Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DENN > SEC Filings for DENN > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for DENNYS CORP

Form 10-K for DENNYS CORP


10-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with "Selected Financial Data," and our Consolidated Financial Statements and the notes thereto.

Overview

Summary of Operations

Our fiscal year ends on the last Wednesday in December. As a result, a fifty-third week is added to a fiscal year every five or six years. 2013, 2012 and 2011 each included 52 weeks of operations. Fiscal 2014 ends December 31, 2014 and will include 53 weeks of operations.

Our revenues are derived primarily from two sources: the sale of food and beverages at our company restaurants and the collection of royalties and fees from restaurants operated by our franchisees under the Denny's name. Sales and customer traffic at both company operated and franchised restaurants are affected by the success of our marketing campaigns, new product introductions, customer service and menu pricing, as well as external factors including competition, economic conditions affecting consumer spending and changes in guest tastes and preferences. Sales at company restaurants and royalty income from franchised restaurants are also impacted by the opening of new restaurants, the closing of existing restaurants and the sale of company restaurants to franchisees.

Our operating costs are exposed to volatility in two main areas: product costs and payroll and benefit costs. Many of the products sold in our restaurants are affected by commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally outside of our control and are often unpredictable. In general, we purchase food products based on market prices or we set firm prices in purchase agreements with our vendors. Our ability to lock in prices on certain key commodities is imperative to control food costs in an environment in which many commodity prices are on the rise. In addition, our continued success with menu management helps us to offer menu items that provide a compelling value to our customers while maintaining consistent product costs and appropriate profitability. The volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses, such as medical benefit costs and workers' compensation costs. A number of our employees are paid the minimum wage. Accordingly, substantial increases in the minimum wage increase our labor costs. Additionally, changes in guest counts and investments in store-level labor impact payroll and benefit costs as a percentage of sales.

Impacts of Refranchising

During 2012, we completed our FGI program, a strategic initiative to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. A total of 380 company restaurants were sold under our FGI program, which began in early 2007. While we now consider the FGI program to be complete, we may, from time to time, continue to sell restaurants to franchisees where geographically and economically beneficial to the Company. Conversely, we may, from time to time, reacquire restaurants from franchisees if similar benefits exist.

Additionally, we currently have active development agreements for 272 new domestic restaurants, 170 of which have opened. The majority of the remaining restaurants in the development agreement pipeline are expected to open over the next five years. While the majority of the restaurants to be opened under these agreements are on schedule, from time to time some of our franchisees' ability to grow and meet their development commitments is hampered by the economy and the difficult lending environment.

As a result of the development efforts described above, over the past seven years we have transitioned from a restaurant portfolio mix of 66% franchised and 34% company operated to a restaurant portfolio mix of 90% franchised and 10% company operated at December 25, 2013. Now that we have achieved our mix target, we expect that our percentage of company operated restaurants will gradually decrease, as the majority of our future unit growth will be through franchised restaurants.


Specifically, our focus on refranchising has impacted our financial performance as follows:

Company restaurant sales have decreased from $411.6 million in 2011 to $328.3 million in 2013, primarily as a result of the sale of restaurants to franchisees.

The decline in company restaurant revenues is partially offset by increased royalty income derived from the growth in the franchised restaurant base resulting from both traditional development and the conversion of restaurants. As a result, royalty income, which is included as a component of franchise and license revenue, has increased from $79.2 million in 2011 to $85.5 million in 2013.

The resulting net reduction in total revenue related to our FGI program is generally recovered by the benefits of a lower cost structure related to franchise and license revenues, a decrease in depreciation and amortization (from $28.0 million in 2011 to $21.5 million in 2013) due to the sale of restaurant related assets to franchisees and lower ongoing capital expenditure requirements and a reduction in interest expense (from $20.0 million in 2011 to $10.3 million in 2013) resulting from the use of proceeds to reduce debt. See "Debt and Refinancing and Reductions" below.

Initial franchise fees, included as a component of franchise and license revenue, are generally recognized in the period in which a restaurant is sold to a franchisee or when a new unit is opened. These initial fees are completely dependent on the number of restaurants sold to or opened by franchisees during a particular period and, as a result, can cause fluctuations in our total franchise and license revenue from year to year.

Occupancy revenues, also included as a component of franchise and license revenue, result from leasing or subleasing restaurants to franchisees. As a result of our FGI program, occupancy revenues have increased from $44.5 million in 2011 to $47.1 million in 2013. Additionally, when restaurants are sold and leased or subleased to franchisees, the occupancy costs related to these restaurants move from costs of company restaurant sales to costs of franchise and license revenue to match the related occupancy revenue. As subleases with franchisees end over time, franchise occupancy revenue and costs could decrease if franchisees enter into direct leases with landlords.

