Denny's reports Q2 net earnings of US$6.2M, up 34.7% from year-ago period as franchise and license revenue rises 0.7% to US$33.7M

Nevin Barich

SPARTANBURG, South Carolina , July 29, 2013 (press release) – Adjusted Net Income Per Share* Increased 20.7% to $0.08

Denny's Corporation (DENN), franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its second quarter ended June 26, 2013.

Second Quarter Summary

System-wide same-store sales increased 0.6%, comprised of a 0.7% increase at domestic franchised restaurants and a 0.5% decrease at company restaurants.

Net Income of $6.2 million, or $0.07 per diluted share, grew 34.7% compared with the prior year quarter Net Income of $4.6 million, or $0.05 per diluted share.

Adjusted Net Income per Share* of $0.08 grew 20.7% compared with the prior year quarter Adjusted Net Income per Share* of $0.07. Adjusted Net Income* excludes debt refinancing charges, impairment charges and gains on sales of assets and other. Please see the tables in the Appendix for a reconciliation of Adjusted Net Income*.

Generated $11.1 million of Free Cash Flow* primarily used to repurchase 1.7 million shares for $9.4 million.

Acquired one franchised restaurant located in the Miami market and two parcels of real estate for a total of $3.2 million.

Opened 11 new franchised restaurants and closed ten franchised restaurants bringing total restaurant count to 1,690.

Opened newest international location at the Monterrey International Airport in Apodaca, Mexico which marks the first new location opened in Mexico in over 5 years.

John Miller, President and Chief Executive Officer, stated, "We delivered another quarter of solid results as we grew both our system-wide same-store sales and Adjusted Net Income per Share*. Our efforts to revitalize Denny's image, while increasing the growth of the Denny's brand and growing profitability and Free Cash Flow*, are taking hold as we continue to execute against our three key objectives. We believe that by leveraging our primarily franchise-focused business model and effectively allocating capital between reinvestments in the brand and returning cash to shareholders, we can provide attractive long-term shareholder returns."

Second Quarter Results

For the second quarter of 2013, franchise and license revenue increased 0.7% to $33.7 million compared with $33.5 million in the prior year quarter. The $0.2 million increase in franchise revenue was primarily driven by a $0.5 million increase in royalties and $0.3 million increase in occupancy revenue primarily driven by 32 additional equivalent franchised restaurants. The increase was partially offset by a $0.6 million decrease in initial fee revenue from refranchising 17 restaurants in the prior year quarter. Company restaurant sales were $82.8 million reflecting a decline of $8.4 million due to 24 fewer equivalent company restaurants, which reflects the impact of selling company restaurants to franchisees as part of the
Company's refranchising strategy that was completed at the end of 2012.

Denny's opened 11 new franchised restaurants in the second quarter of this year and closed ten franchised restaurants bringing the total restaurant count to 1,690. Franchise operating margin of $22.1 million was flat to the prior year. Franchise operating margin (as a percentage of franchise and license revenue) was 65.7%, a decrease of 0.3 percentage points. The decrease was primarily due to the lower initial fee revenue noted above, partially offset by the increases in royalties and occupancy margin.

Company restaurant operating margin was $11.4 million, a decrease of $2.1 million, primarily due to the impact of selling company restaurants to franchisees. Company restaurant operating margin (as a percentage of company restaurant sales) was 13.7%. The 1.1 percentage point decrease was primarily driven by higher product costs and unfavorable workers' compensation claims development compared to the prior year quarter. These increases were partially offset by lower payroll and benefits costs and lower occupancy costs.

Total general and administrative expenses decreased by $0.7 million to $14.1 million in the quarter. Depreciation and amortization expense decreased by $0.5 million primarily as a result of the sale of company restaurants in 2012. Net operating gains, losses and other charges, which include restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $5.5 million in the quarter. This decrease was primarily due to gains on the sale of company restaurants to franchisees in the prior year quarter.

