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Denny's (NASDAQ:DENN)

Q3 2013 Earnings Call

October 28, 2013 4:30 pm ET

Executives

Whit Kincaid

John C. Miller - Chief Executive Officer, President and Director

F. Mark Wolfinger - Chief Financial Officer, Chief Administrative Officer, Executive Vice President and Director

Analysts

Michael W. Gallo - CL King & Associates, Inc., Research Division

Will Slabaugh - Stephens Inc., Research Division

Michael Halen - Sidoti & Company, LLC

Anton Brenner - Roth Capital Partners, LLC, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Nick Setyan - Wedbush Securities Inc., Research Division

Conrad Lyon - B. Riley Caris, Research Division

Amitabh Kapoor - Gabelli & Company, Inc.

Operator

Good day, and welcome to the Denny's Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Whit Kincaid, Senior Director of Investor Relations. Please go ahead, sir.

Whit Kincaid

Thank you, Vicky. Good afternoon, and thank you for joining us for Denny's third quarter 2013 investor conference call. This call is being broadcast simultaneously over the Internet. With me today from management are John Miller, Denny's President and Chief Executive Officer; and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer and Chief Financial Officer. John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our third quarter results. I will conclude the call with commentary on Denny's updated full year guidance for 2013. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 26, 2012, and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and CEO.

John C. Miller

Thank you, Whit, and good afternoon, everyone. In the third quarter, we generated domestic system-wide same-store sales of positive 1.2%, driven by positive same-store sales at both company and franchised restaurants. We have achieved positive system-wide same-store sales in 9 of the past 10 quarters and expect to achieve our third consecutive year of positive system-wide same-store sales. Denny's performance in the face of the ongoing challenging consumer economic environment is a testament to our focus on delivering both everyday value and new product offerings supported by improvements in hospitality and in our facilities. We see evidence that we are moving in the right direction with our positive sales performance relative to key industry benchmarks like EMPD family and the Nap Track Casual.

In addition, we continue to see better performance in key geographies for Denny's like California, Texas and Arizona where we have over 670 restaurants. Most importantly, our franchise-focused business provides financial stability and flexibility while enabling us to generate significant free cash flow that can be used to further strengthen our brand and increase long-term shareholder value. We continue to evolve our strategies to better meet the needs of our guests and our franchisees. This week, we had the Denny's Annual Franchise Convention hosted by the Denny's Franchisee Association. We are pleased to say that our partnership with our franchisees is as strong as ever. Together, we are eager to continue to move the brand forward with our entire leadership team focused on executing against our 3 key objectives to increase shareholder returns, by revitalizing and growing the Denny's brand. Our first key objective is to revitalize Denny's through menu service and facilities initiative designed to fully leverage our competitively distinct America's Diner brand positioning. We continue to balance our compelling Limited Time Only offerings with our highly competitive and effective $2/$4/$6/$8 Value Menu, which gives us a tiered pricing strategy with a very attractive starting price points for full-service dining. The $2/$4/$6/$8 Value Menu currently features new products like our Baja Quesadilla Burger and Mini Banana Split, which helped increased the incidence rate to 20%, about 1 percentage point higher than second quarter and about 3 percentage points higher than the third quarter of last year. With the mix at the high end of our target range, our value platform is providing full-service customers a place to treat themselves. We will continue to look for ways to further leverage the menu's high brand awareness which helps drive traffic into our restaurants while balancing the desire to manage check. In addition to the national media messaging supporting everyday value, we ran a coordinated local promotion with a national coupon program in time for the back-to-school period to drive additional traffic. For the higher end of our tiered pricing strategy, we featured 3 different Limited Time Only promotions this quarter, giving us a steady stream of new product news along with continued improvements to our core menu. Our most popular core menu additions have been the Prime Rib Cobb Salad and Sirloin Steak, which are premium entrées also featured as part of our Limited Time Only menu. The fact that they are mixing above expectations confirms that our customers crave quality, value and new products. After completion of our successful Red, White and Blue Plate specials, Limited Time Only menu in July, we have brought back our Build Your Own Pancake promotional menu for the month of August, which provided our guest a value-oriented, margin-friendly offering for the important back-to-school period. Prior to the Labor Day holiday weekend, we launched the Build Your Own Omelette menu, which was last offered in the fall of 2010. The menu offers both the option to build a basic omelette for $5.99 and more premium custom or signature builds starting at $7.99. And on November 5, we will launch our final marketing module of the year as we once again partner with Warner Bros. as the exclusive restaurant brand for The Hobbit, the Desolation of Smaug. This is the eagerly anticipated sequel to last year's blockbuster and will hit the theaters on December 13. We recently kicked off the excitement with a Greatest Fan contest to win a red carpet trip to see the world premier screening. Our Limited Time menu will feature several new additions, along with existing favorites from last year's menu like The Hobbit Hole Breakfast and the Shire Sausage Skillet. The combination of cravable new products for all day parts and exclusive only at Denny's content will help further differentiate Denny's in this ultra-competitive environment. In addition to our menu enhancements, we are updating our look to reflect the more contemporary diner feel to further reinforce our America's Diner positioning. Of the 115 remodels completed through the first 3 quarters, 26 utilize our new heritage scheme, which has a significantly updated look and feel with new flooring, wall and accent colors, booth and tabletop colors and some signature touches. We're very encouraged by the positive consumer reviews and same-store sales increases primarily in traffic which had been consistent with our historical mid-single-digit range of gains, even in these more challenging times. We'll work closely with our franchisees to finalize the elements and we'll be introducing our new remodel program to our franchisees this week at the Denny's Annual Franchise Convention. Although Denny's has opened around 300 new restaurants since the end of 2008, around 2/3 of our domestic restaurants utilize an older scheme. As a result, we believe executing a full remodel cycle will be an important part of the Denny's brand revitalization. We also believe that executing continued improvements in our menu, service and facilities will enable us to revitalize the Denny's brand with the goal of generating further improvements and system-wide, same-store guest and traffic -- traffic and sales.

