Denny's Corporation (DENN)

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Denny’s Corporation (DENN)

Q1 2010 Earnings Call

May 10, 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

Debra Smithart-Oglesby – Chair, President, O/S Partners


Mark Smith – Feltl & Company

Steve Anderson – MKM Partners

Mark Argento – [Craig-Hallum Capital Group]

Nichole Miller Regan – Piper Jaffray

Michael Gallo – C.L. King & Associates, Inc.



Welcome everyone to the first quarter 2010 earnings release conference call. (Operator Instructions) Mr. Enrique Mayor-Mora, Vice President of Investor Relations, you may begin your conference.

Enrique Mayor-Mora

Thank you. Good afternoon and thank you for joining us for Denny’s first quarter 2010 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 as well as Debra Smithart-Oglesby, Denny’s Board Chair. Nelson will begin today’s call with an overview of our business and strategic initiatives. After that, Mark will provide a financial review of our first quarter results. Debra will conclude the call with remarks related to our proxy contest. As a reminder, the 10-Q will be filed today.

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 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 30, 2009 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.

Nelson Marchioli

Thank you, Enrique. Good afternoon, everyone. In the first quarter we had two major accomplishments that we expect will accelerate sales growth and improve long-term profitability.

First, during the first quarter we completed the testing of our $2, $4, $6 and $8 everyday value menu and our test results demonstrated a strong impact on guest traffic trends. In the 320 system units and 6 DMA’s where we tested the menu we saw a positive five percentage point improvement in guest count trend with only a 2.5% decline in guest check average. We were pleased to see these results and believe they reflect guest acceptance of everyday value at Denny’s.

While this wasn’t in place long enough to impact first quarter same store sales it resonated with consumers in the test market and based on those strong results we have rolled it out system wide in the second quarter. The entire Denny’s system is very excited about this program and its potential impact on our future sales growth. In fact, over 95% of our franchise community voted to roll this value menu.

Second, we were chosen as the full service restaurant operator of choice by Pilot for up to 140 Flying J Travel Centers. We expect to start converting these locations into Denny’s in the second quarter pending final FTC approval of the Pilot Travel Center and Flying J merger. We believe this opportunity will further spur unit growth through the entire system. Once complete, Travel Centers will make up at least 10% of our system.

In addition, we continue to benefit from our migration to a more heavily franchised business model. Despite the backdrop of a challenging sales environment we have continued to drive improvements and profitability, free cash flow and restaurant unit growth. We also continued in the first quarter to further rationalize our operating costs and G&A and improve our operating margins all while reducing our debt levels and leverage ratio.

First quarter sales [audio break] the back half of 2009 and to the midscale segment. We also anticipate sales will build throughout the year as our guests who have been particularly impacted by the economy and among the slowest to emerge begin to return from the challenging albeit seemingly improving economic environment.

Our renewed focus on everyday value, new product innovation through LTOs and a greater weight placed on national and local media is expected to drive sales for the balance of the year. This improvement in trend is implied in our full-year guidance. Since the $2, $4, $6 and $8 everyday value menu rolled on April 3rd with ads during the NCAA Final Four Tournament, results have behaved similarly to those in the test markets.

Key learnings have been first the program builds over time. The markets that rolled out the program during the test have outperformed the markets that rolled it out in April. Second, certain markets are slower to build guests than others. Specifically, since April our Northern California markets have been slower to embrace the value menu. Accordingly we are diving into these markets to learn how to optimize the program.

In an effort to broaden our customer base and drive traffic we began advertising with AARP in late March of this year. In conjunction with the advertising program we are currently offering AARP members a 20% discount between 4 p.m. and 10 p.m. daily and $1 coffee all day at participating restaurants nationwide. With the positive initial response we have seen to these offers, we are excited to have signed a multi-year agreement with AARP to provide continuing discounts to its members.

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