Following the release of third-quarter 2013 results on Oct 28,
Spartanburg, South Carolina-based restaurant chain,
) share price has declined 3.8%. We believe lower-than-expected
revenues, higher costs and reduced margins are responsible for
such disappointing results.
In the third quarter, Denny's adjusted earnings of 8 cents per
share were in line with the Zacks Consensus Estimate but above
the year-ago quarter's earnings of 6 cents by 33.3%. Earnings in
the quarter received a boost from lower interest expenses and
reduced share count in the quarter.
Total revenue was nearly $117.3 million missing the Zacks
Consensus Estimate of $119 million by 1.4% and the year-ago
quarter's revenues of $121 million by 3.1%. Lower company
restaurant sales pulled down the revenues during the quarter.
Performance Highlights in the Quarter
During the quarter, sales at the company-operated restaurants
declined 3.7% year over year to $83.4 million, due to the decline
in the number of company restaurants resulting from the company's
refranchising activities. Same-restaurant sales (comps) at
company restaurants were up 0.7% on the back of an increase in
the same-store average check, offset by lower traffic.
Franchise and license revenues decreased 1.4% year over year
to $33.9 million owing to lower occupancy revenues and reduced
initial fees. Comps at franchised restaurants were up 1.3% with
the rise in guest check average offsetting the decline in
Domestic system-wide comps nudged up 1.2%, higher than a 0.5%
growth in the year-earlier quarter.
Company-operated restaurants' operating margin contracted 240
basis points (bps) year over year to 12.3% due to a rise in the
product cost, higher payroll and benefits costs, and increased
other operating costs. Franchise operating margin expanded 90 bps
year over year to 65.8%, driven by higher royalty and licensing
margin. Total operating margin reduced 120 bps year over year to
27.8% due to lower company restaurant operating margin.
During the quarter, the company unveiled nine franchised unit
and shut down 13 franchised restaurants. At quarter-end, the
company had 164 company-owned and 1,522 franchised and licensed
restaurants. Apart from this, Denny's acquired a restaurant in
The company remains steadfast in its goal to expand
internationally. It has recently added a restaurant to its Latin
American portfolio by opening a unit each in El Salvador and
The company now expects the number of openings to be at the
lower end of its previous guidance of 40-45 franchised
restaurants in 2013. The restaurateur also intends to shut down
35-40 restaurants in 2013.
Denny's ended the third quarter with cash and cash equivalents
of $6.3 million versus $2.0 million in the prior quarter.
Long-term debt, at quarter-end, came in at $152.5 million as
compared with $153.8 million at the end of the second
During the third quarter, the company bought back 1.8 million
shares worth $10.2 million. Currently, 9.7 million shares remain
under the company's existing share repurchase program. Since the
beginning of its share repurchase in 2010 the company has
repurchased 15.3 million shares worth $69.2 million.
For 2013, Denny's reiterated its comps guidance. The company
continues to expect that its domestic system-wide comps growth
will be within the range of 0%-1%.
In 2013, commodity cost is expected to be 2.5%, within the
company's prior guidance range of 2%-3%. The company continues to
expect its franchise margin to be at the higher end of its prior
estimate of 65%-66%. However, Denny's believes that its
restaurant margin will be lower than its initial guidance range
The company continues to believe that capital expenditure will
be within $20 million-$22 million.
Denny's has undertaken several initiatives such as menu
innovation and aggressive expansion to significantly drive
revenues. The company is increasingly focusing on refranchising
to generate more free cash flow.
Although, Denny's' earnings were in line with the Zack
Consensus Estimate in the third quarter, we remain concerned
about the lower top line and muted comps growth.
The Zacks Rank #4 (Sell) company is still at the transitional
stage and will take some time to stabilize the operation both at
company-owned and franchised units. Continuous decline in margin
in the past few quarters also remains an overhang.
Other Stocks to Consider
Some other players in the restaurant industry which look
attractive at the current level include
Red Robin Gourmet Burgers Inc.
Cracker Barrel Old Country Store, Inc.
Bob Evans Farms, Inc.
). While Red Robin holds a Zacks Rank #1 (Strong Buy), Cracker
Barrel and Bob Evans Farms carry a Zacks Rank #2 (Buy).
BOB EVANS FARMS (BOBE): Free Stock Analysis
CRACKER BARREL (CBRL): Free Stock Analysis
DENNY'S CORP (DENN): Free Stock Analysis
RED ROBIN GOURM (RRGB): Free Stock Analysis
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