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Denny’s Achieves Positive Same-store Sales and Guest Counts for Q2

2011-08-03

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Denny’s 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.

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.


Component – Full Year 2011	Previous Guidance**	Updated Guidance
Company Same-Store Sales	(2.0%) to 1.0%	(1.0%) to 1.0%
Franchise Same-Store Sales	(2.0%) to 1.0%	(1.0%) to 1.0%
New Company Units	7 - 12	No Change
	(includes 5-
	10 Flying J units
	and 2 Denny’s Fast
	Casual test units)
New Franchise Units	63	No Change
	(includes 15 -20
	Flying J units and
	10 university
	units)
Total New Unit Openings	70 – 75	No Change
	(includes 25 Flying
	J units)
Adjusted EBITDA* ($M)	$80 to $85	No Change
Adjusted Income Before Taxes* ($M)	$38 to $42	No Change
Cash Interest Expense ($M)	$17	No Change
Cash Capital Expenditure ($M)	$18	No Change

*		Please refer to the historical reconciliation of net income to adjusted income before taxes and adjusted EBITDA included in the tables below.
**		As announced in Fourth Quarter and Full Year 2010 Earnings Release on February 15, 2011.


DENNY’S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)


			Quarter			Quarter
			Ended			Ended
(In thousands, except per share amounts)			6/29/11			6/30/10

Revenue:
	Company restaurant sales		$	104,021		$	105,301
	Franchise and license revenue			31,832			29,776
		Total operating revenue		135,853			135,077
Costs of company restaurant sales				90,154			90,765
Costs of franchise and license revenue				11,085			11,123
General and administrative expenses				14,092			13,111
Depreciation and amortization				7,234			7,291
Operating (gains), losses and other charges, net				(419	)		(117	)
		Total operating costs and expenses		122,146			122,173
Operating income				13,707			12,904
Other expenses:
	Interest expense, net			4,901			6,514
	Other nonoperating expense, net			268			570
		Total other expenses, net		5,169			7,084
Income before income taxes				8,538			5,820
Provision for income taxes				408			362
Net income			$	8,130		$	5,458


Basic and diluted net income per share			$	0.08		$	0.05


Weighted average shares outstanding:
	Basic			98,421			99,263
	Diluted			100,602			101,983


DENNY’S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)


			Two Quarters			Two Quarters
			Ended			Ended
(In thousands, except per share amounts)			6/29/11			6/30/10

Revenue:
	Company restaurant sales		$	208,576		$	213,084
	Franchise and license revenue			63,082			59,565
		Total operating revenue		271,658			272,649
Costs of company restaurant sales				182,102			183,898
Costs of franchise and license revenue				22,650			23,489
General and administrative expenses				28,231			26,185
Depreciation and amortization				14,422			14,664
Operating (gains), losses and other charges, net				(948	)		306
		Total operating costs and expenses		246,457			248,542
Operating income				25,201			24,107
Other expenses:
	Interest expense, net			10,594			12,912
	Other nonoperating expense, net			1,746			558
		Total other expenses, net		12,340			13,470
Income before income taxes				12,861			10,637
Provision for income taxes				607			591
Net income			$	12,254		$	10,046


Basic and diluted net income per share			$	0.12		$	0.10


Weighted average shares outstanding:
	Basic			98,700			98,179
	Diluted			100,976			101,068


DENNY’S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)


(In thousands)				6/29/11			12/29/10

ASSETS
	Current Assets
		Cash and cash equivalents		$	12,937		$	29,074
		Receivables, net			15,920			17,280
		Assets held for sale			671			1,933
		Other			13,767			14,199
					43,295			62,486

	Property, net				125,399			129,518
	Goodwill				31,218			31,308
	Intangible assets, net				50,747			52,054
	Other assets				36,003			35,840
			Total Assets	$	286,662		$	311,206

