Denny’s Corporation, franchisor and operator of one of America's largest franchised full-service restaurant chains, reported results for its fourth quarter and full year ended December 30, 2015.
John Miller, president and chief executive officer, says, “Our brand revitalization strategies led to another great year for the Denny’s brand. We achieved the highest same-store sales and traffic growth in over a decade as we continued to offer craveable products and more consistent service, both delivered in a more inviting environment. With only 32 percent of the system reflecting the Heritage image at the end of 2015, we are still in the early stages of our revitalization. We currently anticipate over 70 percent of the system will have the Heritage image by the end of 2018. As we continue to grow and transform the Denny’s brand, we will consistently grow same-store sales and expand our global reach, while returning cash to shareholders through our ongoing share repurchase program.”
- Domestic system-wide same-store sales growth of 5.8 percent, comprised of a 6.5 percent increase at company restaurants and 5.7% increase at domestic franchised restaurants.
- Opened 45 system restaurants with net system growth of eight restaurants.
- Completed 232 remodels including 51 at company restaurants.
- Adjusted EBITDA of $88.7 million increased $6.2 million, or 7.5 percent.
- Net Income of $36.0 million, or $0.42 per diluted share, increased 9.9 percent.
- Adjusted Net Income per Share of $0.43 grew 16.4 percent.
- Generated $42.3 million of Free Cash Flow, after cash capital spending of $32.8 million.
- Allocated $105.8 million towards share repurchases.
Fourth Quarter Highlights
- Domestic system-wide same-store sales growth of 2.9 percent, comprised of a 3.5 percent increase at company restaurants and 2.8 percent increase at domestic franchised restaurants.
- Opened 14 system restaurants including three company restaurants.
- Adjusted EBITDA of $21.9 million grew 4.8 percent, excluding the impact of an additional operating week in 2014 which contributed approximately $3.6 million.
- Net Income of $8.8 million, or $0.11 per diluted share, decreased 9.5 percent.
- Adjusted Net Income of $8.9 million, or $0.11 per diluted share, increased 18.9 percent, excluding the impact of an additional operating week.
- Generated $7.1 million of Free Cash Flow and repurchased 5.1 million shares.
Fourth Quarter Results
Denny’s domestic system-wide same-store sales grew 2.9 percent, including growth of 3.5 percent at company restaurants and 2.8 percent at domestic franchised restaurants. During the quarter, Denny’s opened 14 restaurants, including 11 franchised locations and three company operated restaurants in partnership with Kwik TripTM convenience stores. Franchisees closed four restaurants, bringing the total number of restaurants to 1,710.
Denny’s total operating revenue of $124 million decreased by $4.7 million due to an additional operating week in the prior year. Excluding this impact, total operating revenue would have increased $6 million, or 5.1 percent, primarily from the growth in same-store sales and the opening of new company restaurants, including the full-year impact of the Las Vegas Casino Royale restaurant which reopened in late 2014, and acquisition of three franchised locations.
The additional operating week in 2014 added approximately $8.3 million of company restaurant sales and $2.4 million of franchise and licensing revenue, $3.6 million of additional operating income, and $2.2 million of additional net income. Company restaurant and franchise operating margins increased approximately $2 million and $2.2 million, respectively, with additional general and administrative expenses of approximately $0.6 million.
Franchise operating margin was $24.3 million, or 69.9 percent of franchise and licensing revenue. The $0.9 million decrease was primarily due to the additional operating week in the prior year, which was partially offset by an increase in royalties. Company restaurant operating margin was $13.5 million, or 15.2 percent of company restaurant sales. The 0.4 percentage point decrease was primarily due to higher incentive compensation, increased commodity costs, and the additional operating week in the prior year, partially offset by the growth in same-store sales, favorable workers’ compensation costs, and the reopening of the Las Vegas Casino Royale restaurant.
Total general and administrative expenses of $16.8 million improved $0.5 million compared to the prior year quarter primarily due to a reduction in share-based compensation, partially offset by additional incentive and deferred compensation and payroll and benefits expenses. Depreciation and amortization expense of $5.7 million was up by $0.2 million. Interest expense of $2.6 million was up by $0.3 million due to additional outstanding debt. Denny’s ended the fourth quarter with $215.7 million of total debt outstanding, including $195.0 million of borrowings under its revolving credit facility. The provision for income taxes was $3.7 million, reflecting an effective tax rate of 29.9 percent. Due to the use of net operating loss and tax credit carryforwards, the Company paid $0.4 million in cash taxes during the quarter.
Denny's net income of $8.8 million, or $0.11 per diluted share, decreased compared to prior year quarter net income of $9.7 million, or $0.11 per diluted share, primarily due to the additional operating week in the prior year. Adjusted Net Income per Share of $0.11 increased 28.2 percent compared to the prior year quarter when excluding the additional operating week in the prior year.
Free Cash Flow and Capital Allocation
Denny’s generated $7.1 million of Free Cash Flow in the quarter after investing $12 million to remodel 14 company restaurants, acquire a franchised restaurant, and purchase a parcel of real estate. During the year, the Company allocated $105.8 million towards share repurchases including the $50 million accelerated share repurchase agreement announced in November 2015. A total of 8.5 million shares were acquired during the year with 5.1 million shares acquired during the fourth quarter. As of December 30, 2015, the Company had approximately $38 million remaining under a $100 million authorized share repurchase program.
Pension Plan Liquidation
The company anticipates that its Advantica Pension Plan will be liquidated by the end of the second quarter of 2016. The Advantica Pension Plan was closed to new participants at the end of 1999. The Company expects to record an operating loss of approximately $24 million and make a required contribution of approximately $9.4 million as a result of the liquidation during the second quarter.
Mark Wolfinger, Denny's executive vice president, chief administrative officer, and chief financial officer, comments, “Our continued strong performance driven by our same-store sales growth enabled us to grow our revenue, margins, and profitability, while making investments in our support systems and company restaurants. Our highly franchised business generated $42.3 million of Free Cash Flow* after accelerating remodels at company restaurants and acquiring franchised restaurants and real estate. Our annual guidance for 2016 anticipates continued same-store sales growth and ongoing investments in company restaurant remodels. As a result, we are expecting to grow our Adjusted EBITDA 4 percent to 7 percent and generate between $59 and $62 million of Free Cash Flow*."
The following full year 2016 estimates are based on management’s expectations at this time and exclude any impact from the liquidation of the Advantica Pension Plan.
- Same-store sales growth at company restaurants between 1.5 percent and 2.5 percent with same-store sales growth at domestic franchised restaurants between 1% and 2 percent.
- 44 to 48 new restaurant openings, including one company operated opening in partnership with Kwik TripTM convenience stores, with net restaurant growth of 5 to 10 restaurants.
- Total operating revenue between $501 and $506 million with franchise and licensing revenue between $140 and $141 million.
- Company margin between 16 percent and 17 percent with franchise margin between 68.5 percent and 69 percent.
- Total general and administrative expenses between $64 and $67 million.
- Adjusted EBITDA between $92 and $95 million.
- Depreciation and amortization expense between $21.5 and $22 million.
- Net interest expense between $11 and $11.5 million.
- Effective income tax rate between 33 percent and 37 percent with $3 to $5 million of cash taxes.
- Cash capital expenditures between $18 and $20 million including completion of approximately 25 remodels at company restaurants, opening of one new company restaurant, and scrape and rebuild of a company restaurant.
- Free Cash Flow* between $59 and $62 million.