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Denny’s Ekes Out Gain in 2013 Same-Restaurant Sales

photo by blue maumau
Photo by Blue MauMau

SPARTANBURG, S.C., -- Denny's Corporation (NASDAQ:DENN), franchisor and operator of 1,700 family dining restaurants, last week reported results for its fourth quarter as well as 2013.

The chain is the second largest in terms of systemwide sales in the United States. Competitor IHOP is the largest. Domestic systemwide same-store sales for Denny's grew 0.5 percent for the year. That was comprised of a 0.6 percent increase at domestic franchised restaurants and flat same-store sales at company restaurants. Compare Denny's restaurant results with competitor IHOP for 2013, which managed to increase domestic same-store sales by 2.4 percent.

As the fourth quarter began to wind down, franchise owners told Blue MauMau that they were aware that IHOP same-store sales figures were higher. Franchisees collaborated with their franchisor to strategize a more robust growth, and in the final quarter of 2013, ending December 25, Denny's came in with a slightly higher increase — 0.8 percent in domestic franchise same-restaurant sales and 1.5 percent at company-owned restaurants.

Denny's increases restaurants by 12 units

John Miller, Denny's chief executive officer, stated that 2013 was the chain's third consecutive year of positive same-store sales. "We have made great progress revitalizing the Denny's brand with improvements in food, service and atmosphere," he said. "Our comprehensive approach has enabled us to grow sales despite the challenging economic environment." He added, "We have demonstrated that our franchise-focused business provides financial stability and flexibility while enabling us to generate earnings growth and significant free cash flow."

In an earnings call to analysts last week, Miller mentioned that Denny's 1,700 restaurants had 274 franchise owners. "New franchisees continue to come into Denny's family, with 15 franchisees joining in 2013, leading to a net increase of 90 franchisees over the past two years," stated the CEO. "Over 40 percent of our franchisees are new to the system since 2007, when we launched our refranchising [converting company restaurants to franchise owned] strategy."

Chart: Blue MauMau / Data:The NPD Group

In the soft segment of mid-scale or family dining, Denny's managed to increase its number of restaurants by 12 units in 2013. The company forecasts the chain to grow in 2014 by a net of 5 to 15 restaurants. In its unaudited income statement, Denny's declared an adjusted EBITDA of $19.4 million for 2013.

"We maintain a very high level of communication with franchisees, who remain heavily involved in many key strategic initiatives," said Miller. The CEO added that his company was trying to help franchisees remodel their stores. "We've worked with Direct Capital, a leading vendor to franchisees, to facilitate a $250 million loan pool for the heritage remodel program. Denny's will backstop up to 5 percent of the outstanding loans used under this program. This kind of support is one of the many ways Denny's stands out among other restaurant franchising competitors."

According to foodservice researcher The NPD Group, fast casual is a restaurant segment that grew 8 percent in traffic in 2013. It's a sector that Denny's would like to be a player in. Compare fast casual's 9 percent growth in 2012 and 8 percent last year to zero growth or even negative traffic for restaurants and the family diner segment. Those growth numbers has caught Denny's attention, as well as just about everyone else. In a presentation to analysts by CEO Miller last month at the ICR Xchange in Orlando, he said that Denny's is experimenting with a fast casual concept.

Mark Kalinowski, restaurant equity analyst with Janney Montgomery Scott, seems to reference those downward trends in this restaurant segment. He notes that there are "challenging fundamentals within the family dining sector" when it comes to Denny's and IHOP restaurant performance in 2014. Kalinowski estimates that in 2014 Denny's "will perform in line with comparable companies within its sector." He added, "Denny's targets company-owned same-store sales of +1.5% to +2.5% for 2014. For the franchised side of the business – roughly 90% of the store base is franchised – the domestic same-store sales target for 2014 is 1% to 2%."


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