DENNY’S CORPORATION REPORTS RESULTS FOR THE SECOND QUARTER 2008
SPARTANBURG, S.C., July 29, 2008 – Denny’s Corporation (NASDAQ: DENN) today reported results for its second quarter ended June 25, 2008.
Second Quarter Summary
| · | Same-store sales decreased 0.7% at company units and decreased 3.7% at franchised units |
| · | Company restaurant operating margin increased by 0.9 percentage points to 12.5% of sales |
| · | Net income decreased $7.4 million to $3.2 million due primarily to lower asset sale gains |
| · | Adjusted income before taxes increased $4.2 million to $5.7 million |
| · | Sold 20 company restaurants to seven franchisees under Franchise Growth Initiative (FGI) |
| · | Announced new organizational structure expected to result in annualized general and administrative expense savings of $6 to $8 million in 2009 |
| · | Raising guidance for 2008 adjusted income before taxes to $13 to $17 million, a 25-60% increase over 2007 |
Nelson Marchioli, President and Chief Executive Officer, stated, “We are pleased to report greater operating margins and strong core earnings growth despite the difficult consumer and cost environment. The strategic actions we have taken to optimize our business model, increase profitability and reduce debt are evident in our improving results. The growing contribution of our higher margin franchise operations along with margin improvements in our company restaurants have allowed us to raise our income guidance for 2008. While we expect the challenge of reduced consumer spending to continue impacting our sales, we are encouraged by the reception to our new products and promotions. Our brand and marketing teams are delivering compelling new menu items along with aggressive new promotional campaigns to build profitable and sustainable sales growth. Through our strategic initiatives and day-to-day execution in our restaurants, we expect continued financial performance improvements as well as enhanced shareholder value over time.”
Second Quarter Results
For the second quarter of 2008, Denny’s reported total operating revenue, including company restaurant sales and franchise revenue, of $190.3 million compared with $240.9 million in the prior year quarter. Company restaurant sales decreased $55.1 million due primarily to 141 fewer equivalent company restaurants compared with the prior year quarter resulting from the sale of company restaurants to franchisees under the Franchise Growth Initiative. During the second quarter, Denny’s opened two new company restaurants, closed one and sold 20 to franchisee operators.
Company restaurant operating margin (as a percentage of company restaurant sales) for the second quarter was 12.5%, an increase of 0.9 percentage points compared with the same period last year. Product costs for the second quarter decreased 1.9 percentage points to 23.9% of sales due primarily to favorable menu mix and menu price increases. Payroll and benefit costs increased 0.2 percentage points to 42.3% of sales as a result of higher group insurance and management staffing costs partially offset by improved crew labor efficiency and menu price increases. Utility expenses increased 0.3 percentage points to 4.9% of sales due primarily to higher natural gas costs.
Franchise revenue in the second quarter increased $4.4 million, or 20%, to $27.0 million due primarily to an increase of 146 equivalent franchise restaurants compared with the prior year period. The growth in franchise revenue included a $3.0 million increase in occupancy revenue, a $1.6 million increase in royalties partially offset by a $0.2 million decrease in franchise fees. Franchise operating margin increased by $2.8 million, or 18%, to $18.5 million in the second quarter as higher franchise revenue offset a $1.6 million increase in franchise costs, primarily franchise occupancy costs. Franchise operating margin was 68.5% as a percentage of franchise and license revenue. During the second quarter, Denny’s franchisees opened two new restaurants, closed eight and purchased 20 company restaurants.
General and administrative expenses for the second quarter declined $1.6 million from the same period last year resulting primarily from reduced staffing and other compensation expenses.
Depreciation and amortization expense for the second quarter declined by $2.6 million compared with the prior year period primarily as a result of the sale of restaurant and real estate 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 $15.1 million in the quarter due primarily to a $10.3 million decrease in gains on the sale of restaurants and a $4.5 million increase in severance and other restructuring charges attributable to the redesign of Denny’s organizational structure as it transitions to a franchise-focused business model.
Operating income for the second quarter decreased $12.8 million to $10.5 million due primarily to the decrease in gains on the sale of restaurants and the increase in restructuring charges compared with the prior year period. Excluding gains, losses, and other charges in both periods, operating income increased $2.3 million despite a $50.7 million decrease in total operating revenue due primarily to the sale of company restaurants.
Interest expense for the second quarter decreased $2.1 million, or approximately 19%, to $8.9 million as a result of a $97.2 million reduction in debt from the prior year period.
Other nonoperating income increased $1.4 million in the second quarter due primarily to changes in the fair value of Denny’s $100 million interest rate swap.
