Denny’s Corporation (DENN)
Q4 2009 Earnings Call
February 17, 2010 5:00 pm ET
Enrique N. Mayor-Mora - Vice President of Planning and Investor Relations
Nelson J. Marchioli – President and Chief Executive Officer
F. Mark Wolfinger – Executive Vice President, Chief Administrative Officer, and Chief Financial Officer
Michael Gallo – C.L. King & Associates, Inc.
Brian Hunt – Wells Fargo Securities
Reza Vahab-Zadeh - Barclays Capital
Mark Smith – Feltl & Company
Tony Brenner – Roth Capital Partners
Jonathon [White] – No Company Listed
Jonathon [Desh] – No Company Listed
Previous Statements by DENN
» Denny's Corporation Q2 2009 Earnings Call Transcript
» Denny's Corporation Q1 2009 Earnings Call Transcript
» Denny’s Corporation Q4 2008 Earnings Call Transcript
Enrique N. Mayor-Mora
Thank you. Good afternoon and thank you for joining us for Denny’s fourth quarter 2009 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 F. Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer and Chief Financial Officer. Nelson will begin today’s call with an overview of our business and our strategic initiatives. After that, Mark will provide a financial review of our fourth quarter results. I will conclude the call with Denny’s 2010 full-year guidance.
As a reminder, we will be filing the 10-K by the due date, March 15, 2010.
Before we begin let me remind you that in accordance with the Safe Harbor provision for 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 considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risk, 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 31, 2008 and in any subsequent quarterly reports on Form 10-Q.
With that, I will now turn the call over to Nelson Marchioli, Denny’s President and CEO.
Thank you, Enrique. Good afternoon, everyone. I would like to start my comments by saying I am very proud of Denny’s ability to execute against the key strategic initiatives that underpin our business model transformation to 85% franchise. This despite the challenging business environment the industry has been operating in for almost two years.
Denny’s has materially and predictably increased adjusted income, organic cash flow, restaurant openings and net system growth. At the same time we have continued to pay down debt, primarily through proceed generated through the divestiture of company owned restaurants in our FGI program while generating commitments for future restaurant growth. The transformation of our business model to a cash flow generating and franchise focused operation has increased operating margins and earnings and lowered both our business and financial risk.
Key accomplishments in 2009 included 40 new restaurant openings, positive 10-system unit growth, total debt lowest in 25 years with a debt leverage ratio of 3.28, adjusted income before taxes of $30 million. I recognize we must improve our sales trends. I do firmly believe that we are beginning to position the brand for sustained sales improvement.
These challenges in 2009 can be broken down between industry specific and Denny’s specific. From an industry standpoint the existing consumer environment continues to be the most challenging. While the industry’s same store sales performance in the fourth quarter of 2009 was better than the 28-year low incurred in the second quarter it was still materially negative. This was despite the industry’s easier year-over-year sales comparables.
There are three main areas that have impacted Denny’s the most from a geographic and demographic perspective. First, our geographic concentration. 41% of our restaurants are located in California, Florida and Arizona, states that have been particularly hard hit by the economy. Second, our late night business which represents almost ¼ of our sales in which skews towards third-shift workers and a younger demographic. These are groups that have been particularly affected by the economy. Third, our target demographic household income level is the lowest in the family dining segment with 44% making a household income of less than $45,000 a year.
Based on the lessons we learned in 2009 we will make the following improvements that should result in our sales improving in 2010. A more focused value strategy. In 2010 we intend on introducing an everyday affordability approach to value. We are currently fine tuning our learnings from our test markets and anticipate a rollout in the second quarter. This value approach should also improve our late night trends where we compete directly with QSR.
Introduction of new products through limited time offers. In 2009 our new product strategy delivered many new craveable items such as our Grand Slamwich, Pancake Puppies and breakfast and dinner item extensions to our Skillet platform. In 2010 new products will be offered through an LTO platform to create a greater sense of urgency for our guests to visit our restaurants.
Reallocation of marketing dollars to media. We are focused on increasing our presence on media through the reallocation of funds within the market fund as well as building off of the success we had in establishing our local marketing cooperatives in 2009.
Facility refresh. Pending test market results we anticipate rolling out a system wide facilities refresh program by the fourth quarter of this year. This program would allow Denny’s to positive impact the look and feel of our units faster than our current 7-year model cycle.