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Denny’s Q3 System-wide Same-store Sales Up Slightly at 0.9%

2011-11-02

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Denny’s Same-store guest counts decreased 0.2% at company-owned units with two-year same-store guest counts of positive 2.1%.

Denny’s Corporation (NASDAQ: DENN) 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.

Component – Full Year 2011	Previous Guidance**	Updated Guidance
Company Same-Store Sales	(1.0%) to 1.0%	0.0% to 1.0%
Franchise Same-Store Sales	(1.0%) to 1.0%	(0.5%) to 0.5%
New Company Units	7 - 12 (includes 5-10 Flying J units and 2 Denny’s Fast Casual test units)	8 (all Flying J conversion units)
New Franchise Units	63 (includes 15 -20 Flying J units and 10 university units)	52 – 54 (includes 15 Flying J conversion units, 5 university units, and 3 international units)
Total New Unit Openings	70 – 75 (includes 25 Flying J units)	60 – 62 (includes 23 Flying J units)
Adjusted EBITDA* ($M)	$80 to $85	$80 to $83
Adjusted Income Before Taxes* ($M)	$38 to $42	$36 to $39
Cash Interest Expense ($M)	$17	No Change
Cash Capital Expenditure ($M)	$18	$17

* 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 Second Quarter 2011 Earnings Release on August 2, 2011.

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

			Quarter		Quarter
			Ended		Ended
(In thousands, except per share amounts)			9/28/11		9/29/10

Revenue:
	Company restaurant sales		$	104,659	$	107,171
	Franchise and license revenue			32,023		32,761
		Total operating revenue		136,682		139,932
Costs of company restaurant sales				89,887		91,193
Costs of franchise and license revenue				10,747		12,009
General and administrative expenses				13,335		14,375
Depreciation and amortization				6,955		7,320
Operating (gains), losses and other charges, net				1,791		(1,900	)
		Total operating costs and expenses		122,715		122,997
Operating income				13,967		16,935
Other expenses:
	Interest expense, net			4,796		6,394
	Other nonoperating expense, net			780		188
		Total other expenses, net		5,576		6,582
Income before income taxes				8,391		10,353
Provision for income taxes				406		419
Net income			$	7,985	$	9,934


Basic and diluted net income per share			$	0.08	$	0.10


Weighted average shares outstanding:
	Basic			96,997		99,579
	Diluted			98,746		101,305

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

			Three Quarters		Three Quarters
			Ended		Ended
(In thousands, except per share amounts)			9/28/11		9/29/10

Revenue:
	Company restaurant sales		$	313,235	$	320,255
	Franchise and license revenue			95,105		92,326
		Total operating revenue		408,340		412,581
Costs of company restaurant sales				271,989		275,091
Costs of franchise and license revenue				33,397		35,498
General and administrative expenses				41,566		40,560
Depreciation and amortization				21,377		21,984
Operating (gains), losses and other charges, net				843		(1,594	)
		Total operating costs and expenses		369,172		371,539
Operating income				39,168		41,042
Other expenses:
	Interest expense, net			15,390		19,306
	Other nonoperating expense, net			2,526		746
		Total other expenses, net		17,916		20,052
Income before income taxes				21,252		20,990
Provision for income taxes				1,013		1,010
Net income			$	20,239	$	19,980


Net income per share:
	Basic		$	0.21	$	0.20
	Diluted		$	0.20	$	0.20

Weighted average shares outstanding:
	Basic			98,132		98,646
	Diluted			100,203		101,264

DENNY’S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands)					9/28/11			12/29/10

ASSETS
	Current Assets
		Cash and cash equivalents		$	14,947		$	29,074
		Receivables, net			13,523			17,280
		Assets held for sale			2,380			1,933
		Other			13,499			14,199
					44,349			62,486

	Property, net				120,652			129,518
	Goodwill				31,023			31,308
	Intangible assets, net				50,092			52,054
	Other assets				34,520			35,840
			Total Assets	$	280,636		$	311,206

LIABILITIES AND SHAREHOLDERS’ DEFICIT
	Current Liabilities
		Current maturities of long-term debt		$	2,589		$	2,583
		Current maturities of capital lease obligations			4,548			4,109
		Accounts payable			20,280			25,957
		Other current liabilities			57,040			57,685
					84,457			90,334
	Long-Term Liabilities
		Long-term debt, less current maturities			205,023			234,143
		Capital lease obligations, less current maturities			19,269			18,988
		Other			67,366			71,453
					291,658			324,584
			Total Liabilities		376,115			414,918

