Denny’s Corporation franchisor and operator of one of America’s largest franchised full-service restaurant chains, today reported results for its second quarter ended July 1, 2015.
Second Quarter Summary
* Adjusted Net Income excludes debt refinancing charges, impairment charges and gains on sales of assets and other. Please refer to the historical reconciliation of Net Income to Adjusted Net Income, Adjusted Net Income per Share, Adjusted EBITDA and Free Cash Flow included in the following tables.
John Miller, President and Chief Executive Officer, stated, “We generated another quarter of strong same-store sales growth at both franchised and company restaurants including our third consecutive quarter of growth in system-wide guest traffic. We are benefitting from the investments we have made in our brand revitalization strategy to enhance our food, service and atmosphere. Our success in driving profitable guest traffic growth and increasing guest satisfaction scores confirm that the improvements we have made are resonating with our guests, franchisees and employees. Going forward, we will remain focused on executing our strategies to elevate the Denny’s experience and are still in the early stages of the revitalization process as our Heritage remodel program has penetrated nearly 25% of the system.”
Second Quarter Results
Denny’s total operating revenue grew 7.6% to $123.3 million resulting from an increase in both company restaurant sales along with franchise and license revenue. Franchise and license revenue of $34.7 million increased $1.2 million, or 3.6%, primarily due to higher royalty revenue resulting from an increase in same-store sales. Company restaurant sales of $88.6 million grew $7.5 million, or 9.2%, primarily due to the increase in same-store sales and the reopening of the Las Vegas Casino Royale restaurant in November 2014.
In the second quarter, Denny’s opened 13 franchised restaurants, including four international locations, and closed 11 system restaurants, including one company restaurant, bringing the total number of restaurants to 1,696. Domestic system-wide same-store sales grew 7.3%, including a 7.9% increase at company restaurants and 7.2% increase at domestic franchised restaurants.
Franchise operating margin was $23.5 million, or 67.7% of franchise and license revenue, an increase of $0.6 million. This improvement was primarily due to an increase in royalties, partially offset by a rise in direct costs. Company restaurant operating margin of $16.3 million, or 18.4% of company restaurant sales, increased $4.8 million, or 4.2 percentage points. The improvement in company margin was primarily driven by the leveraging effect from the growth in same-store sales.
Total general and administrative expenses were $16.8 million compared to $14.1 million in the prior year quarter primarily due to higher incentive and share-based compensation expenses, along with higher payroll and benefits expenses. Depreciation and amortization expense was flat at $5.3 million, as was interest expense at $2.3 million. In the second quarter, the provision for income taxes was $5.5 million, reflecting an effective tax rate of 36.1%. Due to the use of net operating loss and tax credit carryforwards, the Company paid $3.9 million in cash taxes during the second quarter.
Denny’s second quarter net income of $9.7 million increased 17.7% compared to prior year quarter net income of $8.3 million, with net income per diluted share of $0.11 growing 20.8% compared to $0.09 per diluted share in the prior year quarter. Adjusted Net Income* of $9.8 million grew 18.1% compared to prior year quarter Adjusted Net Income* of $8.3 million. Adjusted Net Income per Share* of $0.11 increased 21.2% compared to prior year quarter Adjusted Net Income per Share* of $0.09.
Denny’s generated $9.6 million of Free Cash Flow* in the second quarter, after investing $9.0 million on capital expenditures primarily used to remodel 17 company restaurants and to acquire a parcel of real estate, which is leased to a franchisee. During the quarter, the Company repurchased 1.5 million shares for $16.1 million. At the end of the second quarter, the Company had approximately 10.5 million shares authorized under its ongoing repurchase programs based on the closing share price on July 31, 2015. Denny’s ended the second quarter with $160.6 million of total debt outstanding, including $142.0 million of borrowings under its revolving credit facility.
Business Outlook
Mark Wolfinger, Denny’s Executive Vice President, Chief Administrative Officer and Chief Financial Officer, commented, “Our second quarter same-store sales growth and operations execution helped drive another quarter of margin expansion at our company operated restaurants leading to 21% growth in Adjusted Net Income per Share*. We are focused on driving long-term shareholder value through our highly franchised business while balancing our Free Cash Flow* allocation between reinvesting in our brand and company restaurants and returning value to our shareholders through our share repurchase program.”
Source: marketwatch.com
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