guidance, was $5.1 million compared with prior year period income of $9.1 million.
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated,
“We anticipate building on the momentum we established in the second half of 2010. We expect that our ongoing transition to a franchise focused business model will continue to enable growth in unit development and profitability while delivering increased free cash flow generation that will be used to strengthen our balance sheet and pursue other shareholder friendly activities.”
The following financial guidance for full-year 2011 is based on 2010 results and management’s expectations at this time:
- Both company and franchise same-store sales from (2.0%) to 1.0% with the first quarter expected to be the lowest of the year given the impact of the 2010 Super Bowl promotion
- 70 to 75 new restaurant openings, including:
- approximately 25 Flying J conversions, of which 5 – 10 will be company operated
- 10 university sites
- 2 company operated fast-casual Denny’s Café test sites
- Adjusted EBITDA* between $80 million and $85 million
- Adjusted Income before taxes* between $36 million and $40 million
- Cash interest expense of $19 million
- Cash capital expenditures of $18 million
Denny’s Corporation is pursuing an opportunistic re-pricing of its credit facility to take advantage of lower interest rates available in the current senior secured debt market. The potential impact of this re-pricing is not reflected in the above guidance.
Denny’s will provide further commentary on the results for the full year and fourth quarter of 2010 and its outlook for 2011 on its quarterly investor conference call today, Tuesday, February 15, 2011 at 5:00 p.m. ET. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny’s website at ir.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.
Denny’s is one of America’s largest full-service family restaurant chains, currently operating more than 1,600 franchised, licensed, and Company-owned restaurants across the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Puerto Rico and New Zealand. For further information on Denny’s, including news releases, links to SEC filings and other financial information, please visit the Denny’s investor relations website.