Gains on sales of assets are primarily dependent on the number of restaurants sold to franchisees during a particular period, and as a result, can cause fluctuations in net income from year to year. With the completion of our FGI program, gains on sales of assets have decreased.

Debt Refinancing and Reductions

Over the past several years, we have continued to reduce interest expense through a series of debt refinancings and repayments using the proceeds generated from our FGI transactions, sales of real estate and cash flow from operations. These repayments resulted in an overall debt reduction of approximately $42 million in 2011, $28 million in 2012 and $17 million in 2013.

During the second quarter of 2013, we refinanced our credit facility (the "New Credit Facility") principally to take advantage of lower interest rates available in the senior secured debt market. Borrowings for the new term loan bear a tiered interest rate based on the Company's consolidated leverage ratio. Our interest rate was initially set at LIBOR plus 200 basis points. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Credit Facility."

The combination of lower debt balances and lower overall interest rates on our debt should continue to positively benefit our financial performance on an ongoing basis.

Share Repurchases

Our credit facility permits the payment of cash dividends and/or the purchase of Denny's stock subject to certain limitations. During 2013, we repurchased 4.2 million shares of Common Stock for $24.7 million. Since initiating our share repurchase programs in November 2010, we have repurchased a total of 15.8 million shares of Common Stock for $72.3 million. As of December 25, 2013, there are 9.2 million shares remaining to be repurchased under the current repurchase program. For more information see "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividends and Share Repurchases." Repurchased shares are included as treasury stock in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders' Equity.


Statements of Income

                                                           Fiscal Year Ended
                                  December 25, 2013         December 26, 2012        December 28, 2011
                                                         (Dollars in thousands)
Revenue:
Company restaurant sales       $   328,334      71.0 %   $   353,710      72.4 %   $ 411,595      76.4  %
Franchise and license revenue      134,259      29.0 %       134,653      27.6 %     126,939      23.6  %
Total operating revenue            462,593     100.0 %       488,363     100.0 %     538,534     100.0  %
Costs of company restaurant
sales (a):
Product costs                       85,540      26.1 %        88,473      25.0 %     101,796      24.7  %
Payroll and benefits               131,305      40.0 %       141,303      39.9 %     167,574      40.7  %
Occupancy                           21,519       6.6 %        23,405       6.6 %      27,372       6.7  %
Other operating expenses            45,192      13.8 %        49,025      13.9 %      61,017      14.8  %
Total costs of company
restaurant sales                   283,556      86.4 %       302,206      85.4 %     357,759      86.9  %
Costs of franchise and license
revenue (a)                         46,109      34.3 %        46,675      34.7 %      44,368      35.0  %
General and administrative
expenses                            56,835      12.3 %        60,307      12.3 %      55,352      10.3  %
Depreciation and amortization       21,501       4.6 %        22,304       4.6 %      27,979       5.2  %
Operating (gains), losses and
other charges, net                   7,071       1.5 %           482       0.1 %       2,102       0.4  %
Total operating costs and
expenses, net                      415,072      89.7 %       431,974      88.5 %     487,560      90.5  %
Operating income                    47,521      10.3 %        56,389      11.5 %      50,974       9.5  %
Interest expense, net               10,282       2.2 %        13,369       2.7 %      20,040       3.7  %
Other nonoperating expense,
net                                  1,139       0.2 %         7,926       1.6 %       2,607       0.5  %
Net income before income taxes      36,100       7.8 %        35,094       7.2 %      28,327       5.3  %
Provision for (benefit from)
income taxes                        11,528       2.5 %        12,785       2.6 %     (83,960 )   (15.6 )%
Net income                     $    24,572       5.3 %   $    22,309       4.6 %   $ 112,287      20.9  %

Other Data:
Company average unit sales     $     2,012               $     1,936               $   1,838
Franchise average unit sales   $     1,427               $     1,410               $   1,385
Company equivalent units (b)           163                       183                     224
Franchise equivalent units (b)       1,525                     1,501                   1,447
Company same-store sales
increase (c)(d)                        0.0   %                   0.2   %                 0.8   %
Domestic franchised same-store
sales
increase (c)(e)                        0.6   %                   1.7   %                 0.4   %

(a) Costs of company restaurant sales percentages are as a percentage of company restaurant sales. Costs of franchise and license revenue percentages are as a percentage of franchise and license revenue. All other percentages are as a percentage of total operating revenue.

(b) Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.

(c) Same-store sales include sales from restaurants that were open the same period in the prior year.

(d) Prior year amounts have not been restated for 2013 comparable restaurants.

(e) Prior year amounts have been restated to represent domestic franchised restaurants only.