LIABILITIES AND SHAREHOLDERS’ DEFICIT
	Current Liabilities
		Current maturities of long-term debt		$	2,586		$	2,583
		Current maturities of capital lease obligations			4,383			4,109
		Accounts payable			23,327			25,957
		Other current liabilities			52,941			57,685
					83,237			90,334
	Long-Term Liabilities
		Long-term debt, less current maturities			214,799			234,143
		Capital lease obligations, less current maturities			19,131			18,988
		Other			69,018			71,453
					302,948			324,584
			Total Liabilities		386,185			414,918
	Shareholders' Deficit
		Common stock			1,022			1,001
		Paid-in capital			554,979			548,490
		Deficit			(617,860	)		(630,114	)
		Accumulated other comprehensive loss, net of tax			(19,199	)		(19,199	)
		Treasury stock			(18,465	)		(3,890	)
			Total Shareholders' Deficit		(99,523	)		(103,712	)
			Total Liabilities and Shareholders' Deficit	$	286,662		$	311,206



Debt Balances

(In thousands)					6/29/11			12/29/10

Credit facility revolver loans due 2015				$	-		$	-
Credit facility term loans due 2016, net of discount of $2,755 and $3,455, respectively					217,245			236,545
Capital leases and other debt					23,654			23,278
	Total Debt			$	240,899		$	259,823


DENNY’S CORPORATION
Income, EBITDA and G&A Reconciliations
(Unaudited)


		Quarter			Quarter			Two Quarters			Two Quarters
Income and EBITDA Reconciliation		Ended			Ended			Ended			Ended
(In millions)		6/29/11			6/30/10			6/29/11			6/30/10

Net income		$	8.1		$	5.5		$	12.3		$	10.0

Provision for income taxes			0.4			0.4			0.6			0.6
Operating (gains), losses and other charges, net			(0.4	)		(0.1	)		(0.9	)		0.3
Other nonoperating expense, net			0.3			0.6			1.7			0.6
Share-based compensation			1.2			(0.1	)		2.1			1.2

Adjusted income before taxes⁽¹⁾		$	9.6		$	6.2		$	15.8		$	12.8

Interest expense, net			4.9			6.5			10.6			12.9
Depreciation and amortization			7.2			7.3			14.4			14.7
Cash payments for restructuring charges and exit costs			(0.7	)		(0.9	)		(1.5	)		(2.3	)
Cash payments for share-based compensation			(0.1	)		-			(0.1	)		(1.0	)

Adjusted EBITDA⁽¹⁾		$	20.9		$	19.1		$	39.3		$	37.1




		Quarter			Quarter			Two Quarters			Two Quarters
General and Administrative Expenses Reconciliation		Ended			Ended			Ended			Ended
(In millions)		6/29/11			6/30/10			6/29/11			6/30/10

	Share-based compensation	$	1.2		$	(0.1	)	$	2.1		$	1.2
	Other general and administrative expenses		12.9			13.2			26.1			25.0
	Total general and administrative expenses	$	14.1		$	13.1		$	28.2		$	26.2

(1)

We believe that, in addition to other financial measures, Adjusted Income Before Taxes and Adjusted EBITDA are appropriate indicators to assist in the evaluation of our operating performance on a period-to-period basis. We also use Adjusted Income and Adjusted EBITDA internally as performance measures for planning purposes, including the preparation of annual operating budgets, and for compensation purposes, including bonuses for certain employees. Adjusted EBITDA is also used to evaluate our ability to service debt because the excluded charges do not have an impact on our prospective debt servicing capability and these adjustments are contemplated in our credit facility for the computation of our debt covenant ratios. However, Adjusted Income and Adjusted EBITDA should be considered as a supplement to, not a substitute for, operating income, net income or other financial performance measures prepared in accordance with U.S. generally accepted accounting principles.


