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A Mixed Bag for Denny's in 4Q - Analyst Blog

Posted: 2/22/2013 12:40:00 PM
Referenced Stocks: AFCE;BKW;DENN;KKD

Denny's Corporation ( DENN ) recently reported fourth quarter 2012 earnings of 7 cents per share, in line with the Zacks Consensus Estimate but below the year-ago quarter's earnings of 94 cents per share. In full year of 2012, earnings per share were 23 cents versus $1.13 per share recorded in 2011.

Total operating revenues declined 10.9% year over year to $115.9 million, but surpassed the Zacks Consensus Estimate of $112.0 million. In 2012, the revenues were $488.4 million, down 9.3% year over year.

Performance Highlights in the Quarter

During the quarter, sales at the company-operated restaurants declined 16.9% year over year to $81.7 million, as the number of operating units have reduced annually by 49 owing to the company's divestment.

Franchise and license revenues increased 7.5% to $34.2 million, attributable to an improvement in royalties as well as occupancies, propelled by 55 additional franchised restaurants in operation at the end of the quarter in comparison with the year-ago quarter.

System-wide same-restaurant sales (comps) nudged up 1.7% based on a 2.0% growth in franchised units and a 0.5% rise in company-operated units. The 10 basis point (bps) improvement was higher than a 1.6% growth in overall comps witnessed in the year-earlier quarter. Same-store guest count fell 0.8% but guest check average inched up 1.3%, while same-store guest count exhibited a downward trend from the year-ago level, guest check showed signs of improvement.

Company-operated restaurants' operating margin enhanced 70 basis points (bps) to 13.5% due to reduced payroll as well as benefit expenses and other operating costs neutralizing the rise in product costs . Franchise operating margin declined 30 bps to 65.2% owing to low fee revenues. Hence, total operating margin expanded 310 bps to 28.8%.

Store Update

During the quarter, Denny's shut down one company-owned as well as 11 franchised restaurants and also divested 8 company-owned units to franchisees. The company unveiled 12 franchised units in the quarter including one company-owned unit. At quarter-end, the company had 164 company-owned and 1,524 franchised and licensed restaurants.


Denny's ended the quarter with cash and cash equivalents of $13.6 million and long-term debt of $161.5 million.

Share Repurchase

The company bought back 4.8 million shares worth $22.2 million in 2012.


For 2013, Denny's projects that system-wide same-store sales growth will be within the range of flat to 2%. Adjusted income before taxes will be within $76-$80.0 million. Capital expenditure will be between $17 million and $19 million. The franchisor and operator of one of America's largest full-service restaurant chains also expects that its free cash flow will be within the range of $46.0-$49.0 million.

The company expects to introduce nearly 40-45 franchised restaurants in 2013.

Our Take

Denny's is still in the transitional stage and will take some time to stabilize the operation both at company-owned and franchised units. Continued margin expansion at company-owned stores amid a value-sensitive business environment is another positive factor. However, we are cautious about the stock given the company's continued moderated results as well as slowdown in key matrices.

Denny's currently retains a Zacks Rank #3 (Hold). Another restaurateur AFC Enterprises Inc. ( AFCE ) recently declared its preliminary fourth quarter and full year 2012 results. The company projects its adjusted earnings per share for the full year of 2012 to be within $1.23-$1.24, up from 99 cents in 2011. AFC also provided an optimistic outlook for 2013. AFC currently holds a Zacks Rank #2 (Buy).

Other restaurateurs, which are expected to perform well moving ahead, include Krispy Kreme Doughnuts, Inc. ( KKD ) and Burger King Worldwide, Inc. ( BKW ). Both carry a Zacks Rank #2 (Buy).

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