Our second key objective is to increase the growth of the Denny's brand, both domestically and internationally through traditional and nontraditional venues. Franchisees opened 9 new restaurants in the third quarter, including 1 nontraditional location and 3 international locations. Our most recent nontraditional all nighter location was opened on the campus of Wright State University in Dayton, Ohio in partnership with the campus group. We are very pleased that Denny's entered into 2 new countries during the quarter with our first opening in El Salvador and Chile. The restaurant in San Salvador is opened by our franchisee based in Honduras who opened their first Denny's in Honduras in November of 2009. Our first restaurant in South America is located in the Las Condes section of Santiago, Chile. Our local partner, the Musiet Group, has a development agreement to open in 10 locations there over the next 15 years. This is a great milestone for the brand as it makes Denny's the first American family dining chain to expand its footprint into Chile and South America. Denny's now has 100 restaurants outside the U.S. and has the largest number of international American family dining chain locations. We think family dining can do well in most parts of the world especially in Asia, Central and South America and the Middle East. Our efforts are focused on finding the right, well-capitalized franchisees to build our international pipeline and increase our international footprint.

Our third key objective is to grow profitability and free cash flow through our franchise-focused business, balancing capital allocation between reinvesting in the growth of the brand, returning cash to shareholders and reducing outstanding debt. Given that we have a meaningful base of company restaurants, we will look to reinvest in our restaurants and are on track to complete at least 24 remodels this year. And with our attractive free cash flow, we are also reviewing the opportunity to accelerate remodels at the company restaurants. In addition, we will continue to opportunistically look at acquiring franchise restaurants where we can generate attractive returns. In the third quarter, we acquired a location in Columbus, Ohio market. We have generated around $35 million of free cash flow and through the first 3 quarters, after capital spending and acquisitions. So for this year, we have repurchased around 3.8 million shares. As we move forward, we will continue to work closely with our franchisees to increase restaurant-level performance and new restaurant growth, while also balancing our capital allocation between reinvestments in the brand and returning value to shareholders via our share repurchase program. With that, I'll turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer. Mark?

F. Mark Wolfinger

Thank you, John, and good afternoon, everyone. Our third quarter results were highlighted by increasing domestic system-wide, same-store sales by 1.2%, opening 3 international restaurants, growing adjusted net income per share by 5% and generating $11.6 million of free cash flow. Denny's opened 9 new franchise restaurants and closed 13 franchise restaurants in the quarter. In addition, we acquired 1 franchise restaurant located in the Columbus, Ohio market and sold 2 company restaurants located in Hawaii to a franchisee during the quarter. As a result, we ended the quarter with 164 company restaurants and 1,522 franchise restaurants, bringing the total restaurant count to 1,686. Denny's total operating revenue, including company restaurant sales and franchise and license revenue decreased $3.7 million to $117.3 million. The decrease was primarily driven by a decrease in company restaurant sales in the quarter, resulting from our franchise growth initiative refranchising program completed in 2012. Same-store sales at domestic franchise restaurants increased 1.3%. The increase was primarily driven by an increase in same-store guest check average, partially offset by a decrease in same-store guest traffic.

Denny's franchise and license revenue decreased by $500,000 to $33.9 million in the third quarter. The decrease in franchise and license revenue was primarily driven by a $600,000 decrease in occupancy revenue and a $300,000 decrease in initial fees. These decreases were primarily offset by a $400,000 increase in royalties, which were favorably impacted by 9 additional equivalent franchise restaurants. Franchise operating margin of $22.3 million was flat to the prior-year quarter with a $200,000 increase in royalty and licensing margin, offset by a $200,000 decrease in occupancy margin. Franchise operating margin as a percentage of franchise and license revenue increased 0.9 percentage points to 65.8% compared with the prior-year quarter, due to both the increase in royalty and licensing margin and the decrease in occupancy margin, which has a lower percent margin compared to the royalty and licensing margin.

