Denny’s Corporation (DENN)
Q3 2008 Earnings Call
October 28, 2008 5:00 pm ET
Nelson Marchioli – Chief Executive Officer
Mark Wolfinger – Chief Financial Officer
Alex Lewis – Vice President of Investor Relations and Treasurer
Karen Eltrich – Goldman Sachs
Michael Gallo – C.L. King & Associates
Reza Vahab-Zadeh – Barclays Capital
Brian Hunt – Wachovia Capital
Tony Brenner – Roth Capital Partners
Eric Wold – Merriman Curhan
Mark Smith – Feltl & Company
Steve Anderson – MKM Partners
Ken Bann – Jefferies and Company
Previous Statements by DENN
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Thank you, Heather. Good afternoon and thank you for joining us for Denny’s third quarter 2008 investor conference call. This call is being broadcast simultaneously over the internet. With me today from management are Nelson Marchioli, Denny’s President and Chief Executive Officer and Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer, and Chief Financial Officer. Mark will begin today’s call with financial review of our third quarter results. After that, Nelson will provide his overview of the business and our strategic initiatives. After our prepared remarks, management will be available to answer questions.
Before we begin, let me remind you that accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Denny’s to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company’s annual report on form 10-K for the year ended December 26, 2007, and any subsequent quarterly reports on form 10-Q. One note, our form 10-Q for the third quarter will be filed later on this evening, so you can pick that up as well. With that, I’ll now turn the call over to Mark Wolfinger, Denny’s EVP, CAO, and CFO.
Thank you, Alex, and good evening. I’ll start my comments with a quick review of our third quarter sales performance. System-wise same store sales decreased 5.1% in the third quarter, comprised of a 2.7% decrease at company restaurants and a 6.1% decrease at franchise restaurants. There are many factors that might contribute to the difference in same store sales between company and franchise restaurants including the timing of pricing actions, geographical variances, and the exclusion of same-store sales from restaurants sold over the last year.
Looking at the details for company sales performance, an 8.8% decline in guest counts was partially offset by 6.7% increase in average guest check. Most of the growth in guest check was attributable to pricing actions taken over the past year to help offset minimum wage hikes and commodity cost pressures. The remaining growth in guest check was attributable to a reduction in discounting compared with the prior year period. In fact, our discounts per guest in the third quarter were down 26% compared with prior year as we have reduced our use of these less profitable sales drivers.
Company restaurant sales for the third quarter reflect a continued impact of our Franchise Growth Initiative or FGI, as sales decreased $56.2 million or 26% due to 137 fewer equivalent company restaurants compared with the same period last year. Since the beginning of 2007, we have sold 192 company restaurants or 37% of the company’s store base at that time. As a result, we have increased the mix of franchise restaurants in the Denny’s system from 66% to 78% over the last 21 months. As the successful execution of FGI is ongoing, the sequential decline in company units, company restaurant sales, and company restaurant income is expected to continue while franchise revenue and franchise income are expected to continue increasing.
Turning now to the quarterly operating margin table in our press release, our company restaurant operating margin in the third quarter was 13.3% of sales, an increase of 1.4 percentage points compared with the prior year period. We are pleased to have generated significant margin improvement in the third quarter as our primary costs, food, and labor, have been under pressure for more than a year from substantial commodity inflation and minimum wage hikes.
The most significant change in our second quarter in our P&L was a 1.4 percentage point decrease in food costs. In addition to price increases taken to help offset commodity inflation, we have been proactive in managing our menu mix in order to reduce our food cost per guest while still providing a compelling value offering to our customers. The Build Your Own Grand Slam continued to sell well throughout the third quarter after its second quarter launch and continues as one of our highest margin items.
Payroll and benefit costs increased a slight tenth of a percentage point to 40.8% sales in the third quarter as more efficient crew level and management labor costs in the current quarter were offset by a 1% increase in Workers’ Compensation costs attributable primarily to a benefit in the prior year period. Utility expense in the third quarter increased 0.6% due to higher energy costs which peaked in the third quarter and have since begun to subside.