Interest expense was $2.5 million as a result of a $27.8 million reduction in total gross debt over the last 12 months and lower interest rates under the Company's refinanced credit facility. In the second quarter, the provision for income taxes was $2.5 million, reflecting an effective tax rate of 29.0%. Due to the use of net operating loss and tax credit carryforwards, the Company only paid $1.0 million in cash taxes in the second quarter.

Denny's second quarter net income of $6.2 million, or $0.07 per diluted share, grew 34.7% compared to prior year quarter net income of $4.6 million, or $0.05 per diluted share. Net income was impacted by the refinancing of its credit facility which resulted in a charge to other nonoperating expense of $1.2 million in the second quarter of 2013 and $7.9 million in the prior year quarter. Adjusted Net Income* of $7.6 million, or $0.08 per diluted share, grew 16.0% compared to Adjusted Net Income* of $6.5 million, or $0.07 per diluted share, in the prior year quarter.

Denny's generated $11.1 million of Free Cash Flow* in the second quarter, a portion of which was used to repurchase 1,665,517 shares for $9.4 million. Since initiating its share repurchase strategy in November 2010, the Company has used $59.0 million to repurchase 13.5 million shares through June 26, 2013. As of June 26, 2013, the Company had 11.5 million shares remaining in its current authorized share repurchase initiative. In addition, Denny's ended the second quarter with $176.6 million of total debt outstanding including $97.5 million of borrowings under the revolving line of credit and $59.3 million of term loan debt outstanding.

Business Outlook

The Company continues to successfully execute against its key objectives implemented to strengthen and grow its position as one of the largest American full-service restaurant brands. These include:

Revitalize Denny's image with its "America's Diner" positioning.

Increase the growth of the Denny's brand both domestically and internationally.

Grow profitability and Free Cash Flow* through a primarily franchise-focused business model that balances reinvesting in the brand, returning cash to shareholders, and reducing outstanding debt.

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, concluded, "Our second quarter performance demonstrates the strength of our franchise-focused business model which generates solid Free Cash Flow*. With our new, more flexible, credit facility, we will continue to execute our balanced capital allocation strategy as we invest in growing and strengthening the brand, while returning cash to shareholders through our ongoing share repurchase program."

The following full year 2013 estimates are based on management's expectations at this time.

System-wide same-store sales growth between 0% and 1.0%.

New restaurant openings (all franchised) between 40 and 45 restaurants with net restaurant growth between 5 and 10 restaurants.

Total G&A, including share-based compensation, between $58 million and $60 million.

Adjusted EBITDA* at the lower end of initial guidance range of $76 million to $80 million.

Cash capital expenditures between $20 million and $22 million, including approximately 20 remodels at company restaurants and the acquisition of two franchised restaurants and two parcels of real estate for a total of approximately $4.0 million.

Depreciation and amortization between $20.5 million and $21.5 million.

Net interest expense between $9.5 million and $10.5 million with net cash interest expense between $8.0 million and $9.0 million.

Cash taxes between $2.5 million and $3.5 million with income tax rate between 34% and 36%.

Free Cash Flow* between $43 million and $46 million.

* Please refer to the historical reconciliation of net income to Adjusted Net Income, Adjusted Net Income Per Share, Adjusted EBITDA, and Free Cash Flow included in the tables below.
Conference Call and Webcast Information

Denny's will provide further commentary on the results for the second quarter 2013 on its quarterly investor conference call today, Monday, July 29, 2013 at 4:30 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 investor.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.

About Denny's

Denny's is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on number of restaurants. Denny's currently has 1,690 franchised, licensed, and company restaurants around the world with combined sales of $2.5 billion including 1,592 restaurants in the United States and 98 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic and New Zealand. As of June 26, 2013, 1,525 of Denny's restaurants were franchised and 165 restaurants were company operated. 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 at investor.dennys.com.

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