Net income for the second quarter was $3.2 million, or $0.03 per diluted common share, a decrease of $7.4 million compared with prior year net income of $10.6 million, or $0.11 per diluted common share. Adjusted income before taxes for the second quarter was $5.7 million, an increase of $4.2 million compared with prior year income of $1.5 million. This measure, which is used as an internal profitability metric, excludes restructuring charges, exit costs, impairment charges, asset sale gains, share-based compensation, other nonoperating expenses and income taxes.
Franchise Growth Initiative (FGI)
Denny’s continues its strategic initiative to increase franchise restaurant development through the sale of certain company restaurants. During the second quarter, the company sold 20 restaurants to seven franchisee operators under FGI, bringing the number of company restaurants sold year-to-date to 41 and the number sold since the program began in early 2007 to 171. Additionally, over the last 18 months Denny’s has signed development agreements for 136 new restaurants, 14 of which have opened, yielding a current development pipeline of 122 new restaurants.
Denny’s ended the second quarter of 2008 with a system mix of 77% franchised and licensed restaurants and 23% company restaurants compared with 66% franchised and licensed restaurants and 34% company restaurants before the FGI program began in 2007.
The 41 company restaurants sold in 2008 generated net sale proceeds of $22.0 million of which $16.4 million was received in cash during the first half of the year. $3.2 million of the sales proceeds were received in cash subsequent to the quarter end and were included in accounts receivable on the second quarter balance sheet. Additionally, $2.4 million of the sale proceeds were received in the form of notes receivable. The majority of the cash proceeds were used to reduce debt by $15.4 million during the first half of 2008.
Business Outlook
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “While our sales expectations for the year remain cautious due to the economic pressures on our customers, we will continue to focus on profitable sales drivers, lowering our operating costs and increasing our organizational efficiency. As a result of higher earnings the past two quarters and our expectation for continued income growth through the remainder of the year, we are increasing our guidance for adjusted income before taxes in 2008 to $13 to $17 million, an increase of 25% to 60% over the 2007 result.”
The following financial guidance for full-year 2008 is based on year-to-date results and management’s expectations at this time.
| - | Company same-store sales of (2.0%) to 0.0% for 2008 |
| - | Franchise same-store sales of (4.0%) to (2.0%) for 2008 |
| - | 3 new company restaurant openings in 2008 |
| - | 30 to 34 franchise unit openings in 2008 compared with 18 in 2007 |
| - | 75 to 100 company restaurants sold to franchisees under FGI |
| - | Company restaurant sales of $645 to $655 million compared with $845 million in 2007 |
| - | Franchise and license revenue of $112 to $114 million compared with $95 million in 2007 |
| - | Adjusted EBITDA* of $86 to $89 million compared with $93 million in 2007 |
| - | Adjusted income before taxes* of $13 to $17 million compared with $10.5 million in 2007 |
| - | Cash interest expense of $32 million compared with $39 million in 2007 |
| - | Cash capital expenditures of $29 million compared with $33 million in 2007 |
Certain key considerations for understanding the Company’s outlook for fiscal 2008 compared with its 2007 results include:
| - | 2008 will include 53 operating weeks (14 in the fourth quarter) compared with 52 operating weeks in 2007 |
| - | The expectation of approximately 150 fewer equivalent company restaurants in 2008 compared with 2007 due to the impact of FGI across both years |
| - | Improved product cost margins due to proactive menu mix and pricing actions which help to offset higher commodity costs |
| - | General and administrative expenses (excluding incentive and share-based compensation) will trend down over the second half of the year due to organizational realignment |
* Please refer to the historical reconciliation of net income to adjusted income before taxes and adjusted EBITDA included in the tables below.
Further Information
Denny’s will provide further commentary on its results for the second quarter of 2008 on its quarterly investor conference call today, Tuesday, July 29, 2008 at 5:00 p.m. EST. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny’s website at ir.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.
Denny’s is one of America’s largest full-service family restaurant chains, consisting of 354 company-owned units and 1,191 franchised and licensed units, with operations in the United States, Canada, Costa Rica, Guam, Mexico, New Zealand and Puerto Rico. For further information on Denny’s, including news releases, links to SEC filings and other financial information, please visit the Denny’s website.
The Company urges caution in considering its current trends and any outlook on earnings disclosed in this press release. In addition, certain matters discussed in this release may constitute forward-looking statements. These forward-looking statements involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expects”, “anticipates”, “believes”, “intends”, “plans”, “hopes”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the competitive pressures from within the restaurant industry; the level of success of the Company’s operating initiatives, advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 26, 2007 (and in the Company’s subsequent quarterly reports on Form 10-Q).
