Denny’s Corporation Reports Results for the First Quarter 2010
Same-store sales decreased 5.5% at company units and 6.3% at franchised units.
Denny’s Corporation (NASDAQ: DENN) today reported results for its first quarter ended March 31st, 2010.
“In addition, Denny’s continued to make significant progress towards the strategic goals established several years ago. These goals included opening new units, growing the system’s net unit count, paying down debt, and increasing margins, profitability and free cash flow.”
First Quarter Summary
• Opened ten new restaurants with positive system unit growth of eight restaurants
• New unit openings highlighted by four restaurants in Flying J Travel Centers and one university campus location in partnership with Sodexo
• Adjusted income before taxes* grew 43% to $6.6 million
• Net income of $4.6 million, an increase of $0.3 million
• Reduced outstanding debt by an additional $5.2 million
• Same-store sales decreased 5.5% at company units and 6.3% at franchised units. This represents an improvement in trend to the last six months of 2009 despite the negative impact of weather in the first quarter (weather impact estimated at 90bps, partially offset by 40bps of favorable impact from the Easter shift)
Company restaurant operating margin improved 1.9 percentage points to 13.6% of sales
Nelson Marchioli, President and Chief Executive Officer, stated, “In the first quarter we had two major developments that we expect will accelerate growth and improve long-term profitability. First, we were chosen as the full service restaurant operator of choice by Pilot for up to 140 Flying J Travel Centers. We expect to start converting these locations into Denny’s in the second quarter, pending final FTC approval of the Pilot Travel Center and Flying J merger. We believe this opportunity will further spur unit growth through the entire system. Second, during the first quarter, we also completed the testing of our $2/$4/$6/$8 everyday value menu, and our test results have demonstrated a strong impact on guest traffic trends. While this wasn’t in place long enough to impact first quarter same store sales, it resonated with consumers in the test markets and based on those strong results we have rolled it out system-wide in the second quarter. The entire Denny’s system is very excited about this program and its potential impact on our future sales growth.”
“In addition, Denny’s continued to make significant progress towards the strategic goals established several years ago. These goals included opening new units, growing the system’s net unit count, paying down debt, and increasing margins, profitability and free cash flow. ”
First Quarter Results
For the first quarter of 2010, Denny’s reported total operating revenue, including company restaurant sales and franchise revenue, of $137.6 million compared with $165.8 million in the prior year quarter. Company restaurant sales decreased $27.8 million primarily due to 63 fewer equivalent company restaurants compared with the prior year quarter. The decrease in restaurants resulted from the sale of company restaurants to franchisees under FGI.
Company restaurant operating margin (as a percentage of company restaurant sales) was 13.6%, an increase of 1.9 percentage points compared with the same period last year driven by the factors discussed below.
Product costs were flat at 23.8% of sales primarily due to the impact of a slightly higher average guest check, and flat commodity costs, offset by a higher mix of value priced items.
Payroll and benefit costs decreased 1.6 percentage points to 41.0% of sales primarily due to lower restaurant management incentive compensation as well as efficiency improvements in team and management labor, partially offset by the deleveraging effect of lower sales.
Occupancy costs increased 0.2 percentage points to 6.9% of sales primarily due to the deleveraging effect of lower sales.
Other operating costs decreased 0.5 percentage points to 14.7% of sales. Utility costs decreased 0.8 percentage points to 4.3% due to lower natural gas and electric rates, as well as the recognition of $0.6 million in losses on natural gas contracts during the prior year quarter. Repairs and maintenance expense decreased 0.1 percentage points. Marketing expenses increased 0.5 percentage points to 4.0% of sales. Legal settlement expense decreased 0.2 percentage points driven by minimal new case development.
For the first quarter of 2010, Denny’s reported franchise and license revenue of $29.8 million compared with $30.2 million in the prior year quarter. Franchise revenue decreased $0.4 million, or 1.3%, primarily due to a $1.2 million decrease in franchise fee revenue as no units were refranchised in the first quarter this year, partially offset by $0.7 million increase in franchise occupancy revenue and $0.1 million increase in royalty revenue. The royalty revenue increase was due to an additional 79 equivalent franchise restaurants, offset by negative same-store sales. During the first quarter, Denny’s franchisees opened six new restaurants, and closed two restaurants. Partnering with Sodexo, Denny’s opened its first campus location at California State University in San Bernardino.
