SPARTANBURG, S.C. - Oct. 28, 2013 // GLOBE NEWSWIRE // - Denny's Corporation (Nasdaq:DENN), franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its third quarter ended September 25, 2013.
John Miller, President and Chief Executive Officer, stated, "We achieved our ninth quarter of positive system-wide same-store sales in the past ten quarters, as our focus on delivering both everyday value and new product offerings is continuing to resonate with the consumer. This approach has enabled us to grow sales despite the challenging economic environment. In addition, the ongoing and successful expansion of Denny's global footprint was marked by our recent openings, bringing our total number of international locations to 100. We continue to focus on successfully executing against our key objectives which include growing sales through our 'America's Diner' positioning, increasing the growth of the Denny's brand domestically and internationally, and growing profitability and Free Cash Flow* through our franchise-focused business."
For the third quarter of 2013, franchise and license revenue was $33.9 million compared with $34.4 million in the prior year quarter. The 1.4% decrease in franchise and license revenue was primarily due to decreases in both occupancy revenue and initial fees. The decrease was partially offset by a $0.4 million increase in royalties from nine additional equivalent franchised restaurants. Company restaurant sales were $83.4 million due to 12 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 nine new franchised restaurants in the third quarter of this year and closed 13 franchised restaurants bringing the total restaurant count to 1,686. In addition, the Company sold two company restaurants to a franchisee and acquired one franchised restaurant bringing the total company restaurant count to 164 and total franchised restaurant count to 1,522.
Franchise operating margin of $22.3 million was approximately equal to the prior year. Franchise operating margin (as a percentage of franchise and license revenue) of 65.8% increased 0.9 percentage points primarily due to an increase in the royalty and licensing margin.
Company restaurant operating margin was $10.3 million, or 12.3% of company restaurant sales, down from 14.7% in the third quarter of 2012. The 2.4 percentage point decrease was primarily driven by increases in product costs, payroll and benefits costs and other operating costs. The increase in payroll and benefits costs included $0.2 million, or 0.3 percentage points, of unfavorable workers' compensation claims development compared to the prior year quarter. This increase was driven by $1.5 million of unfavorable workers' compensation claims development in the current quarter and $1.3 million of unfavorable workers' compensation claims development in the third quarter of 2012.
Total general and administrative expenses improved by $1.0 million to $13.7 million in the quarter. Net operating gains, losses and other charges, which include restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, totaled $0.2 million in the quarter.
Interest expense decreased $0.6 million to $2.5 million as a result of a $21.2 million reduction in total debt over the last 12 months and lower interest rates under the Company's refinanced credit facility. In the third quarter, the provision for income taxes was $4.3 million, reflecting an effective tax rate of 38.0%. Due to the use of net operating loss and tax credit carryforwards, the Company only paid $0.5 million in cash taxes in the third quarter.
Denny's third quarter net income of $7.0 million, or $0.08 per diluted share, grew 31.1% compared to prior year quarter net income of $5.4 million, or $0.06 per diluted share. Adjusted Net Income* of $7.0 million, or $0.08 per diluted share, was flat to prior year Adjusted Net Income* of $7.0 million, or $0.07 per diluted share, in the prior year quarter.
Denny's generated $11.6 million of Free Cash Flow* in the third quarter, a portion of which was used to repurchase 1,781,040 shares for $10.2 million. Since initiating its share repurchase strategy in November 2010, the Company has used $69.2 million to repurchase 15.3 million shares through September 25, 2013. As of September 25, 2013, the Company had 9.7 million shares remaining in its current authorized share repurchase initiative. In addition, Denny's ended the third quarter with $175.3 million of total debt outstanding including $97.0 million of borrowings under the revolving line of credit and $58.5 million of term loan debt outstanding.
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, commented, "In the third quarter, the Free Cash Flow* we generated after capital investments demonstrates the strength of our franchise-focused business. Our team's execution, together with a balanced capital allocation strategy, continues to provide us with the ability to reinvest in the brand and return value to shareholders through our share repurchase program."
Based on year-to-date results and management's expectations at this time, Denny's is updating its expectations for certain elements (New Restaurant Openings, Net Restaurant Growth and Total G&A) of its estimates for full year 2013.
* 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.
Denny's will provide further commentary on the results for the third quarter 2013 on its quarterly investor conference call today, Monday, October 28, 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.
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 1,686 franchised, licensed, and company restaurants around the world with combined sales of $2.5 billion including 1,586 restaurants in the United States and 100 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic, El Salvador, Chile and New Zealand. As of September 25, 2013, 1,522 of Denny's restaurants were franchised and 164 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.
The Company urges caution in considering its current trends and any outlook on earnings disclosed in this press release. In addition, certain matters discussed in this release may constitute forward-looking statements. These forward-looking statements, which reflect its best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny's Corporation, its subsidiaries and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as "expects", "anticipates", "believes", "intends", "plans", "hopes", and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the competitive pressures from within the restaurant industry; the level of success of the Company's strategic and operating initiatives, advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company's SEC reports and other filings, including but not limited to the discussion in Management's Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company's Annual Report on Form 10-K for the year ended December 26, 2012 (and in the Company's subsequent quarterly reports on Form 10-Q).
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