Denny's Corporation Reports Results for the Third Quarter 2009

Denny's Corporation (NASDAQ:DENN) today reported results for the third quarter ended September 30, 2009.

Third Quarter Highlights

Opened nine new franchised restaurants and sold seven company restaurants under Denny's Franchise Growth Initiative (FGI) - franchised restaurants now 83% of Denny's system

Net income was $10.0 million, which included $3.1 million from gains on sales of assets

Adjusted income before taxes grew 6.9% to $9.1 million

Reduced debt by an additional $9.8 million

Same-store sales decreased 6.6% at company units and 7.3% at franchised units

Company restaurant operating margin improved 3.0 percentage points to 16.3% of sales, primarily due to favorable workers' compensation claims developments

Nelson Marchioli, President and Chief Executive Officer, stated, 'We continue to execute towards our strategic goals of building new units, refranchising company units, paying down debt, and growing profitability. Our ability to accomplish these goals despite the on-going same-store sales challenges faced by the industry and Denny's is evidence of the strength of the Denny's brand.'

'Although we are making progress towards our strategic goals, our sales trends must improve. Denny's is focused on driving sales by delivering new and craveable products at an affordable price and with great guest service. We are confident our focus, which includes strengthened communication with our target customers, will drive improvement to guest counts over time.'

Third Quarter Results

For the third quarter of 2009, Denny's reported total operating revenue, including company restaurant sales and franchise revenue, of $146.1 million compared with $189.3 million in the prior year quarter. Company restaurant sales decreased $44.0 million due primarily to 89 fewer equivalent company restaurants compared with the prior year quarter resulting from the sale of company restaurants to franchisees under FGI. During the third quarter, Denny's sold seven restaurants to franchisee operators. Denny's did not open or close any company restaurants during the quarter.

Company restaurant operating margin (as a percentage of company restaurant sales) for the third quarter was 16.3%, an increase of 3.0 percentage points compared with the same period last year. Excluding the workers' compensation benefit of 2.2 percentage points noted below, company operating margin would have been 14.1%. The improved margin rate was also driven by the factors discussed below.

Product costs for the third quarter decreased 1.1 percentage points to 23.1% of sales due primarily to a higher average guest check, favorable mix impacts, and solid management at the unit level. This was partially offset by commodity inflation.

Payroll and benefit costs decreased 2.4 percentage points to 38.4% of sales. Excluding $2.3 million of favorable workers' compensation claims developments, payroll and benefits costs would have been 40.6%. Management and team labor efficiency gains that were realized through FGI, management staffing level improvements and crew labor productivity gains were largely offset by sales deleverage.

Occupancy costs increased 0.8 percentage points to 6.7% of sales due primarily to the decrease in same-store sales and the positive development of general liability claims in the prior year quarter. Utility costs decreased 0.7 percentage points to 5.0% due to lower natural gas and electric rates. Marketing expenses increased 0.4 percentage points to 3.9% of sales due to the establishment of local market advertising cooperatives with Denny's franchisees. Legal settlement expense decreased 0.4 percentage points. Other costs increased 0.7 percentage points due primarily to the loss of business interruption income and the subsequent pre-opening expenses incurred as Denny's reopened one of its company units on the Las Vegas strip.

For the third quarter of 2009, Denny's reported franchise and license revenue of $29.5 million compared with $28.7 million in the prior year quarter. Franchise revenue increased $0.8 million, or 2.8%, due primarily to an additional 90 equivalent franchise restaurants compared with the prior year period. The growth in franchise revenue included a $1.5 million increase in occupancy revenue, flat royalty revenue growth and a $0.7 million decrease in initial and other fee revenue driven primarily by fewer refranchised units this quarter. During the third quarter, Denny's franchisees opened nine new restaurants, closed eight and purchased seven company restaurants.

Franchise operating margin decreased $0.7 million, to $19.2 million in the third quarter. Net occupancy income grew by $0.2 million driven by the FGI program. This was offset primarily by a decrease in initial fees due to 14 fewer refranchisings than in the prior year quarter. The increase in royalties driven by the additional 90 equivalent units was offset by the negative same-store sales. Franchise operating margin (as a percentage of franchise and license revenue) for the third quarter was 65.0%, a decrease of 4.5 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 third quarter decreased $0.6 million, or 3.9%, from the same period last year resulting primarily from Denny's continued migration towards a more franchised based company. This benefit was partially offset by a $1.0 million increase in deferred compensation costs and a $0.3 million increase in share-based compensation costs.

Depreciation and amortization expense for the third quarter declined by $2.1 million compared with the prior year period primarily as a result of the sale of restaurants and real estate 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 $1.6 million in the quarter. This decrease was primarily the result of a $2.2 million decrease in gains on sales of company restaurants and real estate.

Operating income for the third quarter decreased $2.1 million from the prior year period to $18.6 million. Excluding gains, losses, and other charges in both periods, operating income decreased only $0.4 million despite a $43.2 million decrease in total operating revenue attributable primarily to the sale of company restaurants.

Interest expense for the third quarter decreased $0.6 million, or 7.4%, to $8.1 million as a result of a $32.3 million reduction in debt from the prior year period. Other nonoperating income increased $1.0 million in the third quarter due primarily to the recognition of unrealized gains and losses related to our interest rate swap and natural gas hedge.

Denny's reported net income of $10.0 million for the third quarter, or $0.10 per diluted common share, compared with prior year period net income of $10.6 million, or $0.11 per diluted common share. Adjusted income before taxes, Denny's metric for earnings guidance, increased $0.6 million, or 6.9%, in the third quarter to $9.1 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 third quarter, the company sold seven restaurants to four franchisee operators under FGI bringing the number sold since the program began in early 2007 to 268 or 52% of the pre-FGI company restaurants.

Denny's ended the third 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 began in the first quarter of 2007.

Year-to-date 2009, the sale of company restaurant operations and other real estate assets generated net sales proceeds of $22.4 million of which $20.7 million was received in cash and the remaining $1.7 million in the form of notes receivable. The majority of cash proceeds were used to reduce debt by $22.0 million during the first three quarters of 2009.

Reader Comments:

Be the first to leave a comment for this article