Sales at company restaurants decreased to $3.2 million to $83.4 million, primarily due to 12 fewer equivalent company restaurants, which reflects the impact of our refranchising strategy that was completed at the end of 2012. Same-store sales at company restaurants increased 0.7% compared with the prior-year quarter. The increase was primarily driven by an increase in same-store guest check average, which was partially offset by a decrease in same-store guest traffic. The third quarter company restaurant operating margin of 12.3% represents a 2.4 percentage point decrease compared with the prior-year quarter, which was driven by the following factors: product cost increase to 1.3 percentage points due to higher commodity cost and the unfavorable impact of product mix in the quarter; payroll and benefits cost increased 0.8 percentage points primarily driven by higher benefit cost. The increase included $200,000 or 0.3 percentage points of unfavorable workers' compensation claims development compared to the prior-year quarter. The current quarter included $1.5 million of unfavorable workers' compensation claims development and the prior-year quarter included a similar $1.3 million adjustment. Other occupancy expense was flat compared to the prior-year quarter. It included a $400,000 unfavorable general liability accrual adjustments. The 0.3 percentage point increase in other operating cost was primarily driven by an investment in California enterprise zone hiring tax credits. Total general and administrative expenses for the third quarter decreased to $1 million from the prior-year quarter primarily due to a $600,000 decrease in incentive compensation and a $300,000 million in professional fees.

For the third quarter, adjusted EBITDA decreased $500,000 to $19.2 million, primarily driven by a $2.5 million decrease in company restaurant operating margin. Adjusted EBITDA, as a percentage of total operating revenue, was 16.3%, which was flat to the prior-year quarter, as the decrease in company margin was primarily offset by lower G&A expense in the quarter. Depreciation and amortization expense declined by $100,000 compared with the prior-year quarter, primarily resulting from the sale of company restaurants from last year. Interest expense for the third quarter decreased by $600,000 to $2.5 million, resulting from a $21.2 million reduction in total debt over the last 12 months and lower interest rates under our refinanced credit facility. In the third quarter, our provision for income taxes was $4.3 million, reflecting a 38.0% effective income tax rate. Through the use of net operating losses and income tax credit carryforwards, we have only paid $1.8 million in cash taxes due through the first 3 quarters of this year. At the end of the third quarter, the deferred tax asset on our balance sheet was $55.8 million. We will continue to utilize additional net operating losses and income tax credit carryforwards to eliminate majority of our cash taxes for the next several years. Cash capital expenditures of $4.9 million increased $1.3 million compared to the prior-year quarter. The increase was primarily driven by the remodeling activity at our company restaurants as we completed 7 remodels during the quarter. In addition, we acquired 1 franchise restaurant in the quarter for approximately $800,000. Free cash flow was $11.6 million in the third quarter and decreased to $1.3 million compared to the prior year, primarily due to the higher cash capital expenditures. We repurchased 1.8 million shares in the quarter for $10.2 million as part of our ongoing share repurchase program. Since November 2010, we have used approximately $69 million to repurchase 15.3 million shares. As of September 25, we had a total of 9.7 million shares authorized and remaining in our ongoing repurchase program. We ended the third quarter with $175.3 million in total debt, including $97 million outstanding on the revolving credit facility, $58.5 million outstanding on the $60 million term loan and $19.8 million of capital lease obligations. Our total debt to adjusted EBITDA ratio was 2.3x at the end of the quarter. As John noted, we will opportunistically use cash to purchase franchise restaurants that enhance our company's restaurant portfolio. That wraps up my review of our third quarter results. I will now turn the call over to Whit, who will comment on our updated annual guidance for 2013. Whit?

Whit Kincaid

Thank you, Mark and good afternoon, everyone. I would like to take a few minutes to expand upon the business outlook section in today's press release. The following estimates for full year 2013 are based on year-to-date results and management's expectations at this time. We continue to expect full year domestic system-wide same-store sales to perform between flat and positive 1%, with domestic franchise same-store sales between flat and positive 1% and company same-store sales between negative 1% and flat. We expect new restaurant openings to be at the lower end of our initial guidance range of 40 to 45 franchise restaurants. We currently expect to achieve net restaurant growth between 0 and 5 restaurants as we anticipate that 35 to 40 restaurants will close this year. We expect that commodity cost inflation will end up around 2.5% this year, in line with our guidance range of 2% to 3%. We are currently locked into approximately 90% of our needs for the year. Based on our current banking, we anticipate that the increase in commodity cost for 2014 will be less than the 2.5% increase we anticipate seeing this year. We are currently locked into around 10% of our needs for next year and are in the process of making further commitments for 2014. We expect our franchise percent margin to be towards the upper end of our initial guidance range of 65% to 66%. We expect our company percent margin to be less than our initial guidance range of 14% to 15%, primarily due to the $1.5 million unfavorable impact from workers' compensation claims development through the first 3 quarters of this year. Our updated annual guidance for total G&A expense including share-based compensation is between $57 million and $59 million, primarily driven by lower payroll and benefits cost, including lower performance-based compensation accruals, and lower professional fees. We continue to anticipate that adjusted EBITDA will trend towards the lower end of our initial guidance range of $76 million to $80 million, which includes the impact of unfavorable workers' compensation claims development through the first 3 quarters of this year. Our annual guidance for free cash flow remains between $43 million and $46 million. Please refer to the historical reconciliation of free cash flow to net income in today's press release. That wraps up our guidance commentary. I will now turn the call over to the operator to begin the Q&A portion of our call.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Michael Gallo with CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Just want to drill in a little bit on the company margins, a little bit of a tough quarter on the margins. Commodities obviously haven't been a huge factor this year, so I was wondering if we can drill down a little bit as to what the driver there was. I mean I know you mentioned $2/$4/$6/$8 was up a few points. There was some couponing, obviously, and I guess the same-store sales on the company side, that 6/10 of 1% wasn't enough to really leverage the operating cost but I think it was down 240, 250 basis points year-over-year. I was wondering if we can just sort of talk about the factors there and then going forward, whether should we -- we should look to see some adjustments on either pricing or products food cost, et cetera, or I guess where the most pressure was.

