Denny’s Corporation (NASDAQ: DENN), one of America’s largest full-service family restaurant chains, today reported results for its second quarter ended June 29, 2011.
Second Quarter Summary
- System-wide same-store sales increased 2.0% with a 2.6% increase at company units and 1.8% increase at franchised units, which is the first time both company and franchise same-store sales have been positive since the third quarter of 2007.
- Same-store guest counts increased 1.4% at company-owned restaurants, marking the first time both same-store sales and guest counts have been positive since the third quarter of 2006.
- Opened 19 new units, including seven Flying J Travel Center conversion sites, two international units and one new Pilot Travel Center.
- Franchise operating margin of $20.7 million grew $2.0 million, or 11%, compared to the prior year quarter.
- Franchise operating margin, as a percentage of franchise and license revenue, increased 2.6 percentage points to 65.2%, compared with the prior year quarter.
- Net income of $8.1 million for the second quarter 2011, or $0.08 per diluted share, increased 49% compared with the prior year quarter net income of $5.5 million, or $0.05 per diluted share.
- Adjusted income before taxes* of $9.6 million increased 55% compared with the prior year quarter adjusted income of $6.2 million.
- Reduced outstanding debt by $10 million bringing total debt repayment to $30 million since our 2010 refinancing.
- Repurchased 1.8 million shares bringing total shares repurchased to 4.8 million.
John Miller, President and Chief Executive Officer, stated, “Denny’s positive same-store sales and guest counts are a testament to the success of our current market strategies, emphasizing everyday affordability with attractive Limited Time Only products. We are especially pleased that we can achieve an increase in sales and profitability despite significant headwinds coming from inflationary pressures and the challenging consumer economic environment. Our franchisees continue to be excited about growing the brand, as evidenced by the opening of 19 new units in the second quarter of this year.”
Mr. Miller concluded, “We have started to effectively re-energize the Denny’s brand while growing free cash flow, which has allowed us to continue to pay down debt and bring additional value to shareholders through share repurchases. Our leadership team is committed to executing successfully on our strategies to further strengthen our position as America`s favorite diner in 2011 and beyond.”
Second Quarter Results
For the second quarter of 2011, Denny’s total operating revenue, including company restaurant sales and franchise revenue, increased by $0.8 million to $135.9 million compared with $135.1 million in the prior year quarter, marking the first quarter of total operating revenue growth since the fourth quarter of 2006. Company restaurant sales decreased $1.3 million due to 11 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 13.3%, a decrease of 0.5 percentage points compared with the prior year quarter. Product costs increased 1.3 percentage points to 24.6% primarily due to the impact of increased commodity costs. Payroll and benefit costs decreased 0.4 percentage points to 40.8% primarily due to improved scheduling of restaurant staff, partially offset by an increase in performance based compensation and higher state unemployment taxes. Occupancy costs decreased 0.1 percentage points to 6.5%. Other operating costs decreased 0.5 percentage points to 14.7% primarily due to the corporate investment in media in the prior year quarter.
Franchise and license revenue increased by $2.0 million to $31.8 million compared with $29.8 million in the prior year quarter. The increase in franchise revenue included a $2.1 million increase in royalties. The royalty revenue increase was due to 120 additional equivalent franchise restaurants, in addition to the effects of higher same-store sales. Denny’s franchisees opened 18 new units in the second quarter of this year, including nine traditional units, six Flying J Travel Center conversion sites, two international units in Honduras and Costa Rica, and one new Pilot Travel Center location. Denny’s franchisees closed six restaurants, including one relocation, and purchased one company restaurant.
Franchise operating margin increased $2.0 million to $20.7 million, primarily due to the $2.1 million increase in franchise royalties. Franchise operating margin (as a percentage of franchise and license revenue) was 65.2%, an increase of 2.6 percentage points compared with the prior year quarter.
Total general and administrative expenses increased $1.0 million compared with the prior year quarter primarily due to an increase in share-based compensation expense as a result of reductions in the prior year related to forfeitures and the issuance of employment inducement awards to certain employees.
Depreciation and amortization expense decreased by $0.1 million compared with the prior year quarter. Operating gains, losses and other charges, net, which reflects restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, increased $0.3 million in the quarter.
Operating income increased $0.8 million from the prior year quarter to $13.7 million primarily due to the $2.0 million increase in franchise margin, partially offset by the $0.6 million decrease in gross profit from our company operations.
Interest expense decreased $1.6 million, or 24.8%, to $4.9 million as a result of lower interest rates under the refinanced and re-priced credit facility and a $20.3 million reduction in total gross debt over the last 12 months.
Denny’s net income was $8.1 million for the second quarter 2011, or $0.08 per diluted share, compared with the prior year quarter net income of $5.5 million, or $0.05 per diluted share. Adjusted income before taxes*, Denny’s metric for earnings guidance, was $9.6 million compared with the prior year quarter adjusted income of $6.2 million.
Business Outlook
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “The strong same-store sales, unit development and profitability produced in the second quarter demonstrates the success of our franchise focused business model, which is enabling us to grow free cash flow, strengthen our balance sheet and pursue additional shareholder friendly activities. Although we anticipate building on the momentum from the second quarter, we remain cautiously optimistic due to the challenging economic environment and inflationary pressures impacting our customers and our business.”
Denny’s is updating the same-store sales portion of its full-year 2011 financial guidance, to reflect the second quarter positive same-store sales and guest counts, and now expects that both company and franchise same-store sales will range from (1.0%) to 1.0%. In addition, the Company now expects commodities to increase in the mid to high 4.0% range, which is slightly higher than the first quarter outlook.
Denny’s is one of America’s largest full-service family restaurant chains, currently operating more than 1,670 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.