The Battle of Denny's

The Battle of Denny's (DENN) continues and is heading to vote tally on May19th.

The last several weeks, we've seen dueling proxy advisory committee opinions, dueling franchisee association opinions, dueling news releases about comps and articles from the founder's daughter supporting change. For a so called "zombie brand" a lot of heat is being generated. 

As we noted earlier in May on Blue MauMau, DENN went through M&A hell in the late 1980s and through 2004. They lost 15 years plus due to multiple owners, debt and conglomerates. Certainly DENN is underperforming--traffic, unit EBITDA, number of units, market share. Unit count and EBITDA per open company store is down.

As greatly debated between the parties, free cash flow is negative cumulatively since 2001, or improved from 2001 vs. 2004 if you examine the 2006-2009 time frame. But Denny's had $32.8M, $15.2M and $12.5 M in gains posted to the P&L in 2007/2008/2009. That is NOT a recurring source of funds. Once you totally refranchise, that is it.

DENN's position to IHOP/DINE and comps sales trend versus IHOP is not now a meaningful point.The fix has to be longer term. more structural, more strategic than what either party is now posing: either refranchsing (the DENN headline tactic) or changing the board and firing the CEO (dissidents headline tactic).

Should this brand still be around? is there a better berth for it other than in the publicly traded world? Can the franchisees help and run it better? Could any PE firms provide the capital and patience to get the chain reformulated?  Whats the real long term plan?

About the author: John A. Gordon, Chain Restaurant Earnings and Economics Experts, Pacific Management Consulting Group

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