Denny’s Corporation, franchisor and operator of one of America's largest franchised full-service restaurant chains, reported results for its second quarter ended June 29.
Second Quarter Highlights
Raised 2016 full year guidance for Adjusted EBITDA.
Domestic system-wide same-store sales decreased 0.5 percent, including a decrease of 0.1 percent at company restaurants and a decrease of 0.5 percent at domestic franchised restaurants.
Two-year domestic system-wide same-store sales increased 6.8 percent.
Opened 13 system restaurants including 12 domestic and one international franchised locations.
Completed 57 remodels including six at company restaurants.
Company restaurant operating margin of $16.4 million increased 0.4 percent and franchise operating margin of $24.3 million increased 3.7 percent.
John Miller, president and chief executive officer, says, “We continued to generate strong Free Cash Flow during the second quarter, which supported ongoing investments in both Denny's brand revitalization and company restaurants and the return of capital to our shareholders. Not unlike others in the industry, our quarterly results were impacted by a challenging full-service dining environment as well as our prior year quarter, during which we achieved our strongest same-store sales performance in over a decade. Despite these circumstances, we continued to grow our revenues and improve our company and franchised restaurant margins through effective cost management. Going forward, we remain committed to delivering positive and profitable system sales growth by executing our brand revitalization strategy, enhancing the overall guest experience, and expanding our global reach.”
Second Quarter Results
Denny’s domestic system-wide same-store sales decreased 0.5 percent, including a 0.1 percent decrease at company restaurants and a 0.5 percent decrease at domestic franchised restaurants. During the quarter, Denny’s franchisees opened 13 restaurants. In addition, the company acquired two franchised restaurants and refranchised two company restaurants. Denny’s franchisees closed six franchised restaurants, bringing the total number of restaurants to 1,720.
Denny’s total operating revenue grew 0.8 percent to $124.3 million due to an increase in both company restaurant sales and franchise royalties. Company restaurant sales grew 0.7 percent to $89.2 million due to a greater number of company restaurants compared to the prior year quarter. Franchise and licensing revenue grew 1.2 percent to $35.1 million primarily due to higher royalty revenue, partially offset by a decrease in occupancy revenue.
Company restaurant operating margin of $16.4 million, or 18.4 percent of company restaurant sales, increased $0.1 million and was flat on a percentage points basis. Franchise operating margin of $24.3 million, or 69.4 percent of franchise and licensing revenue, increased $0.9 million, or 1.7 percentage points.
Total general and administrative expenses of $16.2 million improved $0.6 million compared to the prior year quarter due to lower incentive compensation expense, partially offset by an increase in payroll and benefits expenses. Interest expense of $3 million increased $0.8 million due to higher borrowings compared to the prior year quarter. Denny’s ended the quarter with $221.7 million of total debt outstanding, including $198 million of borrowings under its revolving credit facility.
Free Cash Flow and Capital Allocation
Denny’s generated $18.5 million of Free Cash Flow in the quarter after investing $4.1 million in cash capital expenditures, including the remodeling of six company restaurants.
During the quarter, the company allocated $3.8 million to repurchase 0.4 million shares. As of June 29, the company had approximately $130 million remaining in authorized share repurchases, including the impact of the $50 million accelerated share repurchase agreement announced in November 2015. As part of that agreement, the company received 3.5 million shares at the beginning of the term and received the remaining 1.5 million shares at the end of the agreement, which was completed during July 2016, after the quarter close.
Mark Wolfinger, Denny's executive vice president, chief administrative officer and chief financial officer, says, “The continued successful execution of our brand transformation initiatives resulted in another quarter of increased revenues and company and franchise restaurant margins, along with greater profitability when excluding the one-time loss associated with our pension plan liquidation. Our highly franchised business is expected to generate over $50 million of Free Cash Flow in 2016, after completing substantially all remodels at company restaurants and acquiring seven high-volume franchised restaurants."