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DineEquity and Denny’s Report Yummy Third Quarter

Denny's

SPARTANBURG, S.C. and GLENDALE, Calif. –Denny's Corporation (NASDAQ:DENN) and competitor IHOP this week announced a virtual tie for the third quarter of 2014 in the race for higher same-restaurant sales, outperforming other major brands in the family dining sector. Both Denny's and IHOP's systemwide same-restaurant sales in the United States grew by 2.4 percent.

Restaurant unit economist John Gordon observes that the same-restaurant sales race between these two family dining giants has been interesting to watch. "At times Denny's was ahead, then IHOP. Both seem to be in approximate balance now," states the San Diego-based consultant.

IHOP is one of two franchise chains under holding company DineEquity Inc. (NYSE:DIN). The other is Applebee's. Applebee's restaurants reversed a downtrend to achieve 1.7 percent growth in the quarter for same-restaurant sales.

Domestic Denny's restaurants continue to accelerate same-store sales, which grew during the third quarter at 2.1 percent, while the chain's 160 company-operated stores experienced a grand slam of 4.1 percent, which is the strongest rise in company-store comparable sales in two and a half years. It should be noted that as Denny's ratio of company-owned restaurants to franchises fall from 33 percent to 10 percent, better comparable same-restaurant sales for company stores will likely emerge.

Gordon thinks that family dining has been given something of a reprieve because of lowering gasoline prices in the last three quarters or longer. Family dining has experienced a long-term drop in customer visits. Yet traffic for Denny's company-owned restaurants increased. The founder of Pacific Management Consulting Group thinks that although visits to family diners are slightly down, both IHOP and Denny's were able to increase average tickets by engineering their menus. "Denny's tweaked the 2,4,6,8 value meals while IHOP redesigned the menu optics [to highlight higher priced items]," says Gordon.

Denny's Corporation reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $20.6 million, an increase of $1.4 million over the same quarter last year.

Stronger same-store sales for end of year

Gordon is hearing that Denny's is increasing its remodels, particularly company-owned restaurants. "My research indicates a remodeled Denny's restaurant is getting a sales lift from 4 to 6 percent," says Gordon. "That is okay but not spectacular." He adds, "It needs to be done anyway."

"We are positioned to achieve the highest annual same-store sales growth for the brand in the last eight years," said Denny's president and CEO John Miller. "We're also on track to achieve the highest annual same-store sales growth for our company restaurants in the last 10 years."

On the development side, the 61-year-old Denny's chain of 1,689 restaurants aims to grow its network by 5 to 15 restaurants this year. It will be a reach to match its 1,700 units at the end of 2013.

"I actually see this as a plus. It is a form of transformation," says Gordon. He notes that for an old family dining brand this level of development can be expected. But in analyzing the same-store lift, the analyst points out: "All Denny's are open 24 hours while some IHOP restaurants close at night." Denny's has a slightly harder task in lifting same-store sales and store profitability during quiet early morning hours. Yet, it has been able to match IHOP. "That's pretty good," comments Gordon.

Competitor DineEquity raised its financial performance outlook for 2014, lifting its guidance for IHOP's domestic systemwide same-restaurant sales by more than 100 basis points to range between a positive 2.5 - 3.5 percent.

The 56-year-old IHOP network grew by 44 units since the same quarter last year to 1,637 restaurants. It expects to add another 8 - 10 restaurants by the end of the year.

"IHOP continues to significantly outperform the family dining segment based on industry sales and traffic data, which is a testament to the hard work and dedication of both our brand team and our franchisees," said DineEquity chairman, CEO and interim president of the IHOP Business Unit, Julia Stewart. She says that both traffic and sales were up for IHOP restaurants.

DineEquity is shopping for a third brand

Stewart commented to investors during the firm's earnings conference call that DineEquity is looking to invest in another brand. "Our eager-to-develop franchisees and our core competency in franchising convinced us that another concept can help drive long-term growth and leverage our G&A [general and administrative expenses]."

Gordon thinks starting a new brand gives opportunities for franchisees in mature brands to develop and grow. "This is now a clear trend," says Gordon, citing how Chipotle Mexican Grill has started ShopHouse Southeast Asian Grill. Buffalo Wild Wings Grill & Bar has recently made a major investment in Rusty Taco.

DineEquity's CEO clarifies what sort of restaurant concept it is looking for. "An ideal strategic fix would be an emerging concept with a potential for domestic and international expansion," says Stewart. "Additionally, it would not compete directly with our existing brands and would need to be a very attractive development opportunity for our current franchisees."


Noe: Some executive quotations are from each company's written earnings call transcript on SeekingAlpha.com.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.