Franchise operating margin decreased $1.5 million to $17.4 million, primarily due to the $1.2 million decrease in franchise fee revenue and lower same-store sales, partially offset by the additional 79 equivalent franchise restaurants. Franchise operating margin (as a percentage of franchise and license revenue) was 58.5%, a decrease of 4.1 percentage points compared with the same quarter last year. The decrease in margin was driven primarily by the decrease in FGI-related franchise fees and higher Super Bowl related costs, offset by higher contribution of higher-margin royalty revenue generated through FGI.
General and administrative expenses decreased $0.8 million, or 5.6%, from the same period last year. This decrease resulted from a reduction in incentive compensation, offset by an increase in stock based compensation resulting from the increase in the stock price and deferred compensation costs. Expenses related to the proxy contest were $0.5 million.
Depreciation and amortization expense declined by $1.3 million compared with the prior year quarter primarily as a result of the sale of restaurants and real estate over the past year. Operating gains, losses and other charges, net, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, increased $0.1 million in the quarter.
Operating income for the quarter decreased $0.7 million from the prior year period to $11.2 million, primarily due to a $28.2 million decrease in total operating revenue primarily attributable to the sale of company restaurants and negative same-store sales.
Interest expense decreased $2.1 million, or 24.6%, to $6.4 million as a result of the termination of our interest rate swap and a $52.9 million reduction in debt from the prior year period. Other nonoperating income decreased $0.5 million in the quarter primarily due to the recognition of gains and losses related to our interest rate swap.
Denny’s reported net income of $4.6 million for the first quarter, or $0.05 per diluted common share, compared with prior year period net income of $4.3 million, or $0.04 per diluted common share. Adjusted income before taxes, Denny’s metric for earnings guidance, increased $2.0 million, or 43%, in the first quarter to $6.6 million. This measure, which is used as an internal profitability metric, excludes restructuring charges, exit costs, impairment charges, asset sale gains and losses, share-based compensation, other nonoperating expenses and income taxes.
Business Outlook
Based on year-to-date results and management’s expectations at this time, Denny’s is reaffirming its financial guidance for full-year 2010 as announced in its fourth quarter 2009 earnings release on February 17, 2010.
2010 Guidance Assumptions:
• Top line sales reflect a sequential improvement to our recent trends
• The continued expansion of unit development and system growth primarily through our franchisees
• The ongoing focus on the generation of cash with the objective of paying down debt and strengthening the balance sheet
• Company same-store sales of (4.0%) to (2.0%)
• Franchise same-store sales of (5.0%) to (3.0%)
• 6 new company restaurant openings
• 35 new franchise restaurant openings
• Adjusted EBITDA* between $71 million and $75 million
• Adjusted income before taxes* between $23 million to $28 million
• Cash interest expense of $24 million
• Cash capital expenditures of $17 million
Notes:
* Please refer to the historical reconciliation of net income to adjusted income before taxes and adjusted EBITDA included in the tables below.
| DENNY’S CORPORATION | |||||||||||||
| Condensed Consolidated Statements of Operations | |||||||||||||
| (Unaudited) | |||||||||||||
| Quarter | Quarter | ||||||||||||
| Ended | Ended | ||||||||||||
| (In thousands, except per share amounts) | 3/31/10 | 4/1/09 | |||||||||||
| Revenue: | |||||||||||||
| Company restaurant sales | $ | 107,783 | $ | 135,576 | |||||||||
| Franchise and license revenue | 29,789 | 30,184 | |||||||||||
| Total operating revenue | 137,572 | 165,760 | |||||||||||