John C. Miller

Mike, it's John. I'll talk about product cost first for just a second. The product costs are up about 100 basis points from last year, as you know. We've gone from about 25 to 26.1 in this quarter, up 1 point. I think we're up 1.3 quarter-over-quarter, about 1.1 year-to-date, if memory serves me right. And about 2.5% commodity increase is where we are through 3 quarters. So as you know, we also took price -- we carried a little price in the year. We took price in January, small in July, about 1.5, so it's not covering everything. So we think in this more challenging economic environment, growing full service transaction is a little bit tougher. We're reluctant to price all the way around at this point. So it does give us a little bit of a higher overall cost of sales, net 26 range higher than our historical. Also, we saw in this quarter, our $2/$4/$6/$8 jumped up 3 points, 17 to 20 quarter-over-quarter and it jumped up from 19 to 20 last quarter to this quarter, a year-over-year, 3 points. And so we've improved, we've steadfastly improved the quality of these products, improve our taste and quality scores and to improve our guess satisfaction scores, which we think long term drives stronger overall transactions. So the key overall for us, we believe, is primarily coming from growing the top line, has been our priority and -- but obviously, we're very focused on those kinds of promotions that are margin friendly. So when we start talking about 2014 and I know you didn't ask a question there, but I think what you see is our focus now on the balance of check and margin and obviously, continue to grow the top line. But certainly, this quarter was a little more challenging than it's been.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Just a follow up there, I mean, if I heard you right, we should expect a little more focus on being balanced or as oppose to, I guess, more traffic driven and not enough to cover price, is that right?

John C. Miller

That's right . I mean, we're very proud of how the guests have responded to some of these initiatives. In my comments, I talked about the Mini Banana Split and the Baja Quesadilla Burger. So these things were, you could say they were very successful and in some ways you could argue they're too successful. But they played a role in our brand, continuing to sort of -- and be one of the higher performing full-service brands out there but at the same time, trying to get the balance in all of these things is what we have to focus on now. Then there's also a little commentary on the workers' comp, obviously, and how it affected the quarter.

F. Mark Wolfinger

Yes. And that as we mentioned, Mike, was a $1.5 million impact in the quarter. And again, it's sort of going back a little bit in time, but we went through obviously a real aggressive refranchising process and as we downsized the number of company restaurants we had, and we actually saw significant favorable impact going back in time, going back between 2008, 2010 timeframe. Now the whole workers' compensation change for us is favorable probably $7 to $8 million in that timeframe, so a significant positive impact. But in the most recent few years, I'd say the last 2 or 3 years, we've seen some loss rates increase primarily in California where we operate a big chunk of our company restaurants. And actually, the adjustment that occurred was $1.5 million adjustment that occurred in the current quarter, most of that, virtually all of it was pre-2013. So it's a little bit of the history moving through but we do have some claims activity that we'll need to take a real hard focus on primarily in the state of California, so we recognize that's an opportunity for us.

Operator

We'll take our next question from Will Slabaugh with Stephens, Inc.

Will Slabaugh - Stephens Inc., Research Division

I want to ask you about the remodels. If you could talk a little bit more about what that entails. Just wanted to revisit the lift you were speaking to earlier. Was that a mid-single digit traffic or a total sales that you referred to? I wasn't sure if I heard that correctly.

John C. Miller

Will, it's John. No, we were talking about sales, but we did mention that it's been primarily sales driven by traffic. So both are correct. You just -- you see consumers responding lunch, dinner, really all day parts when the store has been refreshed. So we're pleased to say that this mid-single digit in light of this -- what we're seeing out of other brands in light of the current economy environment is good news that we continue to see a positive consumer response to these remodel efforts, and the debut of these new elements are just taking some modern treatments to our space. We have what we call our heritage program we're debuting at our Franchise Conference. This year, we have had consumers tell us they like it, they were involved in helping us design it along with the Franchise Council. And now, we're going to share that with a balance of our system.

Will Slabaugh - Stephens Inc., Research Division

Got it. And the remodel -- sorry, go ahead.

John C. Miller

The potential to accelerate the company that we're starting that, that was in my comments as well. We will do 20 this year and our franchisees, I believe, will do 125 to 135 this year. And of those -- of that total, a small portion of those are this modernized scheme.

Will Slabaugh - Stephens Inc., Research Division

And if you were to decide to accelerate that process, can you talk about what that timeframe might look like at least as far as the company and that you'd be able to control yourself. And if there were any franchisees as far as what that attraction would look like to them as far as maybe stepping it up and doing that more quickly than what we may have thought?

