Back to top

Bear of the Day: Denny's Corp (DENN)

Read MoreHide Full Article

In-person dining is in trouble. As much as we all want things to be “normal” again, it may well be a long time before everyone feels comfortable going to sit down for a restaurant meal again. Though many restaurants have adapted to the situation as best as they possibly can – converting their operations to provide drive-thru and delivery options and limited seating dining room situations with protective equipment in place.

Others have not been even that lucky and have had almost no opportunity to earn any revenues over the past 8 months.

If you understand the economics of the food service industry, you probably already know this is a disaster.

Restaurants run on tight margins. Hourly employment expenses are high; so are food costs – and food spoils and often gets wasted. Rent is typically between 6-10% of sales. Competition is fierce and the customers are frequently very price-sensitive. If a restaurant can serve a lot of soft drinks or alcoholic beverages, they can partially compensate for the margin challenge, but to consistently turn profits, they need to have most of the seats full during all the hours they are open for business.

Denny’s Corp (DENN - Free Report) operates not only the eponymous breakfast restaurants that have become ubiquitous in large and small towns across the country, but also El Pollo Loco, Carrow’s Hardee’s, Quincy’s and Coco’s. There’s a good chance anyone reading this likes going to at least one of those places.

There’s also a good chance you haven’t done it in a while.

In 2020, revenues at Denny’s are expected to be down 45% from 2019. That’s a big number, but it doesn’t tell the whole story. Earnings are expected to be lower by more than 100%. That’s because of the brutal nature of restaurant net margins. While they’re not selling profitable items in big volume, they’re still paying a big cut of the fixed costs - and net profits fall precipitously.

Large chains often are able to take advantage of economies of scale in the purchases they make and advanced logistics in stocking their locations with food items, but unfortunately, that can’t help you if the customers simply aren’t coming in.

The last earnings report from Denny’s included a ($0.25)/share net loss - even worse than the (already lowered) expectations of a ($0.20)/share loss. Estimates for the next quarter are 122% lower than last year.

That earns Denny’s a Zacks Rank #5 to go along with Value and Momentum scores of “D” and a Growth score of “F.”

It looks like it’s going to be a while before the restaurant industry is operating normally again. As much as we all might like to get one of those favorite comfort dishes from Denny’s, we also want to avoid owning the stock.

5 Stocks Set to Double Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth. Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>






In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Dennys Corporation (DENN) - free report >>