	Shareholders' Deficit
		Common stock			1,026			1,001
		Paid-in capital			555,852			548,490
		Deficit			(609,875	)		(630,114	)
		Accumulated other comprehensive loss, net of tax			(19,199	)		(19,199	)
		Treasury stock			(23,283	)		(3,890	)
			Total Shareholders' Deficit		(95,479	)		(103,712	)
			Total Liabilities and Shareholders' Deficit	$	280,636		$	311,206

Debt Balances

(In thousands)					9/28/11			12/29/10

Credit facility revolver loans due 2015				$	-		$	-
Credit facility term loans due 2016, net of discount of $2,509 and $3,455, respectively					207,491			236,545
Capital leases and other debt					23,938			23,278
	Total Debt			$	231,429		$	259,823

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

		Quarter			Quarter			Three Quarters			Three Quarters
Income and EBITDA Reconciliation		Ended			Ended			Ended			Ended
(In millions)		9/28/11			9/29/10			9/28/11			9/29/10

Net income		$	8.0		$	9.9		$	20.2		$	20.0

Provision for income taxes			0.4			0.4			1.0			1.0
Operating (gains), losses and other charges, net			1.8			(1.9	)		0.8			(1.6	)
Other nonoperating expense, net			0.8			0.2			2.5			0.7
Share-based compensation			1.0			0.8			3.2			2.0

Adjusted income before taxes⁽¹⁾		$	12.0		$	9.4		$	27.8		$	22.2

Interest expense, net			4.8			6.4			15.4			19.3
Depreciation and amortization			7.0			7.3			21.4			22.0
Cash payments for restructuring charges and exit costs			(0.6	)		(1.1	)		(2.1	)		(3.4	)
Cash payments for share-based compensation			(0.5	)		(0.6	)		(0.6	)		(1.6	)

Adjusted EBITDA⁽¹⁾		$	22.6		$	21.4		$	61.9		$	58.5




		Quarter Ended			Quarter Ended			Three Quarters Ended			Three Quarters Ended
General and Administrative Expenses Reconciliation		Quarter Ended			Quarter Ended			Three Quarters Ended			Three Quarters Ended
(In millions)		9/28/11			9/29/10			9/28/11			9/29/10

	Share-based compensation	$	1.0		$	0.8		$	3.2		$	2.0
	Other general and administrative expenses		12.3			13.6			38.4			38.6
	Total general and administrative expenses	$	13.3		$	14.4		$	41.6		$	40.6

(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 Ended				Quarter Ended
(In millions)				9/28/11				9/29/10

Company restaurant operations: ⁽²⁾
	Company restaurant sales			$	104.7	100.0	%	$	107.2		100.0	%
	Costs of company restaurant sales:
		Product costs			25.8	24.7	%		25.4		23.7	%
		Payroll and benefits			41.3	39.4	%		41.5		38.8	%
		Occupancy			6.9	6.6	%		7.1		6.6	%
		Other operating costs:
			Utilities		4.8	4.6	%		4.9		4.6	%
			Repairs and maintenance		1.8	1.7	%		1.8		1.6	%
			Marketing		3.9	3.8	%		4.6		4.3	%
			Legal settlements		0.6	0.6	%		0.6		0.6	%
			Other		4.8	4.6	%		5.2		4.9	%
	Total costs of company restaurant sales			$	89.9	85.9	%	$	91.2		85.1	%
	Company restaurant operating margin ⁽³⁾			$	14.8	14.1	%	$	16.0		14.9	%

Franchise operations: ⁽⁴⁾
	Franchise and license revenue
	Royalty and license revenue			$	20.4	63.9	%	$	18.7		57.0	%
	Initial and other fee revenue				0.4	1.4	%	$	2.8		8.4	%
	Occupancy revenue				11.1	34.8	%	$	11.3		34.6	%
	Total franchise and license revenue			$	32.0	100.0	%	$	32.8		100.0	%

	Costs of franchise and license revenue
	Direct franchise costs			$	2.4	7.5	%	$	3.3		10.0	%
	Occupancy costs				8.3	26.1	%	$	8.7		26.7	%
	Total costs of franchise and license revenue			$	10.7	33.6	%	$	12.0		36.7	%
	Franchise operating margin ⁽³⁾			$	21.3	66.4	%	$	20.8		63.3	%



Total operating revenue ⁽¹⁾				$	136.7	100.0	%	$	139.9		100.0	%
Total costs of operating revenue ⁽¹⁾					100.6	73.6	%		103.2		73.8	%
Total operating margin ⁽¹⁾⁽³⁾				$	36.0	26.4	%	$	36.7		26.2	%

