Denny's Corporation Reports Results for the Second Quarter 2009

Denny's Corporation (NASDAQ: DENN) today reported results for the second quarter ended July 1, 2009.

Second Quarter Highlights

• Adjusted income before taxes grew $1.6 million to $7.3 million

• Net income increased $6.2 million due primarily to $6.4 million less in restructuring charges

• Opened 10 new franchised restaurants and sold 22 company restaurants under Denny's Franchise Growth Initiative (FGI) - increased franchised restaurants to 83% of Denny's system

• Voluntarily paid down $9.4 million in debt

• Same-store sales decreased 2.7% at company units and decreased 4.7% at franchised units

• Company restaurant operating margin improved by 1.8 percentage points to 14.3% of sales

Nelson Marchioli, President and Chief Executive Officer, stated, 'Denny's has continued to deliver growth in profits despite the unprecedented on-going pressures on same-store sales in the restaurant industry due to the challenging consumer environment.'

'Denny's on-going transition to a more franchised based business model was supported by the opening of 10 new franchise stores and the sale of 22 company units to franchisees in the second quarter. This is allowing us to concentrate our resources on driving profitability while developing and introducing new craveable products for our guests. We expect these new product concepts, in combination with Denny's focus on delivering value, will lead to improved traffic over-time. Our transition continues to be characterized by strong demand for our units through the Company's FGI program, impressive new unit development in an industry that is scaling back and by strong margin growth at the operating level.'

Second Quarter Results

For the second quarter of 2009, Denny's reported total operating revenue, including company restaurant sales and franchise revenue, of $155.8 million compared with $190.3 million in the prior year quarter. Company restaurant sales decreased $37.7 million due primarily to 97 fewer equivalent company restaurants compared with the prior year quarter resulting from the sale of company restaurants to franchisees under FGI. During the second quarter, Denny's closed one company restaurant and sold 22 restaurants to franchisee operators.

Company restaurant operating margin (as a percentage of company restaurant sales) for the second quarter was 14.3%, an increase of 1.8 percentage points compared with the same period last year. This improved margin rate was driven largely by an increase in check average (the net of price increases taken over the last 12 months to help counter balance commodity inflation and a stronger value-oriented menu mix), efficiency gains in company operated units, the selling of lower margin units through FGI, and lower utility rates. Product costs for the second quarter decreased 0.5 percentage points to 23.4% of sales due primarily to a higher average guest check partially offset by commodity inflation. Payroll and benefit costs decreased 0.7 percentage points to 41.6% of sales due primarily to improvements in staffing efficiency partially offset by higher restaurant management incentive compensation. Occupancy costs increased 0.3 percentage points to 6.4% of sales due primarily to changes in the portfolio of company-owned restaurants and the decrease in same-store sales. Utility costs decreased 0.5 percentage points to 4.4% primarily due to lower natural gas costs. Marketing expenses increased 0.4 percentage points to 3.8% of sales due to the establishment of local market advertising cooperatives with Denny's franchisees.

For the second quarter of 2009, Denny's reported franchise and license revenue of $30.3 million compared with $27.0 million in the prior year quarter. Franchise revenue increased $3.3 million, or 12.1%, due primarily to an additional 95 equivalent franchise restaurants compared with the prior year period. The growth in franchise revenue included a $2.2 million increase in occupancy revenue, a $0.8 million increase in royalty revenue and a $0.2 million increase in initial franchise fee revenue. During the second quarter, Denny's franchisees opened 10 new restaurants, closed 11 and purchased 22 company restaurants.

Franchise operating margin increased $1.1 million, or 6.0%, to $19.6 million in the second quarter as higher franchise revenue offset a $2.2 million increase in franchise costs, primarily franchise occupancy costs. Franchise operating margin (as a percentage of franchise and license revenue) for the second quarter was 64.7%, a decrease of 3.8 percentage points compared with the same period last year. The franchise margin decrease was due primarily to the increasing contribution of lower-margin occupancy revenue as leased company restaurant units are in turn subleased to franchisees through FGI.

General and administrative expenses for the second quarter increased $0.4 million, or 2.4%, from the same period last year resulting primarily from reduced staffing attributable to the new organizational structure implemented in the second quarter of 2008 offset by increased incentive and share based compensation along with the negative impact related to the accounting for our deferred compensation plan.

Depreciation and amortization expense for the second quarter declined by $1.9 million compared with the prior year period primarily as a result of the sale of restaurant and property assets over the past year. 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 $6.8 million in the quarter due primarily to a $6.4 million decrease in restructuring charges related to prior year organizational structure changes to become a more franchise focused business.

Operating income for the second quarter increased $6.9 million from the prior year period to $17.4 million. Excluding gains, losses, and other charges in both periods, operating income increased $0.1 million despite a $34.5 million decrease in total operating revenue attributable primarily to the sale of company restaurants.

Interest expense for the second quarter decreased $0.6 million, or 7.2%, to $8.2 million as a result of a $22.2 million reduction in debt from the prior year period. Other nonoperating income decreased $0.9 million in the second quarter due primarily to the recognition of unrealized gains/losses related to our interest rate swap.

Denny's reported net income of $9.3 million for the second quarter, or $0.09 per diluted common share, compared with prior year period net income of $3.2 million, or $0.03 per diluted common share. Adjusted income before taxes, Denny's metric for earnings guidance, increased $1.6 million, or 27%, in the second quarter to $7.3 million. This measure, which is used as an internal profitability metric, excludes restructuring charges, exit costs, impairment charges, asset sale gains and losses, share-based compensation, other nonoperating expenses and income taxes.

Franchise Growth Initiative (FGI)

Denny's continued its strategic initiative to increase franchise restaurant development through the sale of certain company restaurants. During the second quarter, the company sold 22 restaurants to eight franchisee operators under FGI bringing the number sold since the program began in early 2007 to 261, or 50% of the pre-FGI company restaurants.

Denny's ended the second quarter of 2009 with a system mix of 83% franchised and licensed restaurants and 17% company restaurants compared with 66% franchised and licensed restaurants and 34% company restaurants before the FGI program in the first quarter of 2007.

The sale of company restaurant operations and other assets year-to-date 2009 generated net sales proceeds of $14.5 million of which $13.0 million was received in cash and the remaining $1.5 million in the form of notes receivable. The majority of cash proceeds were used to reduce debt by $12.3 million during the first half of 2009.

Business Outlook

Based on year-to-date results and management's expectations at this time, Denny's is reaffirming its financial guidance for full-year 2009 as announced in its fourth quarter 2008 earnings release on February 18, 2009. Key guidance provided at that time included:

• Company same-store sales of (3.0%) to (1.0%) for 2009

• Franchise same-store sales of (5.0%) to (3.0%) for 2009

• 30 new franchise restaurant openings

• Adjusted income before taxes of between $15 million and $20 million


Logos, product and company names mentioned are the property of their respective owners.

Reader Comments:

Be the first to leave a comment for this article

Tweet