Zacks_Analysts' Blog : Denny's In Line, Comps Turn Around - Analyst Blog

Denny’s Corporation (DENN) recently reported second quarter 2011 earnings of 8 cents per share, in line with the Zacks Consensus Estimate. Quarterly earnings were higher than the year-ago level of 5 cents. Total revenue nudged up 0.5% year over year to $135.9 million. However, total revenue trailed the Zacks Consensus Estimate of $137 million.

Performance Highlights

During the quarter, sales at company-operated restaurants dipped 1.2% year over year to $104.0 million.

Franchise and license revenue spiked 6.7% to $31.8 million attributable to a rise of $2.0 million in revenues from royalties. The royalty revenue increase was due to 120 additional equivalent franchise restaurants. The effect of higher same-store sales also helped growth.

System-wide same-restaurant sales (comps) upped 2.0% due to an increase of 2.6% at company-operated units and 1.8% at franchised units. This was a solid improvement over the decline of 5.9% in overall same-restaurant sales recorded in the year-earlier quarter. Same-store guest count increased 1.4%. This was the first time since the third quarter of 2006 that comps and guest counts turned positive.

Company-operated restaurants’ operating margin dropped 50 basis points (bps) to 13.3% due to higher product expense partially offset by lower payroll and benefit costs. However, franchise operating margin expanded 260 bps to 65.2%, attributable to a spike in franchise revenue and decline in costs.

Store Update

During the quarter, Denny’s opened 19 new units including seven Flying J Travel Center conversion sites, two international units and one new Pilot Travel Center. At the end of the second quarter, the company had 225 company-owned and 1,452 franchised and licensed restaurants.

Financial Position

Denny’s ended the quarter with cash and cash equivalents of $12.9 million and shareholders’ deficit of $99.5 million. During the quarter, the company repurchased 1.8 million shares.

Outlook

For 2011, Denny’s continues to expect both company-operated and franchised same-store sales in the range of negative 1% to positive 1% (previously 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.

Adjusted income before taxes is guided between $38.0 million and $42.0 million for 2011.

For 2011, capital expenditure is expected to be $18 million.

Our Take

Denny’s finally started to show an improvement in terms of same-restaurant sales, which bounced back into positive territory after quite a long time. Moreover, 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 by reducing debt and improving revenue through franchising.

However, all these efforts are in the initial stage, which makes us cautiously optimistic. Additionally, there are severe macroeconomic pressures like cost inflation that could sway consumer confidence.

Denny’s currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. We are maintaining our long-term “Neutral” recommendation on the stock. On the other hand, one of Denny’s primary competitors, Domino's Pizza Inc. (DPZ), retains a Zacks #1 Rank, which translates into a short-term ‘Buy’ rating.