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Denny's Disappoints in 2Q

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Denny’s Corporation (DENN - Free Report) recently reported second quarter 2012 earnings of 5 cents per share, missing the Zacks Consensus Estimate by a penny and year-ago quarter earnings by 3 cents. Earnings per share included the refinancing of credit facility which led to a charge of $7.9 million for other non-operating expenses.

Total revenue declined 8.2% year over year to $124.7 million lagging the Zacks Consensus Estimate by a slight margin.

Performance Highlights

During the quarter, sales at the company-operated restaurants declined 12.5% year over year to $91.2 million, due to 36 less operating units as compared to the prior year, as well as flat same-restaurant sales improvement .

Franchise and license revenue increased 5.3% to $33.5 million, attributable to improvement in comps and increased royalty of $0.9 million, propelled by 51 additional franchised restaurants in operation at the end of the quarter compared with the year-ago quarter.

System-wide same-restaurant sales (comps) nudged up 0.8% on a flat growth in company-operated units and 0.9% raise in franchised units marking the fifth consecutive quarter of positive comps. This was a docile improvement over a 2.0% growth in overall comps witnessed in the year-earlier quarter. Same-store guest count slid 1.6% but guest check average inched up 1.7%. Both the matrices exhibited a downward trend from the year-ago level.   

Company-operated restaurants’ operating margin enhanced 150 basis points (bps) to 14.8% due to lower payroll and benefit costs as well as other operating costs. Franchise operating margin expanded 80 bps to 66.0%, attributable to a decline in occupancy costs. Hence, total operating margin expanded 300 bps to 28.5%.

Store Update

During the quarter, Denny’s closed 5 system-wide units, including 3 company-owned and 2 franchised and licensed restaurants. The company did not open any company-owned unit in the quarter, but opened 9 franchised ones including two international units in the Dominican Republic and Canada. The company also refranchised 17 units in the quarter. At quarter-end, the company had 177 company-owned and 1,507 franchised and licensed restaurants.

In 2012, Denny's plans to open 40–50 new restaurants, with 1 company-owned unit and rest franchised units. The company also expects to transform additional 7—12 units in franchised form in the second half of 2012 that translates into 30—35 units for full-year 2012.


Denny’s ended the quarter with cash and cash equivalents of $21.0 million and shareholders’ deficit of $2.8 million.

Share Repurchase

The company bought back 1.4 million shares in the second quarter.


For 2012, Denny’s continues to expect company-operated same-store sales growth in the range of flat to 2% and franchise same-store sales to be between 1.0% and 3.0%. Guidance for adjusted income before taxes and capital expenditure are reaffirmed at $45.0—$49.0 million and $15.0—$16.0 million range, respectively. The franchisor and operator of one of America's largest full-service restaurant chains also reiterated free cash flow guidance in the range of $51.0—$55.0 million.

Our Take

The lower-than-expected results at Denny’s as well as slowdown in key matrices call for a cautious view for the upcoming quarter. There was also no surprise from the guidance point of view. The careful trend can be validated by the slash in the Zacks Estimate by one analyst from 9 to 8 cents. No analyst revised the estimate upward. However, we believe, Denny’s is still in the transitional stage and will take some time to stabilize the operation both at company-owned and franchised units.

On the positive side, the company has potential for international expansion. Apart from the recent deal to foray into China, Denny’s has its presence in countries like Costa Rica, Mexico, Honduras, Curaçao, Puerto Rico, Dominican Republic and Canada.

Denny’s, which competes with the likes of Kona Grill Inc. , currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are maintaining our long-term “Neutral” recommendation on the stock.

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