Denny's Corporation Reports Results for Second Quarter 2019

SPARTANBURG, S.C., July 30, 2019 (GLOBE NEWSWIRE) -- Denny's Corporation DENN, franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its second quarter ended June 26, 2019.

Second Quarter 2019 Highlights

• Sold 37 company restaurants to franchisees.
• Total Operating Revenue was $151.9 million.
• Domestic system-wide same-store sales** grew 3.8%, including increases of 4.4% at company restaurants and 3.7% at domestic franchised restaurants.
• Completed 41 remodels, including 40 at franchised restaurants.
• Operating Income was $46.1 million.
• Company Restaurant Operating Margin* was $15.6 million, or 16.4% of company restaurant sales, and Franchise Operating Margin* was $27.6 million, or 48.8% of franchise and license revenue.
• Net Income was $34.2 million, or $0.55 per diluted share.
• Adjusted Net Income* was $14.3 million, or $0.23 per diluted share.
• Adjusted EBITDA* was $27.2 million.
• Adjusted Free Cash Flow* was $6.8 million.
• Repurchased $29.1 million of common stock.

John Miller, President and Chief Executive Officer, stated, "We are pleased with the growth in system-wide same-store sales**, Operating Margins*, and Adjusted Net Income Per Share*. Based on the successful execution and acceleration of our refranchising and development strategy, we now expect the vast majority of the transactions to be completed by the end of 2019. As a result, we have adjusted our annual business outlook to reflect the accelerated timing of these transactions. We believe this strategy will enable us to further evolve into a franchisor of choice in the industry, providing more focused support services. Upon completion, this strategy is expected to result in a higher quality, more asset-light business model and the creation of additional stakeholder value."

Second Quarter Results

Denny's total operating revenue was $151.9 million compared to $157.3 million in the prior year quarter. Company restaurant sales were $95.4 million compared to $102.7 million in the prior year quarter primarily due to a reduction in the number of equivalent company restaurants resulting from the Company's refranchising and development strategy. Franchise and license revenue was $56.4 million compared to $54.6 million in the prior year quarter. This change was primarily due to domestic franchise same-store sales** growth of 3.7% and the impact of the Company's refranchising and development strategy.

Company Restaurant Operating Margin* was $15.6 million, or 16.4% of company restaurant sales, compared to $16.2 million, or 15.7%, in the prior year quarter. This margin rate expansion was primarily due to pricing, menu mix, and an enhanced restaurant portfolio related to the Company's refranchising and development strategy, partially offset by increases in minimum wages and commodities.

Franchise Operating Margin* was $27.6 million, or 48.8% of franchise and license revenue, compared to $25.5 million, or 46.8%, in the prior year quarter. This margin rate expansion was primarily due to an increase in royalty revenue, a reduction in other direct costs which was associated with the Company's refranchising and development strategy, and an improved occupancy margin.

Total general and administrative expenses were $18.5 million, compared to $15.6 million in the prior year quarter. This change was primarily due to higher performance based incentive and share-based compensation expenses, partially offset by a $0.6 million reduction in personnel costs. Interest expense, net was $5.4 million in both the current and prior year quarter. Denny's ended the quarter with $294.1 million of total debt outstanding, including $271.0 million of borrowings under its revolving credit facility.

The provision for income taxes was $6.8 million, reflecting an effective tax rate of 16.5%. During the quarter, the Company recognized a net benefit of 4.8% related to the completion of an Internal Revenue Service audit and 3.6% related to the settlement of share-based compensation. Given the Company's utilization of tax credit carryforwards, approximately $11.6 million in cash taxes was paid during the quarter.

Net income was $34.2 million, or $0.55 per diluted share, compared to $11.6 million, or $0.18 per diluted share, in the prior year quarter. Adjusted Net Income Per Share* was $0.23 compared to $0.18 in the prior year quarter, primarily due to tax provision benefits.

Adjusted Free Cash Flow* and Capital Allocation

Denny's generated $6.8 million of Adjusted Free Cash Flow* in the quarter after investing $3.7 million in cash capital expenditures, including facilities maintenance, new construction, and remodels.

