Denny’s Corporation (DENN), America’s largest full-service family restaurant chain, recently reported fourth-quarter 2010 earnings of 3 cents per share, missing the Zacks Consensus Estimate of 8 cents and 18 cents in the prior-year quarter. The company reported results lower than expectations due to a drop in revenue and margin contraction.
Total revenue declined 3.3% year over year to $135.9 million and was also below the Zacks Consensus Estimate of $141.0 million.
For full fiscal 2010, earnings per share were 22 cents, down from 42 cents reported in 2009, while total revenue plunged to $548.5 million from $608.1 million recorded in the prior year.
Performance Highlights
During the quarter, sales at company-operated restaurants plunged 7.0% from the year-earlier quarter to $103.7 million mainly due to the sale of some company-owned restaurants to franchisees under the Franchise Growth Initiative (FGI) program.
Franchise and license revenue spiked 10.4% to $32.2 million due to a rise in revenues from franchise fees and royalties by a respective $1.5 million and $1.4 million.
Same-store sales fell 1.6% at company-operated units and 1.4% at franchised units. Same-store guest counts dipped 0.2%, due to adverse weather conditions across the United States.
Company-operated restaurants’ operating margin dropped 400 basis points (bps) to 12.3%, while franchise operating margin fell by 30 bps to 64.3%. Margins were hurt by higher costs.
Store Update
During the quarter, Denny’s franchisees opened 44 new restaurants, and the company also opened 14 company owned restaurants. At the end of the year, there were 232 company-owned and 1,426 franchised and licensed restaurants.
Financial Position
Denny’s ended the year with cash and cash equivalents of $29.1 million and shareholders’ deficit of $103.7 million. During the quarter, company repurchased 1 million shares and refinanced $300 million debt to a lower cost facility.
Outlook
In 2011, Denny’s expects both company-operated and franchised same-store sales outlook in the range of negative 2% to positive 1%, with first quarter 2011 comparable restaurants sales to be the lowest in the year. Denny plans to open 70-75 new restaurants in 2011.
Our Take
Though the economy is showing signs of improvement, Denny’s is cautiously optimistic regarding positive same-store sales for fiscal 2011, thus we expect estimates to decrease in the coming days.
One of Denny’s primary competitors, Cracker Barrel Old Country Store, Inc. (CBRL), will announce its fourth quarter results on February 22.
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