Market Overview

Denny's Corporation Reports Results for Third Quarter 2012

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SPARTANBURG, S.C.--(BUSINESS WIRE)--

Denny's Corporation (NASDAQ: DENN), franchisor and operator of one of America's largest full-service restaurant chains, today reported results for its third quarter ended September 26, 2012.

Third Quarter Summary

  • System-wide same-store sales grew 0.4%, which marks the sixth consecutive quarter that system-wide same-store sales have been positive.
  • Opened 12 franchised units, including the first international university unit located in Canada at the Southern Alberta Institute of Technology.
  • Signed first international development agreement in South America for 10 units in Chile.
  • Franchise operating margin increased $1.0 million to $22.3 million while franchise operating margin (as a percentage of franchise and license revenue) was 64.9%.
  • Company restaurant operating margin increased 0.6 percentage points to 14.7% compared with the prior year, and was impacted by $1.3 million for unfavorable workers' compensation claims development.
  • Adjusted Income Before Taxes* grew 9.3% to $13.1 million compared with the prior year.
  • Net income of $5.4 million, or $0.06 per diluted share, was impacted by $2.5 million in impairment expense and $1.3 million for unfavorable workers' compensation claims development.
  • Generated $12.9 million of Free Cash Flow* in the quarter which was used to reduce outstanding term loan debt by $7.0 million and repurchase 1.0 million shares.

John Miller, President and Chief Executive Officer, stated, “We are pleased that we achieved our sixth consecutive quarter of positive system-wide same-store sales despite the ongoing challenging consumer economic environment. We continue to grow and revitalize the brand and are making progress in our efforts to differentiate Denny's in the market place. As Denny's approaches its 60th anniversary and 1,700th location, we believe that Denny's will grow its position as one of the largest American full-service brands in the world. Our recent partnership to open units in South America is another step toward that goal. By executing on our strategies to further reinforce our position as America's Diner, we will build on our efforts to grow the brand and increase shareholder value.”

Third Quarter Results

For the third quarter of 2012, franchise and license revenue increased 7.3% to $34.4 million compared with $32.0 million in the prior year quarter. The $2.3 million increase in franchise revenue was primarily driven by a $1.2 million increase in occupancy revenue and $0.9 million increase in royalties due to 60 additional equivalent franchise restaurants. Company restaurant sales of $86.6 million decreased $18.1 million due to 49 fewer equivalent company restaurants compared with the prior year quarter. This decrease reflects the continuing impact of selling company-owned units to franchisees as part of our FGI refranchising strategy that will be completed at the end of 2012. Denny's total operating revenue, including both company restaurant sales and franchise revenue, was $120.9 million compared with $136.7 million in the prior year quarter.

Denny's opened 12 new franchised units in the third quarter of this year, including the first international university unit located in Calgary, Canada, at the Southern Alberta Institute of Technology. During the quarter, Denny's closed nine franchised and company restaurants and franchisees purchased five company-owned restaurants.

Franchise operating margin increased $1.0 million to $22.3 million primarily due to the increases in occupancy margin and franchise royalties. Franchise operating margin (as a percentage of franchise and license revenue) was 64.9%, a decrease of 1.5 percentage points compared with the prior year quarter, primarily due to an increase in direct franchise costs.

Company restaurant operating margin decreased $2.0 million primarily due to a $1.3 million unfavorable workers' compensation claims development and the impact of selling company-owned units to franchisees. Company restaurant operating margin (as a percentage of company restaurant sales) was 14.7%, an increase of 0.6 percentage points compared with the prior year quarter. The current year quarter included a 1.5 percentage point unfavorable impact from worker's compensation claims development.

Total general and administrative expenses increased $1.4 million compared with the prior year quarter primarily due to higher performance-based compensation accruals.

Depreciation and amortization expense decreased by $1.7 million compared with the prior year quarter, primarily as a result of the sale of restaurants over the past two years. Net operating gains, losses and other charges, which include restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $1.6 million in the quarter. The decrease was primarily the result of lower gains on the sale of company-owned units to franchisees and higher restructuring costs.

Interest expense decreased $1.7 million to $3.1 million as a result of a $37.4 million reduction in total gross debt over the last 12 months and lower interest rates under the refinanced credit facility.

