Zacks_Analysts' Blog : Denny's Misses on Lower Revenue - Analyst Blog

America’s largest full-service family restaurant chain, Denny’s Corporation (DENN) recently reported first quarter 2011 adjusted earnings of 6 cents per share, which missed the Zacks Consensus Estimate by a penny. Lower-than-expected results were due to a slump in revenue.

On a GAAP basis, the company reported net income of $4.1 million or 4 cents per share below the prior-year quarter earnings of $4.6 million or 5 cents per share.

Total revenue dipped 1.3% year over year to $135.8 million and was also below the Zacks Consensus Estimate of $136.0 million.

Performance Highlights

During the quarter, sales at company-operated restaurants plunged 3.0% from the year-earlier quarter to $104.6 million mainly due to the sale of some company-owned restaurants to franchisees under the Franchise Growth Initiative (FGI) program and sluggish same-store sales.

Franchise and license revenue spiked 4.9% to $31.3 million attributable to a rise of $0.5 million and $1.3 million, respectively, in revenues from franchise fees and royalties, partially offset by a $0.3 million drop in occupancy revenue.

System-wide same-store sales fell 1.7% due to a drop of 1.3% at company-operated units and 1.7% at franchised units. Same-store guest count dipped 1.1%, due to the calendar shift of Easter from March to April and absence of 2010 Super Bowl promotion. However, same-store guest count improved from the decline of 5.6% witnessed last year.

Company-operated restaurants’ operating margin dropped 150 basis points (bps) to 12.1% due to higher product expense and payroll and benefit costs. However, franchise operating margin expanded 450 bps to 63.0%, attributable to a spike in franchise revenue and fall in cost.

Store Update

During the quarter, Denny’s opened 13 franchised and 5 company-owned restaurants. At the end of the first quarter, the company had 226 company-owned and 1,439 franchised and licensed restaurants.

Financial Position

Denny’s ended the quarter with cash and cash equivalents of $19.2 million and shareholders’ deficit of $102.3 million. During the quarter, the board of directors of Denny’s approved a new buyback program for 6 million shares and refinanced $290 million of debt at a lower cost.

Outlook

In 2011, Denny’s continues to expect both company-operated and franchised same-store sales outlook in the range of negative 2% to positive 1%. Denny's plans to open 70–75 new restaurants in 2011, with 63 franchised units and 7–12 company-owned units.

Our Take

Though the economy is showing signs of improvement, Denny’s is cautiously optimistic regarding positive same-store sales for fiscal 2011, thus we expect estimates to decrease in the coming days. However, the company is taking initiatives such as Limited Time Offers and other marketing strategies to attract customers. Moreover, Denny’s continues to make efforts to strengthen its balance sheet, enhance shareholder value to drive higher revenue through franchising.

One of Denny’s primary competitors, Cracker Barrel Old Country Store, Inc. (CBRL), will announce its first quarter results on May 24.