Restaurant stocks are always a hot favorite among investors, especially when they are growth stocks. A great player in this industry is Denny’s Corporation (DENN, Financial).
This restaurateur has posted excellent quarterly results, including a 3.72% increase in total operating revenue. During the quarter, it has opened 12 system restaurants, including one company restaurant and six international locations.
Denny's Corporation is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. The company serves classic American comfort food at a good price around the clock. As of March 30, Denny’s had 1,713 franchised, licensed and company restaurants around the world with combined sales of $2.8 billion, including 117 restaurants in Canada, Puerto Rico, New Zealand, Mexico, Costa Rica, Dominican Republic, Honduras, Guam, the United Arab Emirates, Chile, Curacao, El Salvador and Trinidad and Tobago.
Strong first-quarter results
On May 2, this Spartanburg, South Carolina-based company reported its financial results for the first quarter ended on March 30. The company’s total operating revenue increased 3.72% to $124.64 million, compared to $120.17 million for the comparable prior-year period. Further, the Denny’s company restaurant sales grew 5.13% to $90.39 million, compared to $85.98 million in the same quarter of the previous year. Franchise and license revenue of $34.3 million increased $0.1 million, primarily due to higher royalty revenue offset by a decrease in occupancy revenue.
Denny’s total operating margin increased 7% to $40.53 million, compared to $37.88 million in the prior-year period. Further, its company restaurant operating margin of $16.3 million increased 10.9%, and franchise operating margin of $24.3 million increased 4.5%.
Denny’s net income and adjusted net income for the reported quarter increased 16.65% to $9.95 million and 9.15% to $9.54 million, compared to $8.53 million and $8.74 million for the comparable prior-year period. Adjusted net income per share and adjusted EBITDA increased 20% to 12 cents and 19.78% to $22.53 million, compared to 10 cents and $18.81 million for the same period last year. Total general and administrative expenses of $16.9 million were flat to the prior year as lower incentive and deferred compensation costs offset an increase in share-based compensation and payroll and benefits expenses.
Denny’s ended the quarter with cash and cash equivalents of $4.14 million, a sharp increase of 147.90% compared to the year-ago quarter. The company’s total debt outstanding at the end of the quarter was $221.5 million, which includes $201.0 million of borrowings under its revolving credit facility.
Restaurant count during the quarter
During the reported quarter, Denny’s opened 12 restaurants in total, including 11 franchised locations and one company restaurant in partnership with Kwik Trip convenience stores. Further, the company has acquired one franchised restaurant and refranchised four company restaurants. During the quarter, franchisees closed nine restaurants bringing the total number of restaurants to 1,713, compared to 1,710 for the fourth quarter of fiscal 2015.
Projections
For fiscal 2016, Denny’s expects same-store sales growth of company restaurants between 1.5% and 2.5% with same-store sales growth of domestic franchised restaurants between 1% and 2%. The company expects its total operating revenue with the franchise in the range of $500 million to $505 million and with licensing $139 million to $140 million.
Company margin is expected to be in the range of 16.5% to 17.5%, and franchise margin in the range of 68.5% to 69%. Denny’s expects its adjusted EBITDA and free cash flow in the range of $94 million to $96 million and $60 million to $62 million.
The following chart provides Denny’s different metrics of expenses for fiscal 2016.
| Metrics | In the range of |
| General and administrative expenses | $64 million to $67 million |
| Depreciation and amortization expense | $21.5 million to $22 million |
| Net interest expense | $11 million to $11.5 million |
| Cash capital expenditures | $19 million to $21 million |
For fiscal 2016, Denny’s plans to open 44 to 48 new restaurants, including one company-operated restaurant in partnership with Kwik Trip. Further, the company plans to acquire one franchised restaurant and refranchising of four company restaurants.
Growth and strategies
To attract more and more customers, Denny’s is expanding its global footprint. Since 2009, the company’s growth initiatives have enabled more than 360 new restaurant openings with 90% opened by franchisees. Further, the company has a strong domestic expansion opportunity with the strongest presence on the West Coast and in the Southwest, Texas and Florida. As of December 2015, Denny’s had 111 restaurants in 12 countries and since 2009, territories have grown by 44%.
To offer more craveable products, Denny’s is focusing on better quality. Since 2013, the company has changed and improved more than 50% of its core menu items. The company has executed a brand revitalization strategy that is driving results. Further Denny’s is engaging key customer segments through traditional and new media. Denny’s store remodeling program is in full swing and plans to remodel approximately 45% of system stores and 100% of company stores by the end of 2016. Additionally, it plans to remodel more than 70% of system stores by the end of 2018.
(Source: Company website)
On a concluding note
Overall, Denny’s is a rock-solid company with consistently growing same-store sales, expanding global footprint, strong free cash flow generation, growing profitability with 90% franchised business and consistently returning cash to shareholders.
From 2011 to 2015, Denny’s adjusted net income and adjusted net income per share grew at a CAGR of 13.48% and 16.54%. The company has provided positive systemwide same-store sales in 18 of the last 19 quarters. Since 2010, Denny’s has allocated more than $200 million toward share repurchases. Further, Denny’s has generated more than $230 million of free cash flow over the last five years.
Finally, with the recent quarterly release, the company is aiming for a better future and is all set to deliver a healthy menu to its investors. It is expected to create greater shareholder returns.
Disclosure: I do not hold any position in the company.
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