During the quarter, the Company allocated $29.1 million to share repurchases. Between the end of the second quarter and July 29, 2019, the Company allocated an additional $9.4 million to share repurchases resulting in $47.4 million allocated towards share repurchases year to date. As of July 29, 2019, the Company had approximately $81 million remaining in authorized share repurchases under its existing $200 million share repurchase authorization.

Adoption of Topic 842 and Lease Accounting Impact

Effective December 27, 2018, the first day of fiscal 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842. The new guidance established a right-of-use model ("ROU") that requires lessees to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Denny's elected to apply the modified retrospective transition approach as of the date of initial application without restating comparative period financial statements.

Upon adoption of Topic 842, operating lease liabilities of $101.3 million and ROU assets of $94.1 million related to existing operating leases were recorded. In addition, the Company recorded a cumulative effect adjustment increasing the opening deficit by $0.4 million and deferred tax assets by $0.1 million. The lease liabilities were based on the present value of remaining rental payments under previous leasing standards for existing operating leases primarily related to real estate leases. Exit cost and straight-line lease liabilities that existed at the adoption date were reclassified against the ROU assets upon adoption. The amount recorded to opening deficit represents the initial impairment of ROU assets, net of the deferred tax impact.

Refranchising and Development Strategy

In October 2018, the Company announced a plan to migrate from a 90% franchised business model to one that is between 95% and 97% franchised over a period of 18 months by selling between 90 and 125 total company restaurants with attached development commitments. Based on management's current expectations, the Company now anticipates selling between 115 and 125 total company restaurants with between 70 and 80 attached development commitments. The vast majority of these transactions are now expected to be completed by the end of 2019.

This strategy creates an opportunity for well-capitalized, development-focused franchisees to expand their businesses. In addition to refranchising, the Company plans to upgrade the quality of its real estate portfolio through a series of like-kind exchanges. The use of refranchising proceeds and a moderate increase in leverage are expected to generate more compelling returns for stakeholders, including the return of capital.

During the quarter ended June 26, 2019, 37 company restaurants were sold to franchisees. Additionally, the Company sold three pieces of real estate during the quarter for approximately $3.9 million. The following table summarizes the activity related to the Company's current refranchising and development strategy.

Gains on the sales of company restaurants and real estate are included as a component of operating (gains), losses and other charges, net. In addition to the proceeds noted in the table above, the Company also received front end fees and other transaction fees of approximately $2.0 million related to company restaurants sold to franchisees during the quarter.

As of June 26, 2019, the Company's assets held for sale balance included 49 company restaurants and one piece of real estate at their carrying amounts of $15.4 million. Included in this total were 22 company restaurants that were subsequently sold in July, resulting in a total of 70 company restaurants sold to franchisees under this strategy.

Business Outlook

The following full year 2019 expectations reflect the current business environment and management's expectations at this time:

• Same-store sales** growth at company and domestic franchised restaurants between 1% and 3% (vs. 0% and 2%).
• 35 to 40 new restaurant openings (vs. 35 to 45), with approximately flat net restaurant growth.
• Company Restaurant Operating Margin* between 15.0% and 16.5% and Franchise Operating Margin* between 47.0% and 48.5% (vs. 46.5% and 48.0%).
• Total general and administrative expenses between $71 and $74 million (vs. $66 and $69 million), including approximately $12 million (vs. $8 million) related to share-based compensation and deferred compensation plan valuation adjustments.
• Adjusted EBITDA* between $93 and $96 million (vs. $95 and $100 million).
• Net interest expense between $21 and $23 million.
• Effective income tax rate between 20% and 23% with cash taxes between $23 and $26 million (vs. $13 and $16 million), including between $19 and $22 million related to anticipated gains from refranchising transactions (vs. $9 and $12 million).
• Cash capital expenditures between $38 and $43 million (vs. $35 and $40 million), including between $23 and $28 million of anticipated real estate acquisitions through like-kind exchanges (vs. $20 and $25 million).
• Adjusted Free Cash Flow* between $7 and $10 million (vs. $23 and $26 million).