2013 Compared with 2012

Unit Activity

                                                               Fiscal Year Ended
                                                    December 25, 2013      December 26, 2012
Company restaurants, beginning of period                      164                     206
Units opened                                                    -                       1
Units acquired from franchisees                                 2                       1
Units sold to franchisees                                      (2 )                   (36 )
Units closed                                                   (1 )                    (8 )
End of period                                                 163                     164

Franchised and licensed restaurants, beginning of
period                                                      1,524                   1,479
Units opened                                                   46                      39
Units purchased from Company                                    2                      36
Units acquired by Company                                      (2 )                    (1 )
Units closed                                                  (33 )                   (29 )
End of period                                               1,537                   1,524
Total restaurants, end of period                            1,700                   1,688

Company Restaurant Operations

During the year ended December 25, 2013, same-store sales remained essentially flat. Company restaurant sales decreased $25.4 million, or 7.2%, primarily resulting from a 20 equivalent unit decrease in company restaurants. The decrease in equivalent units reflects the impact of our refranchising program that was completed at the end of 2012.

Total costs of company restaurant sales as a percentage of company restaurant sales increased to 86.4% from 85.4%. Product costs increased to 26.1% from 25.0% primarily due to the unfavorable impact of product mix as well as increased commodity costs. Payroll and benefits increased slightly to 40.0% from 39.9%, as increased workers' compensation costs were partially offset by decreased labor costs. Occupancy costs remained constant at 6.6%. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

                                           Fiscal Year Ended
                             December 25, 2013           December 26, 2012
                                        (Dollars in thousands)
Utilities                $    13,051         4.0 %   $    14,358         4.1 %
Repairs and maintenance        5,943         1.8 %         6,259         1.8 %
Marketing                     11,696         3.6 %        13,397         3.8 %
Legal                            773         0.2 %           682         0.2 %
Other direct costs            13,729         4.2 %        14,329         4.1 %
Other operating expenses $    45,192        13.8 %   $    49,025        13.9 %


Franchise Operations

Franchise and license revenue and costs of franchise and license revenue were
comprised of the following amounts and percentages of franchise and license
revenue for the periods indicated:

                                                      Fiscal Year Ended
                                         December 25, 2013        December 26, 2012
                                                   (Dollars in thousands)
Royalties                              $    85,508     63.7 %   $    83,774     62.2 %
Initial fees                                 1,666      1.2 %         3,092      2.3 %
Occupancy revenue                           47,085     35.1 %        47,787     35.5 %
Franchise and license revenue          $   134,259    100.0 %   $   134,653    100.0 %

Occupancy costs                             34,631     25.8 %        35,401     26.3 %
Other direct costs                          11,478      8.5 %        11,274      8.4 %
Costs of franchise and license revenue $    46,109     34.3 %   $    46,675     34.7 %

Royalties increased by $1.7 million, or 2.1%, primarily resulting from a 24 equivalent unit increase in franchised and licensed restaurants and a 0.6% increase in domestic same-store sales as compared to the prior year. The increase in equivalent units primarily reflects the impact of our refranchising program that was completed at the end of 2012. Initial fees decreased by $1.4 million, or 46.1%, as fewer restaurants were sold to franchisees during the current year. The decrease in occupancy revenue of $0.7 million, or 1.5%, is primarily the result of lease expirations.

Costs of franchise and license revenue decreased by $0.6 million, or 1.2%. The decrease in occupancy costs of $0.8 million, or 2.2%, is primarily the result of lease expirations. Other direct costs increased by $0.2 million, or 1.8%. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 34.3% for the year ended December 25, 2013 from 34.7% for the year ended December 26, 2012.

Other Operating Costs and Expenses

Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.

General and administrative expenses are comprised of the following:

                                                       Fiscal Year Ended
                                           December 25, 2013      December 26, 2012
                                                        (In thousands)
Share-based compensation                  $             4,852    $             3,496
Other general and administrative expenses              51,983                 56,811
Total general and administrative expenses $            56,835    $            60,307

The $3.5 million decrease in general and administrative expenses is primarily the result of reductions in incentive compensation of $2.2 million, professional fees of $1.2 million and other general and administrative expense of $1.8 million. These reductions were partially offset by an increase in share-based compensation of $1.4 million.


Depreciation and amortization is comprised of the following:

                                                                 Fiscal Year Ended
                                                     December 25, 2013       December 26, 2012
                                                                  (In thousands)
Depreciation of property and equipment             $            15,062     $            15,819
Amortization of capital lease assets                             3,527                   3,282
Amortization of intangible and other assets                      2,912                   3,203
Total depreciation and amortization expense        $            21,501     $            22,304

The overall decrease in depreciation and amortization expense is due primarily to the sale of company restaurants to franchisees during fiscal 2012.

