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Denny’s Corporation (NASDAQ:DENN) recently reported third quarter 2011 earnings of 10 cents per share, which came in line with the Zacks Consensus Estimate. Including impairment charges, earnings per share were 8 cents versus 10 cents in the year-ago quarter. Total revenue declined 2.3% year over year to $136.7 million and missed the Zacks Consensus Estimate of $138 million.

Performance Highlights

During the quarter, sales at company-operated restaurants dipped 2.3% year over year to $104.7 million.

Franchise and license revenue increased 2.4% to $32.0 million attributable to initial and other fee revenues associated with opening 42 Flying J conversion units in the prior-year quarter. However, a $1.8 million increase in royalties from 103 additional equivalent franchise restaurants and higher same-store sales partially compensated the overall decline.

System-wide same-restaurant sales (comps) upped 0.9% on increases of 1.1% in company-operated units and 0.8% in franchised units. This was a solid improvement over the 1.1% decline in overall same-restaurant sales recorded in the year-earlier quarter. Same-store guest count slid 0.2% but guest check average increased 1.3%.

Company-operated restaurants’ operating margin dropped 80 basis points (bps) to 14.1% due to higher product expense and payroll and benefit costs partially offset by lower other operating costs resulting from easy comparison. However, franchise operating margin expanded 310 bps to 66.4%, attributable to a spike in royalties and a decline in costs.

Store Update

During the quarter, Denny’s 11 system-wide units, including 3 Flying J Travel Center conversion sites, 3 university units, and 1 international unit. At the end of the third quarter, the company had 223 company-owned and 1,454 franchised and licensed restaurants.

Financial Position

Denny’s ended the quarter with cash and cash equivalents of $14.9 million and shareholders’ deficit of $95.5 million. During the quarter, the company repurchased 1.3 million shares.

Outlook

For 2011, Denny’s continues to expect company-operated same-store sales in the range of zero to 1% (previously negative 1% to positive 1%). Denny's plans to open 60–62 new restaurants (previously 70–75) in 2011, with 52–54 franchised units and 8 company-owned units.

Adjusted income before taxes is guided between $36.0 million and $39.0 million for 2011 (previously $38.0 and $42.0 million).

For 2011, capital expenditure is expected at $17 million (previously $18 million).

Our Take

After showing signs of improvement in the last quarter, Denny’s once again fell into the negative territory in terms of same-restaurant sales as well as revenue. Additionally, the company has also tweaked its guidance for adjusted income before taxes. Net unit openings are also guided to be lower than the prior projection. There are also severe macroeconomic pressures like cost inflation that could sway consumer confidence. However, Denny’s continues to make efforts to strengthen its balance sheet by reducing debt and improving revenue through franchising.

Denny’s currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are maintaining our long-term “Neutral” recommendation on the stock. On the other hand, one of Denny’s primary competitors, Domino's Pizza Inc. (NYSE:DPZ), retains a Zacks #1 Rank, which translates into a short-term ‘Buy’ rating.

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Source: Denny's Disappoints In Q3