Denny’s Corporation, franchisor and operator of one of America's largest franchised full-service restaurant chains, reported results for its third quarter ended September 28.
Third Quarter Highlights
Domestic system-wide same-store sales increased 1 percent, including an increase of 1 percent at company restaurants and an increase of 1 percent at domestic franchised restaurants.
Opened 13 system restaurants including 10 domestic and three international franchised locations.
Completed 62 remodels including six at company restaurants.
Company restaurant operating margin expanded 12.8 percent to $16 million while franchise operating margin grew 4.8 percent to $25 million.
John Miller, president and chief executive officer, says, “As we continue to build one of the leading franchise systems in the country, our strategic initiatives have resulted in consistent revenue and earnings growth along with stable Free Cash Flo generation. During the third quarter, we achieved positive system same-store sales and significantly improved both our company and franchise operating margins as we continued with our improvements in guest appeal.”
Miller continues, “With our marketing efforts focused on driving additional gains in traffic, ongoing enhancements to our menu and atmosphere, and improved execution for our guests, we remain enthusiastic as we look ahead. As our successful brand revitalization program accelerates throughout the system, we are confident in our ability to deliver profitable system sales growth while we expand our global reach and position Denny’s for long-term success.”
Third Quarter Results
Denny’s domestic system-wide same-store sales increased 1 percent, including a 1 percent increase at company restaurants and a 1 percent increase at domestic franchised restaurants. During the quarter, the company acquired six franchised restaurants. Denny’s franchisees opened 13 restaurants and closed five restaurants, bringing the total number of restaurants to 1,728.
Denny’s total operating revenue grew 3.7 percent to $128.4 million due to an increase in both company restaurant sales and franchise royalties. Company restaurant sales improved 4.3 percent to $93.1 million due to a greater number of company restaurants compared to the prior year quarter and the growth in same-store sales. Franchise and licensing revenue grew 2.2 percent to $35.3 million primarily due to higher royalty revenue, partially offset by a decrease in occupancy revenue.
Company restaurant operating margin of $16 million, or 17.2 percent of company restaurant sales, increased $1.8 million, or 130 basis points. Franchise operating margin of $25 million, or 70.9 percent of franchise and licensing revenue, increased $1.1 million, or 180 basis points.
Total general and administrative expenses were $17.6 million compared to $16 million in the prior year quarter primarily due to a $1.2 million market valuation change in our non-qualified deferred compensation plan liabilities. A corresponding gain on plan assets is reflected in other nonoperating income, resulting in no impact on net income. Interest expense of $3.1 million increased $0.8 million due to higher borrowings compared to the prior year quarter. Denny’s ended the quarter with $228.5 million of total debt outstanding, including $203 million of borrowings under its revolving credit facility. Depreciation and amortization expense of $5.6 million increased $0.2 million.
The provision for income taxes was $5.3 million, reflecting an effective tax rate of 35.2 percent. Due to the use of net operating loss and tax credit carryforwards, the company paid $0.2 million in cash taxes during the quarter.
Mark Wolfinger, Denny's executive vice president, chief administrative officer and chief financial officer, comments, “By successfully delivering a differentiated and relevant brand, we once again outperformed key industry benchmarks and increased our market share. In addition, we continued to strategically acquire select franchised restaurants that we intend to reinvigorate and reposition in order to enhance our return on invested capital. With one of the industry’s strongest balance sheets, we have the financial capacity to support our continued growth initiatives while simultaneously returning value to our shareholders with our ongoing share repurchase program.”
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 percent and 2 percent.
45 to 50 (vs. 44 to 48) new restaurant openings, with net restaurant growth of 15 to 20 (vs. 10 to 15) restaurants.
Acquisition of nine (vs. seven) franchised restaurants and refranchising of six company restaurants.
