Denny’s corporation, franchisor, and operator of one of America's largest franchised full-service restaurant chains, reported results for its first quarter ended March 30.
First Quarter Highlights
- Domestic system-wide same-store sales grew 2.5 percent, comprised of a 3.5 percent increase at company restaurants and 2.3 percent growth at domestic franchised restaurants.
- Opened 12 system restaurants including one company restaurant and six international locations.
- Completed 57 remodels including five at company restaurants.
- Company restaurant operating margin of $16.3 million increased 10.9 percent and franchise operating margin of $24.3 million increased 4.5 percent.
John Miller, president and chief executive officer, says, “Our start to the year was quite positive as we grew same-store sales on top of one of our strongest quarters of growth in the prior year. Our revenue growth, coupled with our ongoing focus on costs, resulted in margin improvement and growth in key profitability metrics. We remain focused on executing our brand revitalization strategy to offer affordable and craveable products delivered with consistent service in an inviting environment. Furthermore, given we are still in the early stages of our successful store revitalization efforts, with only 36 percent of the system reflecting the new Heritage image, we have an opportunity to further enhance our performance for the balance of 2016 and beyond. With ongoing same-store sales growth, an expanding global reach, and a highly franchised business model, the Free Cash Flow we are generating enables us to make investments in our company restaurants and our brand support systems while returning excess cash to shareholders through our ongoing share repurchase program.”
First Quarter Results
Denny’s domestic system-wide same-store sales grew 2.5 percent, including a 3.5 percent increase at company restaurants and 2.3 percent increase at domestic franchised restaurants. During the quarter, Denny’s opened 12 restaurants, including 11 franchised locations and one company restaurant in partnership with Kwik Trip convenience stores. In addition, the Company acquired one franchised restaurant and refranchised four company restaurants. Franchisees closed nine restaurants, bringing the total number of restaurants to 1,713.
Denny’s total operating revenue grew 3.7 percent to $124.6 million primarily resulting from an increase in company restaurant sales. Company restaurant sales grew 5.1 percent to $90.4 million primarily from the growth in same-store sales and increase in the number of company restaurants over the last 12 months. The company has opened four restaurants, acquired four franchised restaurants, and refranchised five company restaurants during this time. Franchise and license revenue of $34.3 million increased $0.1 million primarily due to higher royalty revenue offset by a decrease in occupancy revenue.
Company restaurant operating margin of $16.3 million, or 18 percent of company restaurant sales, increased $1.6 million or 0.9 percentage points. Franchise operating margin of $24.3 million, or 70.8 percent of franchise and licensing revenue, increased $1 million, or 2.9 percentage points, primarily due to the increase in royalties.
Free Cash Flow and Capital Allocation
Denny’s generated $14.4 million of Free Cash Flow in the quarter after investing $5.3 million in capital expenditures including remodeling five company restaurants and acquiring a franchised restaurant.
During the quarter, the company allocated $3.9 million to repurchase 400,000 shares. As of March 30, the company had approximately $34 million remaining under a $100 million authorized share repurchase program, including the impact of the $50 million accelerated share repurchase agreement announced in November 2015. As part of the agreement, the company received approximately 3.5 million shares at the beginning of the term and will receive the remaining portion of the shares at the end of the agreement, which is expected to be completed no later than July 2016.
Pension Plan Liquidation
The company’s Advantica Pension Plan, which was closed to new participants at the end of 1999, was liquidated in April, subsequent to the end of the first quarter. As a result of the liquidation, the company made a required contribution of $9.5 million and expects to record an operating loss of approximately $24 million during the second quarter.
Mark Wolfinger, Denny's executive vice president, chief administrative officer and chief financial officer, commentes, “Our continued execution drove another quarter of growth in revenue, margins, and profitability. We believe that an additional avenue of growth will be opportunistic acquisitions of franchised restaurants. Including our anticipated increase in capital expenditures, our highly franchised business is expected to generate over $60 million of Free Cash Flow in 2016, after completing substantially all remodels at company restaurants."