John C. Miller

On the franchise side, we're just now sharing the idea with the broader audience, so I think it's too early to comment there but clearly on the company side, as we prepare for next year, we're taking all things into consideration.

Will Slabaugh - Stephens Inc., Research Division

Okay. And one more follow-up there, can you talk about the opportunity you mentioned of potentially purchasing franchise stores for purposes of remodeling them or other. And just maybe how big that opportunity might be and if that would be something that you would see as an ongoing process or maybe a slug of stores next year or the next, how do you envision that happening?

F. Mark Wolfinger

Will, it's Mark. So I'll take that question and maybe go back a little bit to the remodel question on the company side. I think, what I would try to wrap together in all of this is just the flexibility and the cash flow generation that this model produces and what we can do with that cash flow. So to John's point, as we go through this remodel activity, if we choose to do it, we can bring forward and accelerate remodels in the company side and as part of your question earlier and certainly, it would be open and flexible to do that. I think also on the flexibility of how we use cash, clearly, we have continued to repurchase shares and went through the authorization. We're sort of in our final 10 million share authorization I mentioned in my comment. So that's another opportunity. And to your other question here, the opportunity to repurchase or acquire franchise locations. We have right of first refusal on all franchise to franchise transactions and we've done that selectively, I'll say, over the last 12 months. We did one last year and a couple this year but some real estate as well. And I think to your question, we see that as another opportunistic use of our cash to repurchase franchise locations. Those locations would have to fit into our G&A spend, our field G&A from a company standpoint. And if you look at the ones that we repurchased certainly over the last 12 months, 1 was in Southern California, 1 was in South Florida and 1 was in Ohio and that's where we also have a company base. So I don't really want to speak to the size and scale of that, but we do think that if it fits the right parameters, we'll continue to utilize part of our cash in that manner as well. So I think what you're hearing from me is all of the different avenues we can go down because of the flexibility of our model and what we can do with our cash.

Operator

We'll now take our next question from Michael Halen with Sidoti.

Michael Halen - Sidoti & Company, LLC

Can you please break down the comp -- company stores between guest count, check and mix?

Whit Kincaid

Mike, this is Whit. So same-store traffic at company was negative 0.4% and so yes, so check would have been up by 1.1% for the quarter.

Michael Halen - Sidoti & Company, LLC

Okay. And in terms of the remodels, how much will it cost on average?

John C. Miller

So our remodel -- this is John. Remodels running 150 to 250. I'd say fairly consistent range for about a 7- or 8-year period now. Fairly consistent.

Michael Halen - Sidoti & Company, LLC

Okay. And how many days will the units be closed on average to -- for the remodel?

John C. Miller

About a week on average.

Michael Halen - Sidoti & Company, LLC

Okay. And can you give us any more color into how some of your bigger geographies did, in terms, I guess, Texas, Florida, California?

John C. Miller

Sure. I mean, California's traffic is positive. And a follow-up to Whit's answer to your question about the breakdowns with check and transactions. Bear in mind the company had a fairly substantial sequential improvement over Q2. So we're pleased, by all means, with the momentum.

Michael Halen - Sidoti & Company, LLC

Okay, great. And I guess the last one. In terms of momentum, can you give us that monthly cadence of the comps?

F. Mark Wolfinger

Yes, Mike, we don't generally tend to share kind of the detailed comps but performance has been relatively consistent for us and the big geography. Like California. I think we would also add Arizona and Nevada, certainly the South, Southwest has been relatively consistent throughout most of the year and certainly this last quarter was the same.

Operator

We'll now go to our next question from Tony Brenner with Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

A couple of questions. I wonder if you could isolate the effect of the 3% change in the Value Menu mix on product cost in the quarter year-over-year. If, for example, those had remained at 17% instead of 20% of the mix, would there have been any increase in product cost?

John C. Miller

Yes. The -- Tony, this is John. That's a very good question. What we had there, typically when you drive that up historically, it's been margin neutral and margin friendly the way that menu is designed. So we've taken some trouble to refresh that menu, this Baja Quesadilla Burgers, one call out. And so driving the mix up, then you also see that -- its impact on labor because it drives checks down. So overall margin, we would say requires some study on balancing once you get at the higher end of the range. We like it in that 15% to 18% range and then the trades, of course, to the higher-quality items to roll out Sirloin Steak, a Prime Rib Cobb Salad, some of those things. Again, we're delighted to see the customer interest but they have a margin impact.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Yes. Arguably, it drives traffic a little bit as well. So it makes it even more complicated. Could you quantify what of the, I think, 10 stores that were remodeled through the third quarter for the 9 months, what kind of a sales bounce you're getting in those?

John C. Miller

Well, when you look at the whole brand performance, we're delighted to see the whole brand continue on the average of all remodels to be in that mid-single digit range. So we're not -- and so our brand continues to perform in a very consistent pattern. We are, as we've been saying for a few quarters now, we are into the full remodel cycle and we have -- we're pleased to see the consumer responding in a very positive way. We think that obviously, through the course of time, with fuller employment and more consumer confidence, this continues to lay the foundation for a revitalized brand, and ultimately leading to consecutive quarters of positive sales and traffic growth.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. And lastly, do you have a -- an estimate for the number of company stores that might be remodeled in 2014?

