Denny's reports Q4 net earnings of US$92M, 2011 net earnings of US$112.3M, impacted by US$89M tax benefit from release of valuation allowance on certain deferred tax assets
SPARTANBURG, South Carolina
February 15, 2012
– Denny’s Corporation (NASDAQ: DENN), one of America’s largest full-service family restaurant chains, today reported results for its fourth quarter ended December 28, 2011.
Full Year Summary
* System-wide same-store sales grew 0.7% with a 0.7% increase at franchised units and a 0.8% increase at company-owned units marking the first time both franchise and company same-store sales have been positive since 2007.
* Opened 62 system-wide units, including 23 Flying J Travel Center conversion sites, five international units, and five university units.
* Franchise operating margin, as a percentage of franchise and license revenue, increased 2.7 percentage points to 65.0% compared with the prior year.
* Net income of $112.3 million, or $1.13 per diluted share, was impacted by an $89 million tax benefit from the release of a valuation allowance on certain deferred tax assets.
* Adjusted Income Before Taxes* grew 36.6% to $37.3 million compared with the prior year.
* Free Cash Flow* increased by $25.2 million to $47.6 million compared with the prior year.
* Re-priced credit facility, reduced outstanding term loan debt by $42 million to $198 million, and repurchased 5.7 million shares.
Fourth Quarter Summary
* System-wide same-store sales grew 1.6% with a 1.8% increase at franchised units and a 1.0% increase at company-owned units.
* Same-store guest counts increased 0.7% at company-owned units with two-year same-store guest counts of positive 0.5%.
* Opened 14 system-wide units, including one Flying J Travel Center conversion site and two units in Canada.
* Net income of $92.0 million, or $0.94 per diluted share, was impacted by an $89 million tax benefit from the release of a valuation allowance on certain deferred tax assets and $1.8 million in impairment expense.
* Adjusted Income Before Taxes* increased 86.3% to $9.5 million compared with the prior year quarter.
John Miller, President and Chief Executive Officer, stated, “In 2011 Denny’s made great progress as we generated positive same-store sales and guest counts overcoming the ongoing challenging consumer economic environment. This is a testament to the success of our positioning as America’s favorite diner, emphasizing everyday affordability with attractive Limited Time Only products. We are encouraged about the progress we have made thus far. We will continue to work closely with our franchisees to maintain the growth in new units, sales and profitability, while generating additional free cash flow to further strengthen our balance sheet and repurchase shares in our efforts to increase long-term shareholder value.”
Fourth Quarter Results
For the fourth quarter of 2011, Denny’s total operating revenue, including company restaurant sales and franchise revenue, was $130.2 million compared with $135.9 million in the prior year quarter. Company restaurant sales decreased $5.3 million due to 17 fewer equivalent company restaurants compared with the prior year quarter, partially offset by the increase in same-store sales for the quarter.
Company restaurant operating margin (as a percentage of company restaurant sales) was 12.8%, an increase of 0.5 percentage points compared with the prior year quarter. The increase was primarily driven by lower payroll and benefit costs, partially offset by increases in occupancy expense, and other operating costs compared to the prior year quarter.
Franchise and license revenue was $31.8 million compared with $32.2 million in the prior year quarter. Franchise revenue was impacted by a $1.7 million decrease in initial and other fee revenue associated with opening 36 Flying J conversion units in the prior year quarter. This decrease was partially offset by a $1.0 million increase in royalties due to 61 additional equivalent franchise restaurants and the effects of higher same-store sales. Denny’s franchisees opened 14 new units in the fourth quarter of this year, including one Flying J Travel Center conversion site and two units in Canada. During the quarter, Denny’s franchisees closed six restaurants and purchased 17 company restaurants.
Franchise operating margin increased $0.2 million to $20.9 million primarily due to the increases in franchise royalties and occupancy margin and decrease in direct franchise costs, which were partially offset by the decrease in initial and other fee revenue. Franchise operating margin, as a percentage of franchise and license revenue, was 65.5%, an increase of 1.2 percentage points compared with the prior year quarter.
Total general and administrative expenses decreased $1.3 million compared with the prior year quarter primarily due to a reduction in performance-based compensation expenses.
Depreciation and amortization expense decreased by $1.1 million compared with the prior year quarter, primarily as a result of the sales of restaurants over the past two years. Net operating gains, losses and other charges, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $4.6 million in the quarter. The decrease was primarily the result of lower gains on the sale of assets and impairment charges related to underperforming units.
Interest expense decreased $1.8 million, or 28%, to $4.7 million as a result of lower interest rates under our re-priced credit facility and a $41.5 million reduction in total gross debt over the last 12 months.
In the fourth quarter, we recorded an $89 million net deferred tax benefit from the release of a substantial portion of the valuation allowance on certain deferred tax assets. This release is primarily based on our improved historical and projected pre-tax income. We paid $1.1 million in cash taxes in 2011, which were reduced by the utilization of certain net operating loss carryforwards. We will continue to utilize additional net operating losses and income tax credit carryforwards to eliminate the majority of our cash taxes for the next several years.
Denny’s net income was $92.0 million, or $0.94 per diluted share, compared with the prior year quarter net income of $2.7 million, or $0.03 per diluted share. Adjusted Income Before Taxes*, Denny’s metric for earnings guidance, increased 86.3% to $9.5 million compared with the prior year quarter adjusted income of $5.1 million.
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, “We are pleased that we have been able to drive significant improvements in our business. These improvements are reflected in our results, specifically the increases in profitability and same-store sales. Our franchise focused business model has enabled us to continue to strengthen our balance sheet giving us more flexibility to support our franchise-focused growth and return value to shareholders. We anticipate building upon our momentum by further driving franchise revenue growth through new units and increased same-store sales, which will enable us to deliver increased profitability and free cash flow.”
Denny’s will provide further commentary on the results for the fourth quarter of 2011 on its quarterly investor conference call today, Wednesday, February 15, 2012 at 5:00 p.m. ET. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny’s website at ir.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.
Denny's is one of America's largest full-service family restaurant chains, currently operating more than 1,680 franchised, licensed, and company-owned restaurants across the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Puerto Rico and New Zealand. For further information on Denny's, including news releases, links to SEC filings and other financial information, please visit the Denny's investor relations website.
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