DENNY’S CORPORATION
Operating Margins
(Unaudited)


				Quarter					Quarter
				Ended					Ended
(In millions)				6/29/11					6/30/10

Company restaurant operations: ⁽²⁾
	Company restaurant sales			$	104.0		100.0	%	$	105.3		100.0	%
	Costs of company restaurant sales:
		Product costs			25.6		24.6	%		24.5		23.3	%
		Payroll and benefits			42.4		40.8	%		43.4		41.2	%
		Occupancy			6.8		6.5	%		6.9		6.6	%
		Other operating costs:
			Utilities		4.6		4.4	%		4.4		4.2	%
			Repairs and maintenance		1.9		1.8	%		2.0		1.9	%
			Marketing		4.0		3.8	%		4.5		4.3	%
			Legal settlements		(0.0	)	(0.0	%)		0.1		0.1	%
			Other		4.9		4.7	%		5.0		4.8	%
	Total costs of company restaurant sales			$	90.2		86.7	%	$	90.8		86.2	%
	Company restaurant operating margin ⁽³⁾			$	13.9		13.3	%	$	14.5		13.8	%

Franchise operations: ⁽⁴⁾
	Franchise and license revenue
	Royalty and license revenue			$	19.9		62.6	%	$	17.8		59.9	%
	Initial and other fee revenue				0.7		2.2	%		0.7		2.3	%
	Occupancy revenue				11.2		35.2	%		11.3		37.8	%
	Total franchise and license revenue			$	31.8		100.0	%	$	29.8		100.0	%

	Costs of franchise and license revenue
	Direct franchise costs			$	2.4		7.6	%	$	2.5		8.4	%
	Occupancy costs				8.7		27.2	%		8.6		29.0	%
	Total costs of franchise and license revenue			$	11.1		34.8	%	$	11.1		37.4	%
	Franchise operating margin ⁽³⁾			$	20.7		65.2	%	$	18.7		62.6	%



Total operating revenue ⁽¹⁾				$	135.9		100.0	%	$	135.1		100.0	%
Total costs of operating revenue ⁽¹⁾					101.2		74.5	%		101.9		75.4	%
Total operating margin ⁽¹⁾⁽³⁾				$	34.6		25.5	%	$	33.2		24.6	%

Other operating expenses: ⁽¹⁾⁽³⁾
	General and administrative expenses			$	14.1		10.4	%	$	13.1		9.7	%
	Depreciation and amortization				7.2		5.3	%		7.3		5.4	%
	Operating gains, losses and other charges, net				(0.4	)	(0.3	%)		(0.1	)	(0.1	%)
	Total other operating expenses			$	20.9		15.4	%	$	20.3		15.0	%

Operating income ⁽¹⁾				$	13.7		10.1	%	$	12.9		9.6	%

		(1)		As a percentage of total operating revenue
		(2)		As a percentage of company restaurant sales
		(3)		Other operating expenses such as general and administrative expenses and depreciation and amortization relate to both company and franchise operations and are not allocated to costs of company restaurant sales and costs of franchise and license revenue. As such, operating margin is considered a non-GAAP financial measure. Operating margins should be considered as a supplement to, not as a substitute for, operating income, net income or other financial measures prepared in accordance with U.S. generally accepted accounting principles.
		(4)		As a percentage of franchise and license revenue


DENNY’S CORPORATION
Operating Margins
(Unaudited)


				Two Quarters				Two Quarters
				Ended				Ended
(In millions)				6/30/10				6/30/10

Company restaurant operations: ⁽²⁾
	Company restaurant sales			$	208.6	100.0	%	$	213.1	100.0	%
	Costs of company restaurant sales:
		Product costs			51.2	24.6	%		50.2	23.6	%
		Payroll and benefits			86.6	41.5	%		87.5	41.1	%
		Occupancy			13.7	6.5	%		14.3	6.7	%
		Other operating costs:
			Utilities		9.0	4.3	%		9.0	4.2	%
			Repairs and maintenance		3.7	1.8	%		3.9	1.9	%
			Marketing		7.8	3.7	%		8.8	4.1	%
			Legal settlements		0.1	0.0	%		0.2	0.1	%