John C. Miller

Still too early to guide. I think what we would -- we're happy to share today is that consumer like this new scheme. We have 20 company remodels this year and we now have the opportunity to study stepping up a few more than would be ahead of the normal pace and we will guide more thoroughly on that very soon.

Operator

We will now go to our next question from Mark Smith with Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

First, can you just repeat the breakdown in your comp guidance between company and franchise?

John C. Miller

Yes. So with Mark, yes, to the franchise guidance, the annual guidance would be the same as the domestic systems. So just flat across 1. Company, negative 1 but flat, that's an annual number, and year-to-date, company are negative 0.4% and the system would be positive 0.5% during the first 3 quarters.

Mark E. Smith - Feltl and Company, Inc., Research Division

And then can you guys talk about the price increase that you took in July? How well that was received in your ability to take price going forward?

John C. Miller

Yes, so we did take a price increase in July and we think that early next year with commodities, we think will be a favorable year, better than this year. We think it will be under 2.5%. We think there are some wage pressures particularly in California with the $10 minimum wage, we're going to effect from its current $8 to $9 this coming July. So we think we'll take a little in January and then see what we need to do when we evaluate the effects of the Affordable Care Act and so forth. So it leaves room a little in January and then we're leaving the door open for the following July, particularly in California. We think we do have room and permission from the consumer at some modest level, as long as we're not aggressive and then based on Q3 sequential improvement over 2 and year-to-date, I think that answers the question about our pricing strategy would happen in July.

Mark E. Smith - Feltl and Company, Inc., Research Division

Just wanted to get an update on daypart mix and where you guys spend any delta that we've seen there? And also in product mix, in between breakfast and then or if you guys are seeing any changes you go through continuing to have some menu evolution?

John C. Miller

Yes. It's surprisingly consistent. Breakfast and late-night initiatives are rampant throughout the industry. One would think that, that would affect brands like Denny's. But we've been surprisingly consistent while we've been working very hard to last year's to exploit the diner positioning more fully, meaning that we have credibility for lunch and dinner items rather than just breakfast all day. As those grow, our breakfast also grows and stays consistent. So we think that through due course of time, we have a -- the opportunity to get more reasons for more people to come to Denny's more often, frankly, but we expect to always have at breakfast, lunch and dinner and late night a good portion of our sales coming from the breakfast category. And that's been very consistent. It moves around by 2 to 3 basis points and that's about it.

Mark E. Smith - Feltl and Company, Inc., Research Division

The last question, just let me look at use of cash. And as we look out the next year or 2, kind of where you guys stand on your thought process on buybacks, dividend, repurchasing, buying some franchisees. Any change in your thinking?

F. Mark Wolfinger

It's Mark Wolfinger. The really -- I'd say there's no change in our thinking as much as some of my earlier comments on the question previously. I think it's the flexibility of our thinking. We've -- up until just the last 12 months, we really had not taken some of that cash and repurchase franchise restaurants. We can see the opportunity to do that and the right kind of criteria to do that. We have to see people on some of the cash in that manner. We utilize some of our cash to buy real estate, which is again something new for us in the last 12 to 18. I think back on your question, we obviously have tremendous flexibility under our current bank agreement for use of cash either to repurchase shares or to pay dividends, we continue to be active and consistent in the market on share repurchases. The third quarter itself, we were extremely active. I think it was 1.8 million shares or over $10 million in the third quarter alone. We've gotten -- certainly received great feedback from many of our top shareholders on the share repurchase plan. So I think there might be more articulation that we might say in our year-end mid-February '14 call but at this point in time, I think you'll still hear that consistent theme. And to John's earlier comments, we might take some of that cash and if the opportunity presents itself, we might accelerate some of the company remodels. So I don't think there's any different message there as much as a balance between all of those opportunities and I think the other piece for us that perhaps we didn't fully realized is as we went through this debt reduction process and the change in the model is that when the franchise orders, balance sheet and cash flow metrics improved as dramatically as we've seen our own improvement, that feeds through the entire system and the perception of the brand by third-party lenders, our ability to go in and do loan pools and back stop loans and do the kind of things that are really are very beneficial and positive to grow the entire brand. So that's another piece of our cash use or balance sheet use that, again, we've gotten great feedback on. So we're certainly not hesitating to say that share repurchases are very, very important to us and will continue to be, but there's also obviously other uses of our cash which we've demonstrated over the last 12 or 18 months.

Operator

We'll now go to our next question from Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities Inc., Research Division

So I think I heard the pricing was about 1.5% in the quarter. Is that a level that's appropriate to think about going forward, or could we see a little bit higher than that given the labor pressure that we expect particularly from the California minimum wage hikes?

John C. Miller

Well, I think the ongoing balance in the full-service environment right now of the moving -- keeping an eye on all parts of the model. The guest dynamic you want -- transactions, keep an eye on transactions, keep an eye on check and obviously, keep an eye on margin. So between every quarter, we would, I'd say, we intentionally review the mix and the drivers of all 3. And so pricing is certainly one consideration. So this coming January, of course, we would expect to review it again. That's when we print the menus of January. We expect around 1% pricing then on top of the pricing we've taken year-to-date.