Adjusted Income Before Taxes*, Denny's target metric for earnings, increased 9.3% to $13.1 million compared with the prior year quarter Adjusted Income Before Taxes* of $12.0 million.

In the third quarter, the provision for income taxes increased $2.8 million, primarily due to a higher effective tax rate of 37.4% compared to 4.8% effective tax rate in the prior year quarter. The change in the effective tax rate compared to the prior year resulted from the release of a substantial portion of the valuation allowance on certain deferred tax assets based on our improved historical and projected pre-tax income. Due to the use of net operating loss and tax credit carryforwards, the Company only paid $0.5 million in cash taxes in the third quarter.

Denny's net income was $5.4 million for the third quarter 2012, or $0.06 per diluted share, compared with prior year period net income of $8.0 million, or $0.08 per diluted share. Net income was impacted by $2.5 million in impairment expense and $1.3 million for unfavorable workers' compensation claims development.

In the first three quarters of 2012, Denny's has generated $41.5 million of Free Cash Flow* which the Company has used to reduce its outstanding term loan by $22.0 million and repurchase 2.4 million shares. As of October 26, 2012, the Company has repurchased approximately 10 million shares since initiating a share repurchase strategy and now has 5 million shares remaining in its current authorized share repurchase initiative.

Business Outlook

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “The continuous improvements we are making to our franchised-focused business model are reflected in our results where we have been able to generate new unit growth, positive same-store sales, and growing profitability. Our franchise-focused business model provides financial stability and flexibility enabling us to navigate the challenging environment while continuing to return value to shareholders through debt repayment and share repurchases.”

Based on year-to-date results and management's expectations at this time, Denny's is updating its full-year 2012 financial guidance to reflect the third quarter results and current thinking for the fourth quarter. The Company anticipates that the system will achieve its second consecutive year of positive same-store sales. Despite the challenging consumer economic environment, the company expects Adjusted Income Before Taxes* to grow more than 20% this year while generating around $50 million of Free Cash Flow*.

Component   Full Year 2012 Guidance

Previous**

 

Current

Franchise Same-Store Sales 1.0% to 3.0% 1.0% to 1.5%
Company Same-Store Sales 0.0% to 2.0% 0.0% to 0.5%
New System Units 45 – 50

(includes 1 company-owned unit)

46 – 48

(includes 1 company-owned unit)

Adjusted EBITDA* $80M to $84M $77M to $80M
Adjusted Income Before Taxes* $45M to $49M $45M to $48M
Interest Expense, net $12.5M to $13.5M

(includes $10.5M to $11.5M of net cash interest expense)

No Change
Cash Capital Expenditure $15M to $16M No Change
Cash Taxes $3M to $4M $2M to $2.5M
Free Cash Flow* $51M to $55M $49M to $52M

* Please refer to the historical reconciliation of net income to Adjusted Income Before Taxes, Adjusted EBITDA, and Free Cash Flow included in the tables below.

** As announced in First Quarter 2012 Earnings Release on April 30, 2012 and reiterated in Second Quarter 2012 Earnings Release on July 31, 2012.

Further Information

Denny's will provide further commentary on the results for the third quarter of 2012 on its quarterly investor conference call today, Tuesday, October 30, 2012 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 the franchisor and operator of one of America's largest full-service restaurant chains, based on number of units. As of September 26, 2012, Denny's had 1,687 franchised, licensed, and company-owned restaurants across the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic and New Zealand. 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, which reflect our 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 “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 28, 2011 (and in the Company's subsequent quarterly reports on Form 10-Q).

   
DENNY'S CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Quarter Ended
(In thousands, except per share amounts)   9/26/12   9/28/11
Revenue:
Company restaurant sales $ 86,575 $ 104,659
Franchise and license revenue   34,370   32,023
Total operating revenue   120,945   136,682
Costs of company restaurant sales 73,808 89,887
Costs of franchise and license revenue 12,078 10,747
General and administrative expenses 14,702 13,335
Depreciation and amortization 5,287 6,955
Operating (gains), losses and other charges, net   3,380   1,791
Total operating costs and expenses   109,255   122,715
Operating income   11,690   13,967
Other expenses:
Interest expense, net 3,088 4,796
Other nonoperating expense, net   38   780
Total other expenses, net   3,126   5,576
Net income before income taxes 8,564 8,391
Provision for income taxes   3,201   406
Net income $ 5,363 $ 7,985
 
