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A Mixed Bag for Denny's in 4Q

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Denny’s Corporation (DENN - Free Report) recently reported fourth quarter 2012 earnings of 7 cents per share, in line with the Zacks Consensus Estimate but below the year-ago quarter’s earnings of 94 cents per share. In full year of 2012, earnings per share were 23 cents versus $1.13 per share recorded in 2011.

Total operating revenues declined 10.9% year over year to $115.9 million, but surpassed the Zacks Consensus Estimate of $112.0 million. In 2012, the revenues were $488.4 million, down 9.3% year over year.

Performance Highlights in the Quarter

During the quarter, sales at the company-operated restaurants declined 16.9% year over year to $81.7 million, as the number of operating units have reduced annually by 49 owing to the company’s divestment.

Franchise and license revenues increased 7.5% to $34.2 million, attributable to an improvement in royalties as well as occupancies, propelled by 55 additional franchised restaurants in operation at the end of the quarter in comparison with the year-ago quarter.

System-wide same-restaurant sales (comps) nudged up 1.7% based on a 2.0% growth in franchised units and a 0.5% rise in company-operated units. The 10 basis point (bps) improvement was higher than a 1.6% growth in overall comps witnessed in the year-earlier quarter. Same-store guest count fell 0.8% but guest check average inched up 1.3%, while same-store guest count exhibited a downward trend from the year-ago level, guest check showed signs of improvement.

Company-operated restaurants’ operating margin enhanced 70 basis points (bps) to 13.5% due to reduced payroll as well as benefit expenses and other operating costs neutralizing the rise in product costs. Franchise operating margin declined 30 bps to 65.2% owing to low fee revenues. Hence, total operating margin expanded 310 bps to 28.8%.

Store Update

During the quarter, Denny’s shut down one company-owned as well as 11 franchised restaurants and also divested 8 company-owned units to franchisees. The company unveiled 12 franchised units in the quarter including one company-owned unit. At quarter-end, the company had 164 company-owned and 1,524 franchised and licensed restaurants.


Denny’s ended the quarter with cash and cash equivalents of $13.6 million and long-term debt of $161.5 million.

Share Repurchase

The company bought back 4.8 million shares worth $22.2 million in 2012.


For 2013, Denny’s projects that system-wide same-store sales growth will be within the range of flat to 2%. Adjusted income before taxes will be within $76—$80.0 million. Capital expenditure will be between $17 million and $19 million. The franchisor and operator of one of America's largest full-service restaurant chains also expects that its free cash flow will be within the range of $46.0—$49.0 million.

The company expects to introduce nearly 40-45 franchised restaurants in 2013.

Our Take

Denny’s is still in the transitional stage and will take some time to stabilize the operation both at company-owned and franchised units. Continued margin expansion at company-owned stores amid a value-sensitive business environment is another positive factor. However, we are cautious about the stock given the company’s continued moderated results as well as slowdown in key matrices.

Denny’s currently retains a Zacks Rank #3 (Hold). Another restaurateur AFC Enterprises Inc. recently declared its preliminary fourth quarter and full year 2012 results. The company projects its adjusted earnings per share for the full year of 2012 to be within $1.23-$1.24, up from 99 cents in 2011. AFC also provided an optimistic outlook for 2013. AFC currently holds a Zacks Rank #2 (Buy).

Other restaurateurs, which are expected to perform well moving ahead, include Krispy Kreme Doughnuts, Inc. and Burger King Worldwide, Inc. . Both carry a Zacks Rank #2 (Buy).

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