Nick Setyan - Wedbush Securities Inc., Research Division

Okay. So does that imply an acceleration? Is this another 1% or is there some drop-off that's going to cover?

John C. Miller

No. We'd be lapping some pricing that we took last January of about 0.6%, I believe. And then of course, we took pricing in July that does carry into next year. So we -- it would keep us...

Nick Setyan - Wedbush Securities Inc., Research Division

Got it, got it. Okay. And then just some of the cost that you guys can control. In terms Of G&A and the franchise cost, are there any other opportunities where we can maybe see a G&A run rate that's a little bit lower than $58 million next year and a maybe franchise cost that are -- continued improvement in the margin on the franchise side?

John C. Miller

So, again, in general, we've taken a lot of cost out of our business model and so I think the -- the discussion of growing company margins primarily will come from top line growth and obviously, growth in units and additional leverage.

Nick Setyan - Wedbush Securities Inc., Research Division

Got it. And just last question on the topic of the dividend.

John C. Miller

[indiscernible].

Nick Setyan - Wedbush Securities Inc., Research Division

Go ahead. Go ahead. Sorry I interrupted you.

F. Mark Wolfinger

You were going to ask a question on dividend.

Nick Setyan - Wedbush Securities Inc., Research Division

Yes, so on the dividend, how do you guys think about a dividend? Sort of what are some of the pros and the cons that you guys think of that come into that consideration when you discuss that subject. It -- we haven't seen a dividend so far and sort of what are, I guess, the advantages of not going with a dividend I suppose?

F. Mark Wolfinger

I think that part of its flexibility, Nick. I think certainly, flexibility in valuation. Again, I look at it and look at the share buyback program that we've had in place really for about 3 years now. And I think, it's certainly been beneficial. We've gotten strong feedback from our investment along those lines. And that, again, that gives us flexibility to move the grid around and our buyback program around depending upon the volatility that is in the equity markets. I think on the dividend side, we clearly are aware that's another opportunity or a flexible point use of our cash. It certainly is a situation, I think, from the dividend standpoint that once you put in that -- put that dividend in place, obviously, that changes your flexible approach to things. And at the same time, we look at it that, again, share buyback has been successful for us, but also reinvesting in the brand and things like the repurchase of franchise stores, the purchase of real estate, investing in the company base, our company remodel platform, that John mentioned, that's also a great use of cash. So we know that dividends continue to be on the radar screen and clearly, that's a topic that's discussed by a lot of other brands out there, not just in the restaurant sector but at this point, our use of cash is primarily focused on share buyback but also investing other aspects of our brand.

Operator

We'll now go to our next question from Conrad Lyon with B. Riley and Company.

Conrad Lyon - B. Riley Caris, Research Division

Question about units. It's been a couple of years since franchise closures about faced, those that opened. Question is, is that more of a blip or is there something more to that. Or then a kind of a second part of the question is, should we still expect net unit openings deposit going forward next several years?

F. Mark Wolfinger

This is mark, Conrad. What we said in our comments was that the range, I think, we're opening this year is 40 to 45 towards the lower end of that range and the closing number of sort of that net unit opening number is sort of, I'll say, low -- the midpoint is sort of low-single digit. On the closure side, we've gone back and look at probably last 5 or 6 years and that closure rate as far as number of units closed is sort of ranged in that low 30 type of number for franchise system. I don't -- it moves a little bit but part of that could be timing on leases. We did have some nontraditional closings this past quarter. And so, no, I don't think there's a specific batch of movement in the different direction but clearly, focus on net unit growth to your point, to your comment. In general, the stores that are closing, obviously, tend to be lower volume stores, and the ones that were opening are better volume stores and there's a positive moment there as well. But I think in a brand that's 60 years old, this is our 60th anniversary, a closure rate that's sort of in that 1.5% to 2% range of total units is not uncommon, I think, when you look at the underlying lease structure, trade area, things along those lines.

Conrad Lyon - B. Riley Caris, Research Division

Okay, nothing really different.

John C. Miller

Nothing different.

Conrad Lyon - B. Riley Caris, Research Division

Yes, okay. The second...

John C. Miller

That is the same -- go ahead. Go ahead. Go ahead.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Yes -- no, I'm good with the units. Second question regarding the margin dynamics this quarter, was it similar for franchisees as well? With the mix, that is?

John C. Miller

Yes. I would say that franchisees will be experiencing a similar result through their P&L.

Conrad Lyon - B. Riley Caris, Research Division

Okay. So my next question is, does the suggestion box come up abnormally more or is it kind of a status quo?