 
Net income per share:
Basic $ 0.06 $ 0.08
Diluted $ 0.06 $ 0.08
 
Weighted average shares outstanding:
Basic   94,705   96,997
Diluted   96,745   98,746
 
Comprehensive income $ 5,631 $ 7,985
   
DENNY'S CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Quarters Ended
(In thousands, except per share amounts)   9/26/12     9/28/11
Revenue:
Company restaurant sales $ 271,977 $ 313,235
Franchise and license revenue   100,437     95,105
Total operating revenue   372,414     408,340
Costs of company restaurant sales 231,506 271,989
Costs of franchise and license revenue 34,776 33,397
General and administrative expenses 45,150 41,566
Depreciation and amortization 17,174 21,377
Operating (gains), losses and other charges, net   (794 )   843
Total operating costs and expenses   327,812     369,172
Operating income   44,602     39,168
Other expenses:
Interest expense, net 10,537 15,390
Other nonoperating expense, net   7,941     2,526
Total other expenses, net   18,478     17,916
Net income before income taxes 26,124 21,252
Provision for income taxes   10,295     1,013
Net income $ 15,829   $ 20,239
 
 
Net income per share:
Basic $ 0.17   $ 0.21
Diluted $ 0.16   $ 0.20
 
Weighted average shares outstanding:
Basic   95,472     98,132
Diluted   97,196     100,203
 
Comprehensive income $ 16,633   $ 20,239
 
DENNY'S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
   
(In thousands)   9/26/12     12/28/11  
Assets
Current assets
Cash and cash equivalents $ 24,148 $ 13,740
Receivables, net 13,614 14,971
Assets held for sale 1,582 2,351
Current deferred tax asset 18,706 15,519
Other   10,183     14,712  
  68,233     61,293  
Property, net 103,235 112,772
Goodwill 30,402 30,764
Intangible assets, net 49,208 50,921
Noncurrent deferred tax asset 47,943 60,636
Other assets   26,833     34,115  
Total assets $ 325,854   $ 350,501  
 
Liabilities
Current liabilities
Current maturities of long-term debt $ 9,781 $ 2,591
Current maturities of capital lease obligations 4,264 4,380
Accounts payable 17,604 25,935
Other current liabilities   53,673     54,289  
  85,322     87,195  
Long-term liabilities
Long-term debt, less current maturities 166,250 193,257
Capital lease obligations, less current maturities 16,239 18,077
Other   57,480     61,648  
  239,969     272,982  
Total liabilities   325,291     360,177  
 
Shareholders' equity
Common stock 1,037 1,027
Paid-in capital 561,665 557,396
Deficit (501,998 ) (517,827 )
Accumulated other comprehensive loss, net of tax (24,009 ) (24,813 )
Treasury stock   (36,132 )   (25,459 )
Total shareholders' equity   563     (9,676 )
Total liabilities and shareholders' equity $ 325,854   $ 350,501  
 
 
Debt Balances
(In thousands)   9/26/12     12/28/11  
Credit facility term loan due 2017, net of discount of $0 and $2,251, respectively $ 176,000 $ 195,749
Capital leases and other debt   20,534     22,556  
Total debt $ 196,534   $ 218,305  
         
DENNY'S CORPORATION
Income, EBITDA, Free Cash Flow and G&A Reconciliations
(Unaudited)
 
Income and EBITDA Reconciliation Quarter Ended Three Quarters Ended
(In thousands)   9/26/12     9/28/11     9/26/12     9/28/11  
Net income $ 5,363 $ 7,985 $ 15,829 $ 20,239
 
Provision for (benefit from) income taxes 3,201 406 10,295 1,013
Operating (gains), losses and other charges, net 3,380 1,791 (794 ) 843
Other nonoperating expense, net 38 780 7,941 2,526
Share-based compensation 1,128 1,031 2,794 3,180
       
Adjusted Income Before Taxes (1) $ 13,110   $ 11,993   $ 36,065   $ 27,801  
 
Interest expense, net 3,088 4,796 10,537 15,390
Depreciation and amortization 5,287 6,955 17,174 21,377
Cash payments for restructuring charges and exit costs (1,521 ) (633 ) (2,845 ) (2,086 )
Cash payments for share-based compensation (294 ) (495 ) (649 ) (594 )
       
