) second-quarter 2013 adjusted earnings of 8 cents per share beat
both the Zacks Consensus Estimate and the year-ago quarter's
earnings of 7 cents by 14.3%. Earnings in the quarter received a
boost from lower taxes and reduced share count in the
Total operating revenues was nearly $117 million in line with
the Zacks Consensus Estimate but were lower than the year-ago
quarter's revenues by 6.5%. Lower company restaurant sales
pressurized the total revenue during the quarter.
Performance Highlights in the Quarter
During the quarter, sales at the company-operated restaurants
declined 9.2% year over year to $82.8 million, with the decline
in the number of company restaurants annually by 24 owing to the
company's divestment and refranchising activities and decline in
same-store sales (comps).
Franchise and license revenues increased 0.7% to $33.7
million, attributable to an improvement in royalties as well as
occupancies, propelled by 32 additional franchised restaurants in
operation at the end of the quarter in comparison with the
Due to a 1.7% decline in traffic at company-owned units, comps
at company restaurants were down 0.5%. Comps at franchised
restaurants were up 0.7% with the rise in guest check average
offsetting the decline in same-store traffic. System-wide
same-restaurant sales (comps) nudged up 0.6%, lower than a 0.8%
growth in overall comps witnessed in the year-earlier
Company-operated restaurants' operating margin contracted 110
basis points (bps) to 13.7% due to a rise in the product cost and
higher labor expenses which was offset by the decline in payroll,
benefit expenses and operating costs. Hence, operating income, as
a percentage of revenue reduced 440 bps to 10.8%.
During the quarter, the company unveiled 11 franchised units.
Moreover, Denny's shut down 10 franchised restaurants. At quarter
end, the company had 165 company-owned and 1,525 franchised and
licensed restaurants. Apart from this, Denny's completed the
acquisition of a restaurant in Miami for $3.2 million.
The company remains steadfast in its goal to expand its
footprint internationally. It has recently added a restaurant in
its Latin American portfolio by opening a unit in Mexico. The
company expects to introduce nearly 40-45 franchised restaurants
Denny's ended the quarter with cash and cash equivalents of
$2.0 million versus $10.3 million in the prior quarter. Long-term
debt, at the quarter end, came in at $153.8 million as compared
with $156.8 million in the first quarter.
During the second quarter, the company bought back 1.7 million
shares worth $9.4 million. Currently, 11.5 million shares remain
under the company's existing share repurchase program. Since the
beginning of its share repurchase in 2010 the company has
repurchased 13.5 million shares worth $59 million.
For 2013, Denny's lowered the higher end of comps guidance.
The company projects that system-wide comps growth will be within
the range of 0%-1%, down from the previous range of 0%-1.5%.
Franchise comps will be flat to up 1% while comps at
company-owned units will be down 1%.
Commodity cost is expected to be within 2% to 3% in 2013. The
company also anticipates that franchise margin to be at the
higher end of its guidance of 65%-66% while company restaurant
margin is expected to be at the lower end of 14%-15%.
Capital expenditure will be within $20 million - $22 million,
up from $19 million - $21 million.
In order to improve the visibility of its brand, the company
continues to promote itself as America's Diner. Apart from this,
Denny's has undertaken several initiatives such as menu
innovation and aggressive expansion to significantly drive its
revenues. The company is increasingly focusing on refranchising
to generate more free cash flow.
Although, Denny's earnings beat the earnings estimate in the
second quarter, we remain concerned about the lower top line and
sluggish comps growth. Moreover, lowered guidance is a major
headwind. We believe that this Zacks Rank #4 (Sell) company is
still in a transitional stage and will take some time to
stabilize the operation both at company-owned and franchised
Some other players in the restaurant industry which look
attractive at the current level include
Yum! Brands Inc.
Buffalo Wild Wings Inc.
Burger King Worldwide, Inc.
). All these companies carry a Zacks Rank #2 (Buy).
BURGER KING WWD (BKW): Free Stock Analysis
BUFFALO WLD WNG (BWLD): Free Stock Analysis
DENNY'S CORP (DENN): Free Stock Analysis
YUM! BRANDS INC (YUM): Free Stock Analysis
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