Denny’s Corp. (DENN, Financial) franchises one of America's largest full-service restaurant chains. It recently reported strong third-quarter results and raised its guidance. It ended the quarter with decent free cash flow.
It is embarking on making a successful global brand by consistently growing same-store sales and expanding both its domestic and international footprints. It has been known to cater to guests for 60 years now and provides high-quality, moderately priced products – burgers, sandwiches, salads, beverages, appetizers and desserts in addition to its all-day breakfast items.
The restaurant industry is highly competitive, and this chain has already created a niche in the market. The brand differentiates from other players through reasonable price, quality, variety and enhanced guest service. Always changing the menu is a strong point for Denny’s, and it has changed and improved more than 50% of its core menu items since 2013.
Strong third quarter
Net Income during the quarter was $9.7 million, or 13 cents per diluted share (which marked an increase of 8.7% from the prior-year quarter).
Adjusted net income per share during the quarter was 13 cents (which was an increase of 15.0% from the prior-year quarter).
Domestic systemwide same-store sales increased by 1.0%.
Operating revenue during the quarter increased by 3.7% and was $128.4 million.
Company restaurant operating margin during the quarter was $16.0 million, or 17.2% of company restaurant sales (which marked an increase of $1.8 million, or 130 basis points from the prior-year quarter).
Franchise operating margin increased by $1.1 million or 180 basis points from the prior year quarter and was $25.0 million, or 70.9% of franchise and licensing revenue in the current quarter.
Company restaurant sales increased by 4.3% and were $93.1 million in the current quarter.
Franchise and licensing revenue increased by 2.2% and was $35.3 million in the current quarter.
There was a spike in general and administrative expenses during the quarter. It was $17.6 million in the current quarter (which was $16.0 million in the prior-year quarter).
Free cash flows during the quarter were $3.7 million.
Cash capex during the quarter was $18.1 million.
Effective tax rate during the quarter was 35.2%.
Debt:Â It ended the quarter with $228.5 million of total debt.
Store Update:Â Total number of restaurants at the end of the quarter was 1,728.
Share repurchases
The company allocated $11.9 million to repurchase 1.1 million shares.
Expectations for full year
| Â | Range |
| Cash capex | To be between $33 million and $35 million |
| Depreciation and amortization expense | To be between $22 million and $22.5 million |
| Adjusted EBITDA | To be between $97 million and $99 million |
| Net interest expense | To be between $11.5 million and $12 million |
| Effective income tax rate | To be between 33% and 37% |
| Same-store sales growth | To be between 1.5% and 2.5% |
| Total operating revenue | To be between $506 milion and $509 million |
| Company restaurant margin | To be between 17.5% and 18% |
| Total general and administrative expenses | To be between $66 million and $68 million |
Positive attributes of the quarter
- Consistent earnings growth.
- Growing revenue.
- Positive comps.
- Improved franchise operating margins.
Focus
- Expanding global reach.
- Brand building.
- To deliver differentiated brand.
- Revamping menu.
- Making significant investments to support brand reputation.
Conclusion
There is an increase in company restaurant sales and franchise royalties in the current quarter. It is committed to strategically acquiring some franchised restaurants to reposition it and increase market share. Denny’s boasts of a strong balance sheet and is repurchasing shares in order to deliver value to its shareholders.
The restaurants are sprawled over Canada, Puerto Rico, Mexico, New Zealand, Honduras, Costa Rica, Dominican Republic, the United Arab Emirates, Guam, Curaçao, El Salvador and Trinidad and Tobago. It is constantly taking initiatives to enhance food quality and guest experience. Constant evolving of the menu is done to cater to changing customer preferences.
It is well positioned to deliver steady returns in the future. Successful transformation of the brand remains a key priority. It is striking the right balance in allocating free cash flow in strategic investments and share repurchases. Compelling menu and restaurant remodels are in favor of this company’s future growth.
The company has started to benefit from the strategic initiatives it has taken. It is building up long-term strategies to drive its future growth. After a bit of a sluggish start, this stock has picked up momentum and adding this company will reap shareholder returns. I would assign this stock a buy.
Disclosure: I do no hold any position in the company.
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