John C. Miller

No, that's a great question. I think franchise relationships and to be a model franchise [indiscernible] which clearly is our desire, we have to have the best interest of our franchise committee at heart, and we think that having 10% of the base owned by the company and feeling the benefit of our initiatives, as well as the difficult economic times is part of maintaining the good guided set of initiative in collaboration with our franchise community. So our franchisees work alongside with us on designing modules, how much to put on the gas for a transaction growth. Ultimately, if you maintain share, grow share or stop declining share, any of the above, ultimately, you can turn that customer into a profitable customer. But if -- so the balance of transactions versus flow-through, it is something that we keep topping the line on our conversations. And as I mentioned earlier, the focus now throughout the balance of this year, from back-to-school period now into next year, obviously, is to have a good discussion about the balance of those initiatives. I was going to say that in answer to your first question about units, of course, we do expect to grow net units and growth units and we do have this complication of closings. But obviously, we do expect as management team to continue to grow on what we've been able to accomplish so far.

Operator

We'll now go to our next question from Amit Kapoor with Gabelli & Company.

Amitabh Kapoor - Gabelli & Company, Inc.

So just to go back to the remodel of company-owned stores, can you guys talk about the length of the cycle, the overall cycle? I mean should we think about 20 a year for 160-odd stores, so a 7- or 8-year cycle? Is that a good way to think about the remodel cadence?

John C. Miller

Yes, I mean, if you stand back far enough, you can basically divide everything by 7. But the -- during the recession, we had a program we put in place that gave a little time off to create a franchise-friendly approach to remodels and we've created a life of scope. We had a significant number of stores around 300 who signed up for that, and then they were part of that program created a little bit of a different remodel cycle for that group of restaurants, a one-time difference. So you can divide the whole system by 7 or the company base by 7. The company took advantage of the program, we offered our franchisees, so we had -- we sort of cut up our whole system at that point. So now, based on this continued good performance of the overall remodel program that our franchisees have been executing a little bit at a faster pace in companies, you see that they start to outpace the company in overall sales results and the company is starting to close the gap now that we've got some remodels underway for the first time in a few years. So the -- so again, if you step back far enough, you can sort of divide it by 7 but up close, it's a little bit different for a year. About 70% of the system, 2014 through 2018 is due a remodel. And '16 and '17 are the bigger years of that. So that will give you some idea at how that -- and that's mostly because of that -- those 300 stores that are completed during that system.

F. Mark Wolfinger

Right. To John's point, that change in the approach on remodel put 5 years under the remodel cycle from the point in time they did that lighter, refresher remodel and most of us were done 2011, 2012 timeframe. And the company side -- so, and the company side that in late 2010, so if you had 5 years, than can get to that life cycle that John described.

Amitabh Kapoor - Gabelli & Company, Inc.

Right. What was the average spend on the refresh in '11 and '12 or '10 and '11?

F. Mark Wolfinger

The light refresh?

Amitabh Kapoor - Gabelli & Company, Inc.

Yes.

F. Mark Wolfinger

Our call is sort of $50,000 to $60,000 range.

Amitabh Kapoor - Gabelli & Company, Inc.

And just on a different subject, what kind of run rate on share repurchases can you execute? I mean the 1.8 million was a fairly respectable number for the quarter. But are there logistical issues or windows that you would -- that would keep you from buying this number every quarter, or how do you think about the run rate for the remaining 10 million shares?

F. Mark Wolfinger

Sure. This is Mark. So we did. You're right. I mean, the third quarter, we repurchased 1.8 million shares at $10.2 million. Year-to-date, I think we're around $21.6 million, around $22 million of shares that have been repurchased. And actually, that number is pretty close to, as I recall, what we repurchased all of last year, I think the last couple of years, we bought back around $22 million of our stock and that's only coincidental so don't tie those numbers together. 1 is an annual number, 1 is the first 3 quarters. We have a limitation of total, sort of total use of cash and share buyback and dividends, I would say, around $44 million, $45 million under our bank agreement. You asked about limitations, obviously one limitation is just to make sure that we are timing our use of cash with share repurchases and our ability to generate cash on the seasonality of our business. But our view is that, again, we've repurchased, we're 15 million shares of stock since we started in 2010. I certainly would look at our movement in share price the last 18 to 24 months and sort of one of the drivers has been our repurchase plan. We continue to believe in our repurchase plan and continue to look at our underlying valuation and look at other comparables and say, certainly, there's still an opportunity there but we're going to be, obviously, analytical and selective as to how we repurchase shares, but ultimately, we believe it's the strong use of our cash. But I don't want to shy away or eliminate for my earlier comments that it's also a very good use of cash to invest in this brand, invest in our business. Clearly, that's the company remodel program that John mentioned. It's the repurchasing of franchise stores. It's certainly allocating the certain portion of our balance sheet to help our brand grow, to help our franchisees grow in such things as loan pool or direct loans. But again, 3 or 4 years ago, Denny's that was not even contemplated as a possibility with the lack of flexibility we had in our debt structure and our balance sheet. Today, we can do that and we will continue to do that. So we certainly are very satisfied with where we are today and what we continue to be able to do with our cash generation.

Operator

And it appears there are no further questions at this time. Mr. Whit Kincaid, I'd like to turn the conference back to you for any additional or closing remarks.

Whit Kincaid

Thank you, Vicky. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings call in February of next year to discuss our fourth quarter results and detailed annual guidance for 2014. Thank you. Have a great evening.

Operator

That does conclude today's conference. We thank you for your participation.

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