Denny’s Corporation Reports Results for the Third Quarter 2010



SPARTANBURG, S.C.  (Restaurant News Release)  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

Denny’s Corporation Reports Results for the Third Quarter 2010Debra 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:

  • restaurant unit development
  • cash capital expenditure to support new unit growth
  • 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. 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).

DENNY’S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
           
           
      Quarter   Quarter
      Ended   Ended
(In thousands, except per share amounts) 9/29/10   9/30/09
           
Revenue:      
  Company restaurant sales $ 107,171   $ 116,579
  Franchise and license revenue 32,761   29,485
    Total operating revenue 139,932   146,064
Costs of company restaurant sales 91,193   97,591
Costs of franchise and license revenue 12,009   10,308
General and administrative expenses 14,375   14,313
Depreciation and amortization 7,320   7,865
Operating (gains), losses and other charges, net (1,900)   (2,648)
    Total operating costs and expenses 122,997   127,429
Operating income 16,935   18,635
Other expenses:      
  Interest expense, net 6,394   8,117
  Other nonoperating expense (income), net 188   (363)
    Total other expenses, net 6,582   7,754
Income before income taxes 10,353   10,881
Provision for income taxes 419   848
Net income $ 9,934   $ 10,033
           
           
Net income per share:      
  Basic $ 0.10   $ 0.10
  Diluted $ 0.10   $ 0.10
           
           
Weighted average shares outstanding:      
  Basic 99,579   96,506
  Diluted 101,305   99,158
DENNY’S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
           
           
      Three Quarters   Three Quarters
      Ended   Ended
(In thousands, except per share amounts) 9/29/10   9/30/09
           
Revenue:      
  Company restaurant sales $ 320,255     $ 377,655  
  Franchise and license revenue   92,326       89,982  
    Total operating revenue   412,581       467,637  
Costs of company restaurant sales   275,091       324,783  
Costs of franchise and license revenue   35,498       32,295  
General and administrative expenses   40,560       44,067  
Depreciation and amortization   21,984       24,592  
Operating (gains), losses and other charges, net   (1,594 )     (6,101 )
    Total operating costs and expenses   371,539       419,636  
Operating income   41,042       48,001  
Other expenses:      
  Interest expense, net   19,306       24,847  
  Other nonoperating expense (income), net   746       (1,594 )
    Total other expenses, net   20,052       23,253  
Income before income taxes   20,990       24,748  
Provision for income taxes   1,010       1,072  
Net income $ 19,980     $ 23,676  
           
           
Net income per share:      
  Basic $ 0.20     $ 0.25  
  Diluted $ 0.20     $ 0.24  
           
           
Weighted average shares outstanding:      
  Basic   98,646       96,221  
  Diluted   101,264       98,295  
DENNY’S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
           
           
(In thousands) 9/29/10   12/30/09
           
ASSETS      
  Current Assets      
    Cash and cash equivalents $ 40,638     $ 26,525  
    Receivables, net   13,718       18,106  
    Assets held for sale   6,541        
    Other   15,003       13,714  
        75,900       58,345  
           
  Property, net   118,090       131,484  
  Goodwill   31,892       32,440  
  Intangible assets, net   52,888       55,110  
  Other assets   33,908       35,248  
    Total Assets $ 312,678     $ 312,627  
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT      
  Current Liabilities      
    Current maturities of notes and debentures $ 754     $ 900  
    Current maturities of capital lease obligations   3,899       3,725  
    Accounts payable   19,248       22,842  
    Other current liabilities   62,738       64,641  
        86,639       92,108  
  Long-Term Liabilities      
    Notes and debentures, less current maturities   239,446       254,357  
    Capital lease obligations, less current maturities   18,960       19,684  
    Other   70,057       73,976  
        328,463       348,017  
    Total Liabilities   415,102       440,125  
    Total Shareholders’ Deficit   (102,424 )     (127,498 )
    Total Liabilities and Shareholders’ Deficit $ 312,678     $ 312,627  
           
           
           
Debt Balances      
           
(In thousands) 9/29/10   12/30/09
           
Credit facility revolver loans due 2011 $     $  
Credit facility term loans due 2012   65,000       80,000  
Capital leases and other debt   23,059       23,666  
Senior notes due 2012   175,000       175,000  
  Total Debt $ 263,059     $ 278,666  
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) 9/29/10   9/30/09   9/29/10   9/30/09
                   