Operating (gains), losses and other charges, net are comprised of the following:

                                                               Fiscal Year Ended
                                                    December 25, 2013      December 26, 2012
                                                                 (In thousands)
Gains on sales of assets and other, net            $              (66 )   $          (7,090 )
Restructuring charges and exit costs                            1,389                 3,912
Impairment charges                                              5,748                 3,660
Operating (gains), losses and other charges, net   $            7,071     $             482

During the years ended December 25, 2013 and December 26, 2012, we recognized gains of $0.1 million and $7.1 million, respectively, primarily resulting from the sale of restaurant operations to franchisees and the sale of real estate.

Impairment charges of $5.7 million for the year ended December 25, 2013 resulted primarily from the $4.8 million impairment of an underperforming restaurant and the $0.8 million impairment of two restaurants and real estate identified as assets held for sale. Impairment charges of $3.7 million for the year ended December 26, 2012 resulted primarily from the impairment of seven restaurants identified as held for sale and the impairment of an underperforming restaurant.

Restructuring charges and exit costs were comprised of the following:

                                                      Fiscal Year Ended
                                           December 25, 2013     December 26, 2012
                                                        (In thousands)
Exit costs                                $          630        $             1,926
Severance and other restructuring charges            759                      1,986
Total restructuring and exit costs        $        1,389        $             3,912

Severance and other restructuring charges for the year ended December 26, 2012 includes charges related to the departure of the company's former Chief Operating Officer.

Operating income was $47.5 million for the year ended December 25, 2013 and $56.4 million for the year ended December 26, 2012.


Interest expense, net is comprised of the following:

                                                     Fiscal Year Ended
                                          December 25, 2013     December 26, 2012
                                                      (In thousands)
Interest on credit facilities            $           4,067     $           7,074
Interest on capital lease liabilities                3,708                 3,580
Letters of credit and other fees                     1,391                 1,539
Interest income                                        (82 )                (640 )
Total cash interest                                  9,084                11,553
Amortization of deferred financing costs               497                   775
Amortization of debt discount                            -                   137
Interest accretion on other liabilities                701                   904
Total interest expense, net              $          10,282     $          13,369

The decrease in interest expense resulted from a decrease in interest rates related to the 2013 refinancing of our credit facility, as well as debt reductions during 2012 and 2013.

Other nonoperating expense, net was $1.1 million for the year ended December 25, 2013 compared with $7.9 million for the year ended December 26, 2012. The expense for the 2013 period consisted primarily of $1.2 million in expenses and write-offs of deferred financing costs incurred related to our 2013 debt refinancing and $1.0 million of write-offs related to lease terminations and amendments, partially offset by $1.1 million of gains on deferred compensation plan investments. The expense for the 2012 period consisted primarily of expenses and write-offs of deferred financing costs and original issue discount incurred related to our 2012 debt refinancing.

The provision for income taxes was $11.5 million for the year ended December 25, 2013 compared with $12.8 million for the year ended December 26, 2012. For the 2013 period, the difference in the overall effective rate from the U.S. statutory rate was due to state and foreign taxes, employment tax credits and discrete tax items. The passage of the American Tax Payer Relief Act of 2012 resulted in deferred tax benefits of $0.3 million related to work opportunity credits generated in 2012, which were allowed retroactively. In addition, state job tax credits of $0.8 million were claimed during the 2013 period resulting from the prior year's hiring activity. A valuation allowance of $0.2 million was recorded against certain state jobs tax credits during the 2013 period related to changes in California law enacted during the period. For the 2012 period, the difference in the overall effective tax rate from the U.S. statutory rate was due to discrete tax items, including a $1.7 million out-of-period adjustment related to the reversal of a portion of the income tax benefit recorded in fourth quarter of 2011. We do not believe the out-of-period adjustment was material to any prior or current year financial statements or on earnings trends. In addition, a $1.6 million tax benefit was recorded in 2012 relating to additional state credits generated during 2012 from prior years' activity.

Net income was $24.6 million for the year ended December 25, 2013 compared with $22.3 million for the year ended December 26, 2012.


2012 Compared with 2011

Unit Activity

                                                               Fiscal Year Ended
                                                    December 26, 2012      December 28, 2011
Company restaurants, beginning of period                      206                     232
Units opened                                                    1                       8
Units acquired from franchisees                                 1                       -
Units sold to franchisees                                     (36 )                   (30 )
Units closed                                                   (8 )                    (4 )
End of period                                                 164                     206

Franchised and licensed restaurants, beginning of
period                                                      1,479                   1,426
Units opened                                                   39                      53
Units purchased from Company                                   36                      30
Units acquired by Company                                      (1 )                     -
Units closed                                                  (29 )                   (30 )
End of period                                               1,524                   1,479
Total restaurants, end of period                            1,688                   1,685

Company Restaurant Operations

During the year ended December 26, 2012, we realized a 0.2% increase in same-store sales. Company restaurant sales decreased $57.9 million, or 14.1%, primarily resulting from a 41 equivalent unit decrease in company restaurants. . . .

  Add DENN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DENN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.