DENN
📉 Denny’s reported challenging quarterly results, citing significant consumer headwinds, leading to negative comparable store sales (-3%) and a sharp drop in operating income compared to last year.
🏦 The company carries a significant debt load ($405M debt vs. $195M market cap), raising concerns about its financial health, although current covenant analysis suggests compliance for now.
🤔 While Denny’s is undergoing strategic initiatives like remodeling and focusing on value, the combination of weak performance, high leverage, and increased inflation guidance warrants caution.
@bernardodegarcia:
“Oh, yeah. I’m really looking forward to seeing Denny’s. Let’s see here… falling 2%. And you say, no, this can’t fall anymore. Denny’s Investors. Let’s see what they’re saying. Okay. The beginning of the year presented significant challenges for consumers, which is evident in our results. Our teams remained focused on executing against our strategic initiatives and winning with our guests despite these macro headwinds. This included staying true to our Denny’s playbook, focusing on compelling value, being strategic in reaching our younger demographics through innovative partnerships and new menu offerings. Keke’s continued to steal market share, I imagine, in its home state of Florida, while also growing into its seventh state in Georgia. The dedication of our teams and franchisees continues to drive our brands forward. Okay. Total operating revenue $111 million compared to $110 million last year. Okay, Denny’s. But remember, last year had more restaurants than this year. They are closing the ones that don’t work. Denny’s comps were -3%, I imagine. Keke’s comps were 4%. Denny’s opened six new franchises, completed six new remodels. Keke’s opened three new cafes, acquired five franchises. Okay. Operating income was $5.2 million compared to $10 million last year, meaning the previous quarter. Adjusted franchise operating margin was 29.4% or 5.9%. Adjusted EBITDA $9.1 million. Net income was $300,000 or one cent per share. Adjusted income… there it is. Franchise revenues were $57.7M vs $56.6M. Ah, this increase was primarily driven by more advertising and cooperative contributions, partially offset because we have fewer units and also demand at Denny’s restaurants is lower. This doesn’t tell us anything interesting. Let’s see the call. I’m very curious, it doesn’t tell us anything interesting there. Okay. Capital allocation… $9.1 million in cash. Okay. Comps between -2% and +1%. Openings of 25-40 restaurants. Closing between 70 and 90 restaurants. Eh, commodity inflation between 3-5% versus 2-4% they had before. Labor inflation between 2-5%. Eh, G&A between $80-85M, including corporate incentive compensation $9M and $14M of share-based compensation. Phew. Share repurchases between $15-25 million. Wow. So, they are buying back practically between 7% and 12% of the company now. I don’t know, it hasn’t been very positive. Obviously, the comps are negative. Eh, ah the profits compared to last year were terrible. Ah, this is due to them closing stores, opening others, and the new stores, obviously, are not yet producing enough to compensate for what they stopped earning from the ones just closed. And I don’t know, this starts to be something to watch. Well, since day one, right? You have to look at the debt covenants, meaning, what does Denny’s need to keep paying its debt? Okay? Realize that Denny’s is a company with a $195 million market cap, okay? And it has $405 million in debt. So, this is not an easy situation. Eh, besides, as you saw, well, ah, it’s not generating much free cash flow. In fact, we haven’t seen the free cash flow. Let’s see if we find the cash flow now… Okay, looking at the 10-K… The company and some of its subsidiaries have a credit facility consisting of notes, meaning bonds, worth $400 million. Secured Revolver, okay, with a $25 million sublimit for letters of credit. The credit facility includes $450 million… Consolidated leverage ratio four times. Consolidated fixed charge coverage ratio 1.4 times. Hm. Okay. Well, they tell you eh on Christmas Day, December 25, 2024, our consolidated leverage ratio was 3.85 and our fixed charge coverage ratio was 2.18. We are in compliance with all covenants and expect to continue so during 2025. I would like, however, to take a look at the other years, the other annual results. We have debt from revolver loans of $261 million and bond debt of $16 million. Okay. The debt matures between one and two years. Okay… Long-term debt. Revolving loans increased a bit, but well, they still have the revolving line up to $400 million, so they can still draw more money. It’s not that they’re interested, but if necessary, they can draw much more money from there. So, good news. There’s no apparent risk for now that this company could falter, at least from what we see in the 10-K, okay? From the snapshot taken on December 25th last year, almost 6 months ago, okay? The company at that time had the capacity to draw $400 million in debt from a revolver and had drawn $261 million. Okay… Maximum consolidated leverage ratio. I don’t know exactly what this leverage ratio refers to. Obviously, it refers to debt, to leverage, but I don’t know what the numerator is. Minimum consolidated fixed charge coverage ratio. Minimum consolidated fixed charge coverage ratio of 1.5, but you’re at 2.18. That’s what I was thinking. If this refers to your ability to pay interest, which must be 1.5, it can’t go below that, you’re at 2.18, you are in compliance, even if you tell me you are… but well, that’s why… Regarding the results, should I trim the position? No, we have to wait for the call. Exactly. But, I mean, they weren’t good, but ultimately… The main problem isn’t that it’s not expensive, no, I know that. It’s trading at a P/E of eight… But what’s the problem? Well, you have to look at the comps… With the amount of debt you have, should you repurchase shares or should you pay down debt?”
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