Denny's Q2 Earnings Top, Revs in Line - Analyst Blog
August 02 2013 - 11:00AM
Zacks
Denny’s
Corporation’s (DENN) second-quarter 2013 adjusted earnings
of 8 cents per share beat both the Zacks Consensus Estimate and the
year-ago quarter’s earnings of 7 cents by 14.3%. Earnings in the
quarter received a boost from lower taxes and reduced share count
in the quarter.
Total operating revenues was nearly
$117 million in line with the Zacks Consensus Estimate but were
lower than the year-ago quarter’s revenues by 6.5%. Lower company
restaurant sales pressurized the total revenue during the
quarter.
Performance Highlights in
the Quarter
During the quarter, sales at the
company-operated restaurants declined 9.2% year over year to $82.8
million, with the decline in the number of company restaurants
annually by 24 owing to the company’s divestment and refranchising
activities and decline in same-store sales (comps).
Franchise and license revenues
increased 0.7% to $33.7 million, attributable to an improvement in
royalties as well as occupancies, propelled by 32 additional
franchised restaurants in operation at the end of the quarter in
comparison with the year-ago quarter.
Due to a 1.7% decline in traffic at
company-owned units, comps at company restaurants were down 0.5%.
Comps at franchised restaurants were up 0.7% with the rise in guest
check average offsetting the decline in same-store traffic.
System-wide same-restaurant sales (comps) nudged up 0.6%, lower
than a 0.8% growth in overall comps witnessed in the year-earlier
quarter.
Company-operated restaurants’
operating margin contracted 110 basis points (bps) to 13.7% due to
a rise in the product cost and higher labor expenses which was
offset by the decline in payroll, benefit expenses and operating
costs. Hence, operating income, as a percentage of revenue reduced
440 bps to 10.8%.
Store Update
During the quarter, the company
unveiled 11 franchised units. Moreover, Denny’s shut down 10
franchised restaurants. At quarter end, the company had 165
company-owned and 1,525 franchised and licensed restaurants. Apart
from this, Denny’s completed the acquisition of a restaurant in
Miami for $3.2 million.
The company remains steadfast in
its goal to expand its footprint internationally. It has recently
added a restaurant in its Latin American portfolio by opening a
unit in Mexico. The company expects to introduce nearly 40-45
franchised restaurants in 2013.
Liquidity
Denny’s ended the quarter with cash
and cash equivalents of $2.0 million versus $10.3 million in the
prior quarter. Long-term debt, at the quarter end, came in at
$153.8 million as compared with $156.8 million in the first
quarter.
Share
Repurchase
During the second quarter, the
company bought back 1.7 million shares worth $9.4 million.
Currently, 11.5 million shares remain under the company’s existing
share repurchase program. Since the beginning of its share
repurchase in 2010 the company has repurchased 13.5 million shares
worth $59 million.
Guidance
Lowered
For 2013, Denny’s lowered the
higher end of comps guidance. The company projects that system-wide
comps growth will be within the range of 0%-1%, down from the
previous range of 0%-1.5%. Franchise comps will be flat to up 1%
while comps at company-owned units will be down 1%.
Commodity cost is expected to be
within 2% to 3% in 2013. The company also anticipates that
franchise margin to be at the higher end of its guidance of 65%-66%
while company restaurant margin is expected to be at the lower end
of 14%-15%.
Capital expenditure will be within
$20 million - $22 million, up from $19 million - $21 million.
In order to improve the visibility
of its brand, the company continues to promote itself as America's
Diner. Apart from this, Denny’s has undertaken several initiatives
such as menu innovation and aggressive expansion to significantly
drive its revenues. The company is increasingly focusing on
refranchising to generate more free cash flow.
Our Take
Although, Denny’s earnings beat the
earnings estimate in the second quarter, we remain concerned about
the lower top line and sluggish comps growth. Moreover, lowered
guidance is a major headwind. We believe that this Zacks Rank #4
(Sell) company is still in a transitional stage and will take some
time to stabilize the operation both at company-owned and
franchised units.
Some other players in the
restaurant industry which look attractive at the current level
include Yum! Brands Inc. (YUM), Buffalo
Wild Wings Inc. (BWLD) and Burger King Worldwide,
Inc. (BKW). All these companies carry a Zacks Rank #2
(Buy).
BURGER KING WWD (BKW): Free Stock Analysis Report
BUFFALO WLD WNG (BWLD): Free Stock Analysis Report
DENNY'S CORP (DENN): Free Stock Analysis Report
YUM! BRANDS INC (YUM): Free Stock Analysis Report
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