Net income $ 9.9     $ 10.0     $ 20.0     $ 23.7  
                   
Provision for income taxes   0.4       0.8       1.0       1.1  
Operating (gains), losses and other charges, net   (1.9 )     (2.6 )     (1.6 )     (6.1 )
Other nonoperating expense (income), net   0.2       (0.4 )     0.7       (1.6 )
Share-based compensation   0.8       1.2       2.0       3.9  
                   
Adjusted income before taxes (1) $ 9.4     $ 9.1     $ 22.2     $ 21.0  
                   
Interest expense, net   6.4       8.1       19.3       24.8  
Depreciation and amortization   7.3       7.9       22.0       24.6  
Cash payments for restructuring charges and exit costs   (1.1 )     (1.0 )     (3.4 )     (4.6 )
Cash payments for share-based compensation   (0.6 )     (0.7 )     (1.6 )     (2.4 )
                   
Adjusted EBITDA (1) $ 21.4     $ 23.4     $ 58.5     $ 63.3  
                   
                   
                   
                   
      Quarter   Quarter   Three Quarters   Three Quarters
General and Administrative Expenses Reconciliation Ended   Ended   Ended   Ended
(In millions) 9/29/10   9/30/09   9/29/10   9/30/09
                   
  Share-based compensation $ 0.8     $ 1.2     $ 2.0     $ 3.9  
  Other general and administrative expenses   13.6       13.1       38.6       40.2  
  Total general and administrative expenses $ 14.4     $ 14.3     $ 40.6     $ 44.1  
                   
                   
                   
(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 senior 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) 9/29/10   9/30/09
                 
Company restaurant operations: (2)          
  Company restaurant sales $ 107.2   100.0 %   $ 116.6   100.0 %
  Costs of company restaurant sales:          
    Product costs   25.4   23.7 %     26.9   23.1 %
    Payroll and benefits   41.5   38.8 %     44.7   38.4 %
    Occupancy   7.1   6.6 %     7.8   6.7 %
    Other operating costs:          
      Utilities   4.9   4.6 %     5.9   5.0 %
      Repairs and maintenance   1.8   1.6 %     2.5   2.1 %
      Marketing   4.6   4.3 %     4.5   3.9 %
      Legal settlements   0.6   0.6 %     0.0   0.0 %
      Other   5.2   4.9 %     5.3   4.5 %
  Total costs of company restaurant sales $ 91.2   85.1 %   $ 97.6   83.7 %
  Company restaurant operating margin (3) $ 16.0   14.9 %   $ 19.0   16.3 %
                 
Franchise operations: (4)          
  Franchise and license revenue          
  Royalty and license revenue $ 18.7   57.0 %   $ 17.8   60.4 %
  Initial and other fee revenue   2.8   8.4 %     0.7   2.2 %
  Occupancy revenue   11.3   34.6 %     11.0   37.4 %
  Total franchise and license revenue $ 32.8   100.0 %   $ 29.5   100.0 %
                 
  Costs of franchise and license revenue          
  Direct franchise costs $ 3.3   10.0 %   $ 1.7   5.7 %
  Occupancy costs   8.7   26.7 %     8.6   29.3 %
  Total costs of franchise and license revenue $ 12.0   36.7 %   $ 10.3   35.0 %
  Franchise operating margin (3) $ 20.8   63.3 %   $ 19.2   65.0 %
                 
                 
                 
Total operating revenue (1) $ 139.9   100.0 %   $ 146.1   100.0 %
Total costs of operating revenue (1)   103.2   73.8 %     107.9   73.9 %
Total operating margin (1)(3) $ 36.7   26.2 %   $ 38.2   26.1 %
                 
Other operating expenses: (1)(3)          
  General and administrative expenses $ 14.4   10.3 %   $ 14.3   9.8 %
  Depreciation and amortization   7.3   5.2 %     7.9   5.4 %
  Operating gains, losses and other charges, net   (1.9 ) (1.4 %)     (2.6 ) (1.8 %)
  Total other operating expenses $ 19.8   14.1 %   $ 19.5   13.4 %
                 