Adjusted EBITDA (1) $ 19,670   $ 22,616   $ 60,282   $ 61,888  
 
Cash interest expense, net (2,719 ) (4,027 ) (9,048 ) (13,112 )
Cash paid for income taxes, net (500 ) (251 ) (1,865 ) (988 )
Cash paid for capital expenditures (3,567 ) (4,073 ) (7,846 ) (12,927 )
       
Free Cash Flow (1) $ 12,884   $ 14,265   $ 41,523   $ 34,861  
 
General and Administrative Expenses Reconciliation Quarter Ended Three Quarters Ended
(In thousands)   9/26/12     9/28/11     9/26/12     9/28/11  
Share-based compensation $ 1,128 $ 1,031 $ 2,794 $ 3,180
Other general and administrative expenses   13,574     12,304     42,356     38,386  
Total general and administrative expenses $ 14,702   $ 13,335   $ 45,150   $ 41,566  
 
 
(1)     We believe that, in addition to other financial measures, Adjusted Income Before Taxes, Adjusted EBITDA and Free Cash Flow are appropriate indicators to assist in the evaluation of our operating performance on a period-to-period basis. We also use Adjusted Income, Adjusted EBITDA and Free Cash Flow 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. Free Cash Flow, defined as Adjusted EBITDA less cash portion of interest expense net of interest income, capital expenditures, and cash taxes, is used to evaluate operating effectiveness and decisions regarding the allocation of resources. However, Adjusted Income, Adjusted EBITDA and Free Cash Flow 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
(In thousands) 9/26/12   9/28/11  
Company restaurant operations: (2)
Company restaurant sales $ 86,575 100.0 % $ 104,659 100.0 %
Costs of company restaurant sales:
Product costs 21,449 24.8 % 25,847 24.7 %
Payroll and benefits 34,409 39.7 % 41,261 39.4 %
Occupancy 5,780 6.7 % 6,928 6.6 %
Other operating costs:
Utilities 3,760 4.3 % 4,762 4.6 %
Repairs and maintenance 1,578 1.8 % 1,754 1.7 %
Marketing 3,213 3.7 % 3,926 3.8 %
Legal settlements 197 0.2 % 607 0.6 %
Other   3,422   4.0 %   4,802   4.6 %
Total costs of company restaurant sales $ 73,808   85.3 % $ 89,887   85.9 %
Company restaurant operating margin (3) $ 12,767   14.7 % $ 14,772   14.1 %
 
Franchise operations: (4)
Franchise and license revenue
Royalty and license revenue $ 21,333 62.1 % $ 20,449 63.9 %
Initial and other fee revenue 728 2.1 % 437 1.3 %
Occupancy revenue   12,309   35.8 %   11,137   34.8 %
Total franchise and license revenue $ 34,370   100.0 % $ 32,023   100.0 %
 
Costs of franchise and license revenue
Occupancy costs $ 9,027 26.2 % $ 8,349 26.1 %
Direct franchise costs   3,051   8.9 %   2,398   7.5 %
Total costs of franchise and license revenue $ 12,078   35.1 % $ 10,747   33.6 %
Franchise operating margin (3) $ 22,292   64.9 % $ 21,276   66.4 %
 
Total operating revenue (1) $ 120,945 100.0 % $ 136,682 100.0 %
Total costs of operating revenue (1)   85,886   71.0 %   100,634   73.6 %
Total operating margin (1)(3) $ 35,059   29.0 % $ 36,048   26.4 %
 
Other operating expenses: (1)(3)
General and administrative expenses $ 14,702 12.2 % $ 13,335 9.8 %
Depreciation and amortization 5,287 4.4 % 6,955 5.1 %
Operating gains, losses and other charges, net   3,380   2.8 %   1,791   1.3 %
Total other operating expenses $ 23,369   19.3 % $ 22,081   16.2 %
           
