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Denny’s Outperforms Expectations, Franchisees Have Strong Second Quarter

Denny’s Corporation (NASDAQ:DENN), an operator and franchisor over a chain of 1,724 restaurants, reported on Tuesday a strong performance for its second quarter, which ended June 28, 2017. Those rising numbers are set against a general decline in traffic of nearly 4 percent in the casual dining sector, according to foodservice researcher The NPD Group. But where casual dining has had a steady erosion of restaurant comparable sales and traffic, Denny’s has bucked the downward trend in a big way.

Denny’s same-restaurant sales in the United States increased 2.6 percent. Its U.S. company-owned restaurants grew by 2.7 percent, while domestic franchised restaurants rose in same-restaurant sales by 2.6 percent compared to the same period in 2016.

Denny’s tends to own larger and more established restaurants. With a 10-percent share of the system’s restaurants, its 172 company-owned restaurants earned average unit sales for the quarter of $576,000.

“We remain committed to our 90-percent franchised business model,” affirmed John Miller, Denny’s president and CEO during an earnings call* to stock analysts yesterday. He also stated that 58 percent of the restaurants in the chain had remodeled to a more modern image that was the brand’s new standard. “We expect 75 percent of the system to be remodeled by the end of 2018.”

Denny's Q2 2017 results for its franchiseesThe chain’s 1,552 franchisee-owned restaurants pulled in $400,000 in average unit volume for the second quarter, up $10,000 from the same time in 2016.

Royalty rates are now on average 4.14 percent, but Miller expects these fees from franchisees to increase to 4.5 percent. He didn’t say by when.

Restaurant analyst for Nomura Securities, Mark Kalinowski, has long noted that casual dining is a tough section of the restaurant business. Early this morning he noted that Denny’s was against an additional headwind of rising pork costs and minimum wage increases. However, those rising restaurant costs were offset by better-than-expected administrative cost cuts and increased revenues for the corporation. Writing to shareholders, the analyst cautioned that company-owned restaurant margins would be slightly less than expected for the full year, at a margin of 17.5 percent versus 18 percent. He also was concerned about the unanticipated loss of franchises in the chain and the subsequent lowering of its growth in franchises.

“Denny's also lowered its target range for net new restaurants for the full-year 2017 to 5-15, the previous target range had been 10-20,” wrote Kalinowski. “Management cited the unanticipated closing of eight franchised restaurants during the second quarter for the lowered target range.”

Operating margins for Denny’s company-owned restaurants grew 1.7 percent to $16.7 million. The franchisor’s operating margins, which are derived from franchise fees for consulting and supporting franchised restaurants, were up 1.8 percent to $24.8 million.

Denny's chief executive officer mentioned that guest visits were increasing and explained the fruits of that trend. “Our highly franchised business model, coupled with our efforts to further differentiate Denny’s as a relevant and compelling brand, continues to generate strong cash flows which support ongoing investments in Denny’s brand revitalization and company restaurants, and the return of capital to our shareholders," said Miller. "As we continue to successfully execute our brand revitalization strategy, we remain committed to further elevating the guest experience, consistently growing same-store sales, and expanding our global reach, leading to value creation for all franchisees and shareholders."


*Transcript provided by SeekingAlpha.com

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