Denny's reports Q4 net earnings of US$4.3M, down 34.2% from year-ago period as company restaurant sales fall 0.7% to US$81.1M due to six fewer equivalent company restaurants

Nevin Barich

SPARTANBURG, South Carolina , February 19, 2014 (press release) – - Achieved Third Consecutive Year of Positive System-Wide Same-Store Sales -

- 2013 Full Year Adjusted Net Income Per Share* Increased 21.0% to $0.31 -

Denny's Corporation (Nasdaq:DENN), franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its fourth quarter and full year ended December 25, 2013.

Fourth Quarter Summary

Domestic system-wide same-store sales increased 0.9%, comprised of a 0.8% increase at domestic franchised restaurants and a 1.5% increase at company restaurants.
Opened 19 franchised restaurants bringing total number of restaurants to 1,700.
Adjusted EBITDA* of $19.4 million, or 17.0% of total operating revenue, increased $1.7 million compared with the prior year.
Adjusted Net Income per Share* of $0.08 increased 18.7% compared with the prior year quarter Adjusted Net Income per Share* of $0.07.
Net Income, on a GAAP basis, was $4.3 million, or $0.05 per diluted share, including $4.9 million of non-cash impairment expense.
Generated $8.9 million of Free Cash Flow* primarily used to repurchase 0.5 million shares and complete 16 Heritage remodels at company restaurants.
Full Year Summary

Domestic system-wide same-store sales increased 0.5%, comprised of a 0.6% increase at domestic franchised restaurants and flat same-store sales at company restaurants.
Opened 46 franchised restaurants, including five international locations and two non-traditional locations.
Adjusted Net Income per Share* of $0.31 increased 21.0% compared with the prior year quarter Adjusted Net Income per Share* of $0.26.
Net Income, on a GAAP basis, increased by 10.1% to $24.6 million, or $0.26 per diluted share, compared with the prior year Net Income of $22.3 million, or $0.23 per diluted share.
Generated $44.2 million of Free Cash Flow* primarily used to repurchase 4.2 million shares for $24.7 million and reduce outstanding debt by $17.1 million.
* Adjusted Net Income excludes debt refinancing charges, impairment charges and gains on sales of assets and other. 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 following tables.

John Miller, President and Chief Executive Officer, stated, "We delivered another quarter of same-store sales growth, marking our third consecutive year of positive same-store sales. We have made great progress revitalizing the Denny's brand with improvements in food, service and atmosphere. Our comprehensive approach has enabled us to grow sales despite the challenging economic environment. We are successfully expanding Denny's geographic presence in the U.S. and abroad, which now includes 101 restaurants in international locations. In addition, we have demonstrated that our franchise-focused business provides financial stability and flexibility while enabling us to generate earnings growth and significant free cash flow."

Fourth Quarter Results

For the fourth quarter of 2013, franchise and license revenue was $33.2 million compared with $34.2 million in the prior year quarter. Franchise and license revenue was primarily affected by decreases in both occupancy revenue and initial fees, which were partially offset by a $0.3 million increase in royalties from seven additional equivalent franchised restaurants. Company restaurant sales were $81.1 million compared with $81.7 million due to six 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 19 franchised restaurants in the fourth quarter of this year and closed five system restaurants (four franchised and one company) bringing the total restaurant count to 1,700, comprised of 163 company restaurants and 1,537 franchised restaurants.

Franchise operating margin of $21.6 million decreased by $0.7 million primarily due to decreases in occupancy margin and initial fee revenue. Franchise operating margin (as a percentage of franchise and license revenue) of 65.3% increased 0.1 percentage point.

Company restaurant operating margin of $11.2 million, or 13.8% of company restaurant sales, increased $0.2 million, or 0.3 percentage point. The 0.3 percentage point increase was primarily driven by decreases in other operating costs and occupancy costs, which were partially offset by increases in product costs and payroll and benefits costs. The increase in payroll and benefits costs included $0.4 million, or 0.5 percentage points, of unfavorable workers' compensation claims development compared to the prior year quarter.