Operating income (1) $ 11,690   9.7 % $ 13,967   10.2 %
 
(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 Ended
(In thousands) 9/26/12   9/28/11  
Company restaurant operations: (2)
Company restaurant sales $ 271,977 100.0 % $ 313,235 100.0 %
Costs of company restaurant sales:
Product costs 67,684 24.9 % 77,095 24.6 %
Payroll and benefits 108,779 40.0 % 127,876 40.8 %
Occupancy 17,776 6.5 % 20,581 6.6 %
Other operating costs:
Utilities 11,066 4.1 % 13,741 4.4 %
Repairs and maintenance 4,901 1.8 % 5,485 1.8 %
Marketing 10,138 3.7 % 11,738 3.7 %
Legal settlements 366 0.1 % 671 0.2 %
Other   10,796     4.0 %   14,802   4.7 %
Total costs of company restaurant sales $ 231,506     85.1 % $ 271,989   86.8 %
Company restaurant operating margin (3) $ 40,471     14.9 % $ 41,246   13.2 %
 
Franchise operations: (4)
Franchise and license revenue
Royalty and license revenue $ 62,734 62.5 % $ 59,669 62.7 %
Initial and other fee revenue 2,167 2.2 % 2,050 2.2 %
Occupancy revenue   35,536     35.3 %   33,386   35.1 %
Total franchise and license revenue $ 100,437     100.0 % $ 95,105   100.0 %
 
Costs of franchise and license revenue
Occupancy costs $ 26,455 26.3 % $ 25,567 26.9 %
Direct franchise costs   8,321     8.3 %   7,830   8.2 %
Total costs of franchise and license revenue $ 34,776     34.6 % $ 33,397   35.1 %
Franchise operating margin (3) $ 65,661     65.4 % $ 61,708   64.9 %
 
Total operating revenue (1) $ 372,414 100.0 % $ 408,340 100.0 %
Total costs of operating revenue (1)   266,282     71.5 %   305,386   74.8 %
Total operating margin (1)(3) $ 106,132     28.5 % $ 102,954   25.2 %
 
Other operating expenses: (1)(3)
General and administrative expenses $ 45,150 12.1 % $ 41,566 10.2 %
Depreciation and amortization 17,174 4.6 % 21,377 5.2 %
Operating gains, losses and other charges, net   (794 )   (0.2 %)   843   0.2 %
Total other operating expenses $ 61,530     16.5 % $ 63,786   15.6 %
           
Operating income (1) $ 44,602     12.0 % $ 39,168   9.6 %
 
(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)
       
Same-Store Sales Quarter Ended Three Quarters Ended
(increase/(decrease) vs. prior year) 9/26/12 9/28/11 9/26/12 9/28/11
Company Restaurants (0.5 %) 1.1 % 0.1 % 0.7 %
Franchised Restaurants 0.6 % 0.8 % 1.4 % 0.3 %
System-wide Restaurants 0.4 % 0.9 % 1.1 % 0.4 %
 
Company Restaurant Sales Detail
Guest Check Average 1.8 % 1.3 % 1.9 % 0.8 %
Guest Counts (2.2 %) (0.2 %) (1.8 %) 0.0 %
 
 
Average Unit Sales Quarter Ended Three Quarters Ended
(In thousands) 9/26/12 9/28/11 9/26/12 9/28/11
Company Restaurants $ 493 $ 468 $ 1,447 $ 1,383
Franchised Restaurants $ 358 $ 355 $ 1,061 $ 1,043
 
Franchised
Restaurant Unit Activity Company & Licensed Total
Ending Units 6/27/12 177 1,507 1,684
Units Opened 0 12 12
Units Refranchised (5 ) 5 0
Units Closed   (1 )   (8 )   (9 )
Net Change   (6 )   9     3  
Ending Units 9/26/12   171     1,516     1,687  
 
Equivalent Units
Third Quarter 2012 175 1,511 1,686
Third Quarter 2011   224     1,451     1,675  
  (49 )   60     11  
 
 
Franchised
Restaurant Unit Activity Company & Licensed Total
Ending Units 12/28/11 206 1,479 1,685
Units Opened 0 27 27
Units Refranchised (28 ) 28 0
Units Closed   (7 )   (18 )   (25 )
Net Change   (35 )   37     2  
Ending Units 9/26/12   171     1,516     1,687  
 
Equivalent Units
Year-to-Date 2012 188 1,495 1,683
Year-to-Date 2011   226     1,441     1,667  
  (38 )   54     16  

Investor Contact:
Denny's Corporation
Whit Kincaid, 877-784-7167
or
Media Contact:
ICR
Liz Brady, 646-277-1226

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