| Costs of company restaurant sales | 93,133 | 119,685 | |||||||||||
| Costs of franchise and license revenue | 12,366 | 11,298 | |||||||||||
| General and administrative expenses | 13,074 | 13,847 | |||||||||||
| Depreciation and amortization | 7,373 | 8,712 | |||||||||||
| Operating (gains), losses and other charges, net | 423 | 298 | |||||||||||
| Total operating costs and expenses | 126,369 | 153,840 | |||||||||||
| Operating income | 11,203 | 11,920 | |||||||||||
| Other expenses: | |||||||||||||
| Interest expense, net | 6,398 | 8,491 | |||||||||||
| Other nonoperating income, net | (12 | ) | (486 | ) | |||||||||
| Total other expenses, net | 6,386 | 8,005 | |||||||||||
| Income before income taxes | 4,817 | 3,915 | |||||||||||
| Provision for (benefit from) income taxes | 229 | (392 | ) | ||||||||||
| Net income | $ | 4,588 | $ | 4,307 | |||||||||
| Net income per share: | |||||||||||||
| Basic | $ | 0.05 | $ | 0.04 | |||||||||
| Diluted | $ | 0.05 | $ | 0.04 | |||||||||
| Weighted average shares outstanding: | |||||||||||||
| Basic | 97,095 | 96,045 | |||||||||||
| Diluted | 100,153 | 97,606 | |||||||||||
| DENNY’S CORPORATION | |||||||||||||
| Condensed Consolidated Balance Sheets | |||||||||||||
| (Unaudited) | |||||||||||||
| (In thousands) | 3/31/10 | 12/30/09 | |||||||||||
| ASSETS | |||||||||||||
| Current Assets | |||||||||||||
| Cash and cash equivalents | $ | 33,741 | $ | 26,525 | |||||||||
| Receivables, net | 13,735 | 18,106 | |||||||||||
| Assets held for sale | 3,024 | - | |||||||||||
| Other | 15,189 | 13,714 | |||||||||||
| 65,689 | 58,345 | ||||||||||||
| Property, net | 125,665 | 131,484 | |||||||||||
| Goodwill | 32,440 | 32,440 | |||||||||||
| Intangible assets, net | 54,346 | 55,110 | |||||||||||
| Other assets | 35,593 | 35,248 | |||||||||||
| Total Assets | $ | 313,733 | $ | 312,627 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | |||||||||||||
| Current Liabilities | |||||||||||||
| Current maturities of notes and debentures | $ | 1,320 | $ | 900 | |||||||||
| Current maturities of capital lease obligations | 3,784 | 3,725 | |||||||||||
| Accounts payable | 25,008 | 22,842 | |||||||||||
| Other current liabilities | 60,283 | 64,641 | |||||||||||
| 90,395 | 92,108 | ||||||||||||
| Long-Term Liabilities | |||||||||||||
| Notes and debentures, less current maturities | 248,919 | 254,357 | |||||||||||
| Capital lease obligations, less current maturities | 19,480 | 19,684 | |||||||||||
| Other | 73,932 | 73,976 | |||||||||||
| 342,331 | 348,017 | ||||||||||||
| Total Liabilities | 432,726 | 440,125 | |||||||||||
| Total Shareholders' Deficit | (118,993 | ) | (127,498 | ) | |||||||||
| Total Liabilities and Shareholders' Deficit | $ | 313,733 | $ | 312,627 | |||||||||
| Debt Balances | |||||||||||||
| (In thousands) | 3/31/10 | 12/30/09 | |||||||||||
| Credit facility revolver loans due 2011 | $ | - | $ | - | |||||||||
| Credit facility term loans due 2012 | 75,000 | 80,000 | |||||||||||
| Capital leases and other debt | 23,503 | 23,666 | |||||||||||
| Senior notes due 2012 | 175,000 | 175,000 | |||||||||||
| Total Debt | $ | 273,503 | $ | 278,666 | |||||||||
| DENNY’S CORPORATION | |||||||||
| Income, EBITDA and G&A Reconciliations | |||||||||
| (Unaudited) | |||||||||
| Quarter | Quarter | ||||||||
| Income and EBITDA Reconciliation | Ended | Ended | |||||||
| (In millions) | 3/31/10 | 4/1/09 | |||||||
| Net income | $ | 4.6 | $ | 4.3 | |||||
| Provision for income taxes | 0.2 | (0.4 | ) | ||||||
| Operating (gains), losses and other charges, net | 0.4 | 0.3 | |||||||
| Other nonoperating income, net | (0.0 | ) | (0.5 | ) | |||||
| Share-based compensation | 1.4 | 0.9 | |||||||
| Adjusted income before taxes (1) | $ | 6.6 | $ | 4.6 | |||||
| Interest expense, net | 6.4 | 8.5 | |||||||
| Depreciation and amortization | 7.4 | 8.7 | |||||||
| Cash payments for restructuring charges and exit costs | (1.4 | ) | (1.7 | ) | |||||
| Cash payments for share-based compensation | (1.0 | ) | (1.8 | ) | |||||
| Adjusted EBITDA (1) | $ | 18.0 | $ | 18.3 | |||||