Total general and administrative expenses improved by $1.3 million to $13.9 million in the quarter. Depreciation and amortization expense of $5.7 million increased $0.6 million compared to the prior year quarter, primarily as a result of remodeling 26 company restaurants during the last 12 months. Net operating gains, losses and other charges, which include restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, increased $4.0 million in the quarter. The increase was primarily driven by $4.9 million of non-cash impairment charges in the fourth quarter of 2013.

Interest expense improved $0.4 million to $2.5 million as a result of a $17.1 million reduction in total debt over the last 12 months and lower interest rates under the Company's refinanced credit facility. In the fourth quarter, the provision for income taxes was $1.1 million, reflecting an effective tax rate of 20.6% and annual tax rate of 31.9%. Due to the use of net operating loss and tax credit carryforwards, the Company paid $0.9 million in cash taxes in the fourth quarter and $2.8 million in cash taxes for the full year 2013.

Denny's fourth quarter net income of $4.3 million, or $0.05 per diluted share, decreased 34.2% compared to prior year quarter net income of $6.5 million, or $0.07 per diluted share. Adjusted Net Income* of $7.6 million, or $0.08 per diluted share, increased 13.6% compared with Adjusted Net Income* of $6.7 million, or $0.07 per diluted share, in the prior year quarter.

Denny's generated $8.9 million of Free Cash Flow* in the fourth quarter, a portion of which was used to repurchase 0.5 million shares for $3.1 million. Since initiating its share repurchase strategy in November 2010, the Company has used $72.3 million to repurchase 15.8 million shares through December 25, 2013. As of December 25, 2013, the Company had 9.2 million shares remaining in its current authorized share repurchase initiative. In addition, Denny's ended the fourth quarter with $173.1 million of total debt outstanding, including $95.3 million of borrowings under the revolving line of credit and $57.8 million of term loan debt outstanding.

Business Outlook

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, commented, "We generated solid results in 2013, growing Adjusted Net Income per Share* by 21% while generating $44 million of Free Cash Flow* after capital investments. The Free Cash Flow* we generate demonstrates the strength of our franchise-focused business, which continues to provide us with the ability to reinvest in the brand and return value to shareholders through our ongoing share repurchase program."

Key considerations impacting the Company's outlook for 2014 include:

2014 will include 53 operating weeks (14 in the fourth quarter) compared to 52 operating weeks in 2013.
The highest volume company operated restaurant located on the Las Vegas Strip is closed for reconstruction and expected to reopen in early 2015. The landlord is redeveloping the location to include a completely rebuilt Denny's restaurant to be funded by the landlord. In 2013, this restaurant generated $7.9 million of sales and $2.9 million of pre-tax operating income.
The following full year 2014 estimates are based on management's expectations at this time.

Company same-store sales growth between 1.5% and 2.5% and domestic franchised same-store sales growth between 1% and 2%.
New restaurant openings between 45 and 50 franchised restaurants with net restaurant growth between 5 and 15 restaurants.
Total G&A expenses, including share-based compensation, between $57 million and $59 million.
Adjusted EBITDA* between $77 million and $79 million.
Cash capital expenditures between $20 million and $22 million, including approximately 40 Heritage remodels at company restaurants.
Depreciation and amortization expense between $20.5 million and $21.5 million.
Net interest expense between $9.0 million and $9.5 million.
Effective income tax rate between 34% and 38%.
Free Cash Flow* between $44 million and $47 million.
* Adjusted Net Income excludes debt refinancing charges, impairment charges and gains on sales of assets and other. 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 following tables.

Conference Call and Webcast Information

Denny's will provide further commentary on the results for the fourth quarter and full year ended December 25, 2013 on its quarterly investor conference call today, Wednesday, February 19, 2014 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 the number of restaurants. Denny's currently has 1,700 franchised, licensed, and company restaurants around the world with combined sales of $2.5 billion including 1,599 restaurants in the United States and 101 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic, El Salvador, Chile and New Zealand. As of December 25, 2013, 1,537 of Denny's restaurants were franchised and 163 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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