Other operating expenses: ⁽¹⁾⁽³⁾
	General and administrative expenses			$	13.3	9.8	%	$	14.4		10.3	%
	Depreciation and amortization				7.0	5.1	%		7.3		5.2	%
	Operating gains, losses and other charges, net				1.8	1.3	%		(1.9	)	(1.4	%)
	Total other operating expenses			$	22.1	16.2	%	$	19.8		14.1	%

Operating income ⁽¹⁾				$	14.0	10.2	%	$	16.9		12.1	%

(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)

				Three Quarters				Three Quarters
				Ended				Ended
(In millions)				9/28/11				9/29/10

Company restaurant operations: ⁽²⁾
	Company restaurant sales			$	313.2	100.0	%	$	320.3		100.0	%
	Costs of company restaurant sales:
		Product costs			77.1	24.6	%		75.6		23.6	%
		Payroll and benefits			127.9	40.8	%		129.1		40.3	%
		Occupancy			20.6	6.6	%		21.4		6.7	%
		Other operating costs:
			Utilities		13.7	4.4	%		14.0		4.4	%
			Repairs and maintenance		5.5	1.8	%		5.7		1.8	%
			Marketing		11.7	3.7	%		13.5		4.2	%
			Legal settlements		0.7	0.2	%		0.8		0.3	%
			Other		14.8	4.7	%		15.1		4.7	%
	Total costs of company restaurant sales			$	272.0	86.8	%	$	275.1		85.9	%
	Company restaurant operating margin ⁽³⁾			$	41.2	13.2	%	$	45.2		14.1	%

Franchise operations: ⁽⁴⁾
	Franchise and license revenue
	Royalty and license revenue			$	59.7	62.7	%	$	54.5		59.0	%
	Initial and other fee revenue				2.1	2.2	%		3.9		4.2	%
	Occupancy revenue				33.4	35.1	%		34.0		36.8	%
	Total franchise and license revenue			$	95.1	100.0	%	$	92.3		100.0	%

	Costs of franchise and license revenue
	Direct franchise costs			$	7.8	8.2	%	$	9.4		10.2	%
	Occupancy costs				25.6	26.9	%		26.1		28.2	%
	Total costs of franchise and license revenue			$	33.4	35.1	%	$	35.5		38.4	%
	Franchise operating margin ⁽³⁾			$	61.7	64.9	%	$	56.8		61.6	%



Total operating revenue ⁽¹⁾				$	408.3	100.0	%	$	412.6		100.0	%
Total costs of operating revenue ⁽¹⁾					305.4	74.8	%		310.6		75.3	%
Total operating margin ⁽¹⁾⁽³⁾				$	103.0	25.2	%	$	102.0		24.7	%

Other operating expenses: ⁽¹⁾⁽³⁾
	General and administrative expenses			$	41.6	10.2	%	$	40.6		9.8	%
	Depreciation and amortization				21.4	5.2	%		22.0		5.3	%
	Operating gains, losses and other charges, net				0.8	0.2	%		(1.6	)	(0.4	%)
	Total other operating expenses			$	63.8	15.6	%	$	61.0		14.8	%

Operating income ⁽¹⁾				$	39.2	9.6	%	$	41.0		9.9	%

(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
Statistical Data
(Unaudited)

			Quarter			Quarter			Three Quarters			Three Quarters
Same-Store Sales			Ended			Ended			Ended			Ended
(increase/(decrease) vs. prior year)				9/28/11			9/29/10			9/28/11			9/29/10

Same-Store Sales
	Company Restaurants			1.1	%		(0.7	%)		0.7	%		(4.2	%)
	Franchised Restaurants			0.8	%		(1.2	%)		0.3	%		(4.5	%)
	System-wide Restaurants			0.9	%		(1.1	%)		0.4	%		(4.4	%)

Company Restaurant Sales Detail
	Guest Check Average			1.3	%		(2.9	%)		0.8	%		(1.8	%)
	Guest Counts			(0.2	%)		2.3	%		0.0	%		(2.4	%)


			Quarter			Quarter			Three Quarters			Three Quarters
Average Unit Sales			Ended			Ended			Ended			Ended
($ in thousands)				9/28/11			9/29/10			9/28/11			9/29/10

	Company Restaurants		$	468		$	462		$	1,383		$	1,368

	Franchised Restaurants		$	355		$	348		$	1,043		$	1,029



						Franchised
Restaurant Unit Activity			Company			& Licensed			Total

Ending Units 6/29/11				225			1,452			1,677

	Units Opened			2			9			11
	Units Relocated			0			0			0
	Units Refranchised			(3	)		3			0
	Units Closed (Including Units Relocated)			(1	)		(10	)		(11	)
		Net Cha