Operating income (1) $ 16.9   12.1 %   $ 18.6   12.8 %
                 
                 
  (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) 9/29/10   9/30/09
                 
Company restaurant operations: (2)          
  Company restaurant sales $ 320.3   100.0 %   $ 377.7   100.0 %
  Costs of company restaurant sales:          
    Product costs   75.6   23.6 %     88.5   23.4 %
    Payroll and benefits   129.1   40.3 %     154.6   40.9 %
    Occupancy   21.4   6.7 %     24.9   6.6 %
    Other operating costs:          
      Utilities   14.0   4.4 %     18.3   4.8 %
      Repairs and maintenance   5.7   1.8 %     7.6   2.0 %
      Marketing   13.5   4.2 %     14.1   3.7 %
      Legal settlements   0.8   0.3 %     0.4   0.1 %
      Other   15.1   4.7 %     16.4   4.3 %
  Total costs of company restaurant sales $ 275.1   85.9 %   $ 324.8   86.0 %
  Company restaurant operating margin (3) $ 45.2   14.1 %   $ 52.9   14.0 %
                 
Franchise operations: (4)          
  Franchise and license revenue          
  Royalty and license revenue $ 54.5   59.0 %   $ 53.7   59.7 %
  Initial and other fee revenue   3.9   4.2 %     3.6   4.0 %
  Occupancy revenue   33.9   36.8 %     32.7   36.3 %
  Total franchise and license revenue $ 92.3   100.0 %   $ 90.0   100.0 %
                 
  Costs of franchise and license revenue          
  Direct franchise costs $ 9.4   10.2 %   $ 7.1   7.8 %
  Occupancy costs   26.1   28.2 %     25.2   28.1 %
  Total costs of franchise and license revenue $ 35.5   38.4 %   $ 32.3   35.9 %
  Franchise operating margin (3) $ 56.8   61.6 %   $ 57.7   64.1 %
                 
                 
                 
Total operating revenue (1) $ 412.6   100.0 %   $ 467.6   100.0 %
Total costs of operating revenue (1)   310.6   75.3 %     357.1   76.4 %
Total operating margin (1)(3) $ 102.0   24.7 %   $ 110.6   23.6 %
                 
Other operating expenses: (1)(3)          
  General and administrative expenses $ 40.6   9.8 %   $ 44.1   9.4 %
  Depreciation and amortization   22.0   5.3 %     24.6   5.3 %
  Operating gains, losses and other charges, net   (1.6 ) (0.4 %)     (6.1 ) (1.3 %)
  Total other operating expenses $ 61.0   14.8 %   $ 62.6   13.4 %
                 
Operating income (1) $ 41.0   9.9 %   $ 48.0   10.3 %
                 
                 
  (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) 9/29/10   9/30/09   9/29/10   9/30/09
                   
Same-Store Sales              
  Company Restaurants   (0.7 %)     (6.6 %)     (4.2 %)     (2.9 %)
  Franchised Restaurants   (1.2 %)     (7.3 %)     (4.5 %)     (4.5 %)
  System-wide Restaurants   (1.1 %)     (7.1 %)     (4.4 %)     (4.1 %)
                   
Company Restaurant Sales Detail              
  Guest Check Average   (2.9 %)     0.8 %     (1.8 %)     1.1 %
  Guest Counts   2.3 %     (7.3 %)     (2.4 %)     (4.0 %)
                   
                   
      Quarter   Quarter   Three Quarters   Three Quarters
Average Unit Sales Ended   Ended   Ended   Ended
($ in thousands) 9/29/10   9/30/09   9/29/10   9/30/09
                   
  Company Restaurants $ 462     $ 450     $ 1,368     $ 1,365  
                   
  Franchised Restaurants $ 348     $ 348     $ 1,029     $ 1,067  
                   
                   
                   
          Franchised        
Restaurant Unit Activity Company   & Licensed   Total    
                   
Ending Units 6/30/10   228       1,328       1,556      
                   
  Units Opened   6       55       61      
  Units Refranchised   (2 )     2       0      
  Units Closed   0       (5 )     (5 )    
    Net Change   4       52       56      
                   
Ending Units 9/29/10   232       1,380       1,612      
                   
Equivalent Units              
  Third Quarter 2010   232       1,348       1,580      
  Third Quarter 2009   259       1,285       1,544      
        (27 )     63       36      
                   
                   
                   
          Franchised        
Restaurant Unit Activity Company   & Licensed   Total    
                   
Ending Units 12/30/09   233       1,318       1,551      
                   
  Units Opened   10       68       78      
  Units Refranchised   (11 )     11       0      
  Units Closed   0       (17 )     (17 )    
    Net Change   (1 )     62       61      
                   
Ending Units 9/29/10   232       1,380       1,612      
                   
Equivalent Units              
  Year-to-Date 2010   234       1,330       1,564      
  Year-to-Date 2009   277       1,266       1,543      
        (43 )     64       21