Denny’s Corporation Reports Results for Third Quarter 2011


Denny's Corporation Reports Results for Third Quarter 2011
Denny's Corporation Reports Results for Third Quarter 2011

Denny’s Corporation, one of America’s largest full-service family restaurant chains, today reported results for its third quarter ended September 28, 2011.

Third Quarter Summary

  • System-wide same-store sales grew 0.9% with a 0.8% increase at franchised units and a 1.1% increase at company-owned units marking the second consecutive quarter that both franchise and company same-store sales have been positive.
  • Same-store guest counts decreased 0.2% at company-owned units with two-year same-store guest counts of positive 2.1%.
  • Opened 11 system-wide units, including three Flying J Travel Center conversion sites, three university units, and one international unit.
  • Franchise operating margin of $21.3 million grew $0.5 million, compared to the prior year quarter. Franchise operating margin, as a percentage of franchise and license revenue, increased 3.1 percentage points to 66.4%, compared with the prior year quarter.
  • Net income of $8.0 million, or $0.08 per diluted share, was impacted by $2.2 million in impairment expense.
  • Adjusted income before taxes increased 28% to $12.0 million compared with the prior year quarter adjusted income of $9.4 million.
  • Reduced outstanding debt by $10 million bringing total term loan debt repayment to $40 million since October 2010 refinancing.
  • Repurchased 1.3 million shares in the third quarter bringing total shares repurchased to 6.1 million in last 10 months.

John Miller, President and Chief Executive Officer, stated, “Denny’s generated positive same-store sales and positive two-year same-store guest counts in the face of a very challenging consumer and inflationary economic environment. This is a testament to the success of our positioning as America’s favorite diner, emphasizing everyday affordability with attractive Limited Time Only products. We also achieved an increase in profitability despite the headwinds coming from inflationary pressures. We are working closely with our franchisees to continue building on our success in growing units, sales and profitability which has enabled Denny’s to grow free cash flow, pay down debt and repurchase shares in its efforts to increase long-term shareholder value.”

Third Quarter Results

For the third quarter of 2011, Denny’s total operating revenue, including company restaurant sales and franchise revenue, decreased by $3.2 million to $136.7 million compared with $139.9 million in the prior year quarter. Company restaurant sales decreased $2.5 million due to eight fewer equivalent company restaurants compared with the prior year quarter, partially offset by the increase in same-store sales for the quarter.

Company restaurant operating margin (as a percentage of company restaurant sales) was 14.1%, a decrease of 0.8 percentage points compared with the prior year quarter. Product costs increased 1.0 percentage point to 24.7% primarily due to the impact of increased commodity costs. Payroll and benefit costs increased 0.6 percentage points to 39.4% primarily due to $2.1 million, or 2.0%, of favorable workers’ compensation claims development in the prior year period, partially offset by improved scheduling of restaurant staff. Other operating costs decreased 0.9 percentage points to 15.1% primarily due to the corporate investment in media in the prior year and new store opening expenses associated with the opening of 6 company-owned Flying J units in the prior year quarter.

Franchise and license revenue decreased by $0.8 million to $32.0 million compared with $32.8 million in the prior year quarter. The decrease in franchise revenue included a $2.3 million decrease in initial and other fee revenue associated with opening 42 Flying J conversion units in the prior year quarter. This decrease was offset by a $1.8 million increase in royalties due to 103 additional equivalent franchise restaurants and the effects of higher same-store sales. Denny’s franchisees opened nine new units in the third quarter of this year, including four traditional units, three university locations, one Flying J Travel Center conversion site, and one international unit in New Zealand. Denny’s franchisees closed ten restaurants and purchased three company restaurants.

Franchise operating margin increased $0.5 million to $21.3 million, primarily due to the $1.8 million increase in franchise royalties and $0.9 million decrease in direct franchise costs, offset by a $2.3 million decrease in initial and other fee revenue. Franchise operating margin (as a percentage of franchise and license revenue) was 66.4%, an increase of 3.1 percentage points compared with the prior year quarter.

Total general and administrative expenses decreased $1.0 million compared with the prior year quarter primarily due to a decrease in performance-based and deferred compensation expenses.

Depreciation and amortization expense decreased by $0.4 million compared with the prior year quarter. Net operating gains, losses and other charges, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $3.7 million in the quarter. The decrease was primarily the result of lower gains on the sale of real estate and impairment charges related to underperforming units.

Operating income decreased $3.0 million from the prior year quarter to $14.0 million primarily due to the decrease in operating gains, losses and other charges described above.

Interest expense decreased $1.6 million, or 25%, to $4.8 million as a result of lower interest rates under the refinanced and re-priced credit facility and a $29.1 million reduction in total gross debt over the last 12 months.

Denny’s net income was $8.0 million for the third quarter 2011, or $0.08 per diluted share, compared with the prior year quarter net income of $9.9 million, or $0.10 per diluted share. Adjusted income before taxes*, Denny’s metric for earnings guidance, increased 28% to $12.0 million compared with the prior year quarter adjusted income of $9.4 million.

Business Outlook

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “Our efforts to drive improvement in the business are reflected in our results, specifically the increases in profitability and same-store sales in the third quarter. Our franchise focused business model has enabled us to continue to strengthen our balance sheet, and positions us well to navigate the challenging environment impacting our customers and our business.”

Denny’s is updating its full-year 2011 financial guidance to reflect the third quarter positive same-store sales, current thinking on new unit development initiatives, and current commodity inflation expectations. The company anticipates same-store sales for company units to be between 0.0% and 1.0% and same-store sales for franchise units to be between (0.5%) and 0.5% with 60 to 62 new unit openings for 2011 including 23 Flying J conversion units, five university units, three international units, and no new Denny’s Fast Casual test units. In addition, the company expects the annual increase in commodities to be at high end of our second quarter outlook, with Adjusted EBITDA between $80 million and $83 million and Adjusted Income Before Taxes between $36 million and $39 million.