Conference Call and Webcast Information

Denny's will provide further commentary on the results for the second quarter ended June 26, 2019 on its quarterly investor conference call today, Tuesday, July 30, 2019 at 4:30 p.m. Eastern Time. 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 investor.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.

About Denny's

Denny's Corporation is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. As of June 26, 2019, Denny's had 1,702 franchised, licensed, and company restaurants around the world including 137 restaurants in Canada, Puerto Rico, Mexico, the Philippines, New Zealand, Honduras, the United Arab Emirates, Costa Rica, Guam, Guatemala, the United Kingdom, El Salvador, Aruba, and Indonesia. 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 at investor.dennys.com.

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, which reflect its best judgment based on factors currently known, are intended to speak only as of the date such statements are made and 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 "expect", "anticipate", "believe", "intend", "plan", "hope", 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: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, such as avian flu, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), 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 26, 2018 (and in the Company's subsequent quarterly reports on Form 10-Q).

The Company believes that, in addition to GAAP measures, certain other non-GAAP financial measures are appropriate indicators to assist in the evaluation of operating performance on a period-to-period basis. The Company uses Adjusted EBITDA, Adjusted Free Cash Flow, Adjusted Net Income and Adjusted Net Income Per Share 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 the ability to service debt because the excluded charges do not have an impact on prospective debt servicing capability and these adjustments are contemplated in our credit facility for the computation of our debt covenant ratios. We define Adjusted Free Cash Flow for a given period as Adjusted EBITDA less the cash portion of interest expense net of interest income, capital expenditures, and cash taxes. Management believes that the presentation of Adjusted Free Cash Flow provides useful information to investors because it represents a liquidity measure used to evaluate, among other things, operating effectiveness and is used in decisions regarding the allocation of resources. However, each of these non-GAAP financial measures 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.

The Company believes that, in addition to GAAP measures, certain other non-GAAP financial measures are appropriate indicators to assist in the evaluation of restaurant-level operating efficiency and performance of ongoing restaurant-level operations. The Company uses Total Operating Margin, Company Restaurant Operating Margin and Franchise Operating Margin internally as performance measures for planning purposes, including the preparation of annual operating budgets, and these three non-GAAP measures are used to evaluate operating effectiveness.

We define Total Operating Margin as operating income excluding the following three items: general and administrative expenses, depreciation and amortization, and operating (gains), losses and other charges, net. We present Total Operating Margin as a percent of total operating revenue. We exclude general and administrative expenses, which includes primarily non-restaurant-level costs associated with support of company and franchised restaurants and other activities at our corporate office. We exclude depreciation and amortization expense, substantially all of which is related to company restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlays for the restaurants. We exclude special items, included within operating (gains), losses and other charges, net, to provide investors with a clearer perspective of the Company's ongoing operating performance and a more relevant comparison to prior period results.

Total Operating Margin is the total of Company Restaurant Operating Margin and Franchise Operating Margin. We define Company Restaurant Operating Margin as company restaurant sales less costs of company restaurant sales (which include product costs, company restaurant level payroll and benefits, occupancy costs, and other operating costs including utilities, repairs and maintenance, marketing and other expenses) and present it as a percent of company restaurant sales. We define Franchise Operating Margin as franchise and license revenue (which includes franchise royalties and other non-food and beverage revenue streams such as initial franchise fees and occupancy revenue) less costs of franchise and license revenue and present it as a percent of franchise and license revenue.

These non-GAAP financial measures provide a meaningful comparison between periods and enable investors to focus on the performance of restaurant-level operations by excluding revenues and costs unrelated to food and beverage sales in addition to corporate general and administrative expense, depreciation and amortization, and other gains and charges. However, each of these non-GAAP financial measures 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. Total Operating Margin, Company Restaurant Operating Margin and Franchise Operating Margin do not accrue directly to the benefit of shareholders because of the aforementioned excluded costs, and are not indicative of the overall results for the Company.

Investor Contact:
Curt Nichols
877-784-7167

Media Contact:
Hadas Streit, Allison+Partners
646-428-0629