) recently reported second quarter 2012 earnings of 5 cents per
share, missing the Zacks Consensus Estimate by a penny and year-ago
quarter earnings by 3 cents. Earnings per share included the
refinancing of credit facility which led to a charge of $7.9
million for other non-operating expenses.
Total revenue declined 8.2% year over year to $124.7 million
lagging the Zacks Consensus Estimate by a slight margin.
During the quarter, sales at the company-operated restaurants
declined 12.5% year over year to $91.2 million, due to 36 less
operating units as compared to the prior year, as well as flat
same-restaurant sales improvement .
Franchise and license revenue increased 5.3% to $33.5 million,
attributable to improvement in comps and increased royalty of $0.9
million, propelled by 51 additional franchised restaurants in
operation at the end of the quarter compared with the year-ago
System-wide same-restaurant sales (comps) nudged up 0.8% on a flat
growth in company-operated units and 0.9% raise in franchised units
marking the fifth consecutive quarter of positive comps. This was a
docile improvement over a 2.0% growth in overall comps witnessed in
the year-earlier quarter. Same-store guest count slid 1.6% but
guest check average inched up 1.7%. Both the matrices exhibited a
downward trend from the year-ago level.
Company-operated restaurants' operating margin enhanced 150 basis
points (bps) to 14.8% due to lower payroll and benefit costs as
well as other operating costs. Franchise operating margin expanded
80 bps to 66.0%, attributable to a decline in occupancy costs.
Hence, total operating margin expanded 300 bps to 28.5%.
During the quarter, Denny's closed 5 system-wide units, including 3
company-owned and 2 franchised and licensed restaurants. The
company did not open any company-owned unit in the quarter, but
opened 9 franchised ones including two international units in the
Dominican Republic and Canada. The company also refranchised 17
units in the quarter. At quarter-end, the company had 177
company-owned and 1,507 franchised and licensed restaurants.
In 2012, Denny's plans to open 40-50 new restaurants, with 1
company-owned unit and rest franchised units. The company also
expects to transform additional 7-12 units in franchised form in
the second half of 2012 that translates into 30-35 units for
Denny's ended the quarter with cash and cash equivalents of $21.0
million and shareholders' deficit of $2.8 million.
The company bought back 1.4 million shares in the second quarter.
For 2012, Denny's continues to expect company-operated same-store
sales growth in the range of flat to 2% and franchise same-store
sales to be between 1.0% and 3.0%. Guidance for adjusted income
before taxes and capital expenditure are reaffirmed at $45.0-$49.0
million and $15.0-$16.0 million range, respectively. The franchisor
and operator of one of America's largest full-service restaurant
chains also reiterated free cash flow guidance in the range of
The lower-than-expected results at Denny's as well as slowdown in
key matrices call for a cautious view for the upcoming quarter.
There was also no surprise from the guidance point of view. The
careful trend can be validated by the slash in the Zacks Estimate
by one analyst from 9 to 8 cents. No analyst revised the estimate
upward. However, we believe, Denny's is still in the transitional
stage and will take some time to stabilize the operation both at
company-owned and franchised units.
On the positive side, the company has potential for international
expansion. Apart from the recent deal to foray into China, Denny's
has its presence in countries like Costa Rica, Mexico, Honduras,
Curaçao, Puerto Rico, Dominican Republic and Canada.
Denny's, which competes with the likes of
Kona Grill Inc.
), currently retains a Zacks #3 Rank, which translates into a
short-term 'Hold' rating. We are maintaining our long-term
"Neutral" recommendation on the stock.
DENNY'S CORP (DENN): Free Stock Analysis Report
KONA GRILL INC (KONA): Free Stock Analysis
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