DENNY’S CORPORATION REPORTS RESULTS FOR THE THIRD QUARTER 2010
| | SPARTANBURG, S.C., November 2, 2010 – Denny’s Corporation (NASDAQ: DENN) one of America’s largest full-service family restaurant chains, today reported results for its third quarter ended September 29, 2010. |
Third Quarter Summary
| · | Same-store guest counts rose 2.3% at company units, the strongest performance since the first quarter of 2005 |
| · | Same-store sales decreased 0.7% at company units and 1.2% at franchised units |
| · | Opened 61 new units, including 48 Flying J conversion sites and 4 units at university locations |
| · | Secured industry veterans for the Chief Marketing Officer and Chief Operating Officer positions |
| · | Net income of $9.9 million, or $0.10 per diluted share |
| · | Adjusted income before taxes* grew by 3.7%, to $9.4 million |
| · | Refinanced all debt to lower cost credit facility of $300 million while increasing flexibility to perform stockholder friendly actions, subsequent to the end of the third quarter |
Debra Smithart-Oglesby, Interim Chief Executive Officer and Board Chair, stated, “Our third quarter results continued to show encouraging signs of progress towards our key areas of focus. We drove positive same-store guest count growth in the quarter in our company units due primarily to guest acceptance of the Denny’s everyday affordability strategy, led by the $2/$4/$6/$8 Value Menu. Our performance reflects four quarters of sequentially improving guest count trends.”
“We continued to deliver profitable growth while maintaining an aggressive pace of conversions, as we opened 48 new Denny’s sites in Pilot’s Flying J Travel Centers. Last, we brought aboard high-caliber experienced talent at the Senior Executive level through the hiring of Frances Allen as Denny’s Chief Marketing Officer and Robert Rodriguez as Chief Operating Officer and hired Interpublic Group’s Gotham as our new advertising agency.”
Ms. Smithart-Oglesby concluded, “Our solid execution towards the strategic priorities of driving sales, growing profitability, and growing unit development in traditional and non-traditional venues in an increasingly franchised-based system continues to drive our ability to optimize the balance sheet and free cash flow. The Company’s recent $300 million refinancing of its credit facility is further evidence of the strength of our emerging business model.”
Third Quarter Results
For the third quarter of 2010, Denny’s reported total operating revenue, including company restaurant sales and franchise revenue, of $139.9 million compared with $146.1 million in the prior year quarter. Company restaurant sales decreased $9.4 million primarily due to 27 fewer equivalent company restaurants compared with the prior year quarter. The decrease in restaurants resulted from the sale of company restaurants to franchisees under FGI.
Company restaurant operating margin (as a percentage of company restaurant sales) was 14.9%, a decrease of 1.4 percentage points compared with the same period last year. Product costs increased 0.6 percentage points to 23.7% of sales primarily due to the impact of a higher mix of value priced items and increased commodity costs. Payroll and benefit costs increased 0.4 percentage points to 38.8% of sales due to higher restaurant management incentive compensation, partially offset by efficiency improvements in team labor and favorable worker’s compensation claims development. Other operating costs increased 0.4 percentage points to 16.0% of sales due to unfavorable legal claims development and new store opening expense associated with Flying J units, offset by lower utility and repairs and maintenance costs.
Franchise and license revenue increased by $3.3 million to $32.8 million compared with $29.5 million in the prior year quarter. The increase in franchise revenue included a $2.1 million increase in franchise fees, $0.9 million increase in royalties, and $0.3 million increase in franchise occupancy revenue. The franchise fee increase resulted from opening 55 franchise units in the third quarter of this year, which included 42 Flying J Travel Center conversions and four university locations. The royalty revenue increase was due to 63 additional equivalent franchise restaurants. In addition to opening 55 franchise units during the third quarter, Denny’s franchisees closed five restaurants and purchased two company units.
Franchise operating margin increased $1.6 million to $20.8 million, primarily due to the $2.1 million increase in franchise fee revenue and an additional 63 equivalent franchise restaurants, this was partially offset by lower same-store sales. Franchise operating margin (as a percentage of franchise and license revenue) was 63.3%, a decrease of 1.7 percentage points compared with the same quarter last year. The decrease in margin was primarily driven by temporary overhead costs associated with converting the Flying J sites.
General and administrative expenses increased $0.1 million from the same period last year. This increase was primarily driven by senior executive recruiting costs incurred in the quarter, offset by lower stock-based compensation expense during the quarter.
Depreciation and amortization expense declined by $0.5 million compared with the prior year quarter 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 $0.7 million in the quarter. The decrease resulted from higher severance and other restructuring charges, primarily related to Denny’s former CEO, partially offset by $0.6 million more gains on the sale of company restaurants and real estate to franchisees.
Operating income for the quarter decreased $1.7 million from the prior year period to $16.9 million, primarily due to a $6.1 million decrease in total operating revenue attributable to the sale of company restaurants.
Interest expense decreased $1.7 million, or 21.2%, to $6.4 million as a result of the termination of our interest rate swap in late 2009 and a $42.5 million reduction in debt from the prior year period. Other nonoperating expense increased $0.6 million in the quarter.
Denny’s reported net income of $9.9 million for the third quarter, or $0.10 per diluted common share, compared with prior year period net income of $10.0 million, or $0.10 per diluted common share. Adjusted income before taxes*, Denny’s metric for earnings guidance, increased $0.3 million in the third quarter to $9.4 million. This measure, which is used as an internal profitability metric, excludes restructuring charges, exit costs, impairment charges, asset sale gains and losses, share-based compensation, other nonoperating expenses and income taxes.
Business Outlook
Based on year-to-date results and management’s expectations at this time, Denny’s is reaffirming its financial guidance for full-year 2010 and is raising its expectations for:
| o | restaurant unit development |
| o | cash capital expenditure to support new unit growth |
| o | cash interest, which is being updated to reflect Denny’s new lower cost credit facility |
| Component – Full Year 2010 | Previous Guidance (as announced in the second quarter earnings release on August 3, 2010) | Updated Guidance |
| Company Same-Store Sales | (4.0%) to (2.0%) | (4.0%) to (2.0%) |
| Franchise Same-Store Sales | (5.0%) to (3.0%) | (5.0%) to (3.0%) |
| New Company Units | 11 (includes 10 Flying J sites) | 24 (includes 21 Flying J sites and 2 Denny’s Fast Casual (Café) test sites) |
| New Franchise Units | 100 (includes 70 Flying J sites and 4 university sites) | 102 (includes 70 Flying J sites and 6 university sites) |
| Total New Unit Openings | 111 (Includes 80 Flying J sites) | 126 (Includes 91 Flying J sites) |
| Adjusted EBITDA* ($M) | $71 to $75 (excluding restructure costs related to former CEO) | $71 to $75 (including restructure costs related to former CEO) |
| Adjusted Income Before Taxes* ($M) | $23 to $28 | $23 to $28 |
| Cash Interest Expense ($M) | $24 | $23 |
| Cash Capital Expenditure ($M) | $21 (includes $5.7 million for the Flying J sites) | $29 (includes $12.0 million for the Flying J sites) |
| | * 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 the results for the third quarter of 2010 on its quarterly investor conference call today, Tuesday, November 2, 2010 at 5:00 p.m. ET. 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 1,380 franchised and licensed units and 232 company-owned 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 investor relations 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. 60; 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 strategic and 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 and other filings, 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 30, 2009 (and in the Company’s subsequent quarterly reports on Form 10-Q).
