EX-99.1 2 ex991q42019earningspre.htm EXHIBIT 99.1 Exhibit
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DENNY’S CORPORATION REPORTS RESULTS FOR FOURTH QUARTER AND FULL YEAR 2019


SPARTANBURG, S.C., February 11, 2020 - Denny’s Corporation (NASDAQ: DENN), franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its fourth quarter and full year ended December 25, 2019.


Fourth Quarter 2019 Highlights

Sold nine company restaurants to franchisees.
Total Operating Revenue was $113.8 million.
Domestic system-wide same-store sales** grew 1.7%, including an increase of 1.8% at domestic franchised restaurants and an increase of 0.5% at company restaurants.
Completed 27 remodels, including 26 at franchised restaurants.
Operating Income was $26.6 million.
Franchise Operating Margin* was $31.8 million, or 48.9% of franchise and license revenue, and Company Restaurant Operating Margin* was $8.7 million, or 17.7% of company restaurant sales.
Net Income was $18.6 million, or $0.31 per diluted share.
Adjusted Net Income* was $14.0 million, or $0.23 per diluted share.
Adjusted EBITDA* was $24.9 million.
Adjusted Free Cash Flow* was $12.1 million.
Repurchased $45.4 million of common stock.

Full Year 2019 Highlights

Sold 105 company restaurants to franchisees.
Total Operating Revenue was $541.4 million.
Domestic system-wide same-store sales** grew 2.0%, including an increase of 2.0% at domestic franchised restaurants and an increase of 1.9% at company restaurants.
Completed 144 remodels, including 141 at franchised restaurants.
Operating Income was $165.0 million.
Franchise Operating Margin* was $114.7 million, or 48.8% of franchise and license revenue, and Company Restaurant Operating Margin* was $48.0 million, or 15.7% of company restaurant sales.
Net Income was $117.4 million, or $1.90 per diluted share.
Adjusted Net Income* was $47.9 million, or $0.77 per diluted share.
Adjusted EBITDA* was $96.8 million.
Adjusted Free Cash Flow* was $29.8 million.
Repurchased $96.2 million of common stock.

1



John Miller, Chief Executive Officer, stated, “Denny's delivered its ninth consecutive year of domestic system-wide same-store sales** growth and substantially completed its refranchising strategy. With the proceeds from these transactions combined with strong cash flows generated by our business, we returned over $96 million to shareholders through our ongoing share repurchase program. As we look ahead, we will continue our efforts to upgrade the quality of our real estate portfolio and execute on our commitment of being the world's largest, most admired, and beloved family of local restaurants. This focus, along with the substantial completion of our refranchising strategy, should result in a higher quality, more asset-light business model and the sustainable creation of additional stakeholder value in the coming years."

Fourth Quarter Results

Denny’s total operating revenue was $113.8 million compared to $159.5 million in the prior year quarter. Franchise and license revenue was $65.0 million compared to $55.2 million in the prior year quarter. Company restaurant sales were $48.8 million compared to $104.4 million in the prior year quarter. These changes were primarily due to the Company's refranchising and development strategy.

Franchise Operating Margin* was $31.8 million, or 48.9% of franchise and license revenue, compared to $26.6 million, or 48.3%, in the prior year quarter. This margin rate expansion was primarily driven by the Company's refranchising and development strategy which yielded an increase in royalty revenue and an improved occupancy margin.

Company Restaurant Operating Margin* was $8.7 million, or 17.7% of company restaurant sales, compared to $16.9 million, or 16.2%, in the prior year quarter. This margin rate change was primarily due to the decrease in payroll and benefits costs and other operating costs from the leveraging benefit of refranchising restaurants. Offsetting these cost improvements was an increase in occupancy related expenses, including higher property insurance costs and the impact of refranchising restaurants.

Total general and administrative expenses were $15.4 million, compared to $15.7 million in the prior year quarter. This change was primarily due to a decrease in share-based compensation expense in addition to a reduction in personnel costs, partially offset by market valuation changes in the Company's deferred compensation plan liabilities and an increase in performance-based incentive compensation.

Interest expense, net was $3.6 million, compared to $5.4 million in the prior year quarter primarily due to a lower credit facility balance. Denny’s ended the quarter with $256.5 million of total debt outstanding, including $240.0 million of borrowings under its revolving credit facility.

The provision for income taxes was $5.1 million, reflecting an effective tax rate of 21.5%. Approximately $6.3 million in cash taxes was paid during the quarter.

Net income was $18.6 million, or $0.31 per diluted share, compared to $11.5 million, or $0.18 per diluted share, in the prior year quarter. Adjusted Net Income Per Share* was $0.23 compared to $0.18 in the prior year quarter.





2



Adjusted Free Cash Flow* and Capital Allocation

Denny’s generated $12.1 million of Adjusted Free Cash Flow* in the quarter after investing $3.2 million in cash capital expenditures, including real estate acquisitions and facilities maintenance.

During the quarter, the Company allocated $45.4 million to share repurchases. Between the end of the fourth quarter and February 10, 2020, the Company allocated an additional $22.2 million to share repurchases. As of February 10, 2020, the Company had approximately $260 million remaining in authorized share repurchases.

Adoption of Topic 842 and Lease Accounting Impact

Effective December 27, 2018, the first day of fiscal 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The new guidance established a right-of-use (“ROU”) model that requires lessees to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Denny's elected to apply the modified retrospective transition approach as of the date of initial application without restating comparative period financial statements.

Upon adoption of Topic 842, operating lease liabilities of $101.3 million and ROU assets of $94.2 million related to existing operating leases were recorded. In addition, the Company recorded a cumulative effect adjustