With Denny’s expecting to complete the sale of virtually all company-operated restaurants to franchisees by year’s end, the franchisor is considering the use of its cash to buy another restaurant concept.
An acquisition was one of the options cited by CEO John Miller in reviewing the single-concept company’s results for the third quarter ended Sept. 25. Domestic same-store sales for the period rose 1.1%, driven by a 1.2% increase for franchised stores. Comps for company restaurants slipped 0.2%. The chain’s average check jumped 6.5%, indicating that traffic declined.
During the quarter, Denny’s sold 56 stores to franchisees. Management said the company anticipates selling another 115 to 125 units before Jan. 1, at valuations of 4.5 to 5 times store-level earnings before interest, taxes, depreciation and amortization (EBITDA). The proceeds should amount to $125 million to $135 million, according to CFO Mark Wolfinger.
“In addition to investing in our brand, our longstanding internal review process continues to actively consider multiple alternative uses of cash,” Miller told financial analysts. He described the possibilities as “a full array of considerations, from evaluating the acquisition of another concept to acquisitions for conversion like our Flying J transaction earlier in the decade.” In 2010, the family chain entered into an agreement with Flying J, a truckstop operator, to convert restaurants at the travel centers into Denny’s units at a cost of $565,000 each.
Management indicated that the Denny’s brand still has room to grow. Obligations to open additional restaurants will be attached to 70 to 80 of the company units that are earmarked for sale during the remainder of 2019, Wolfinger said. The company anticipates the opening of 30 to 35 restaurants through the remainder of the year.
Thirteen franchised stores opened during Q3, and nine closed. The concept ended the quarter with 1,629 branches.
Denny’s said it will use at least part of the proceeds from refranchising to improve the chain’s real estate portfolio through like-kind exchanges. It is also buying back stock.
Miller said the possibility of buying a second concept is not a new possibility for the chain, though he acknowledged that management had not publicly aired the possibility. “What we're trying to do is just adding clarity around the process [that] has been around for a while here,” he said.
When the refranchising program is essentially completed by year’s end, Denny’s would be 96% to 97% franchised. The few remaining company stores would be high-volume units in unusual locations, such as the store on the Las Vegas Strip.
Roughly 9 out of 10 Denny’s restaurants now offer delivery, and off-premise orders currently generate 11% of total sales, management revealed. Miller cautioned analysts that off-premise business “does have a limit. I don't know what that is. I would suspect it’s somewhere around the middle to upper teens.”
Overall, the franchisor posted a net income of $49.1 million, or more than 3 times the $10.8 million generated for the year-ago quarter, on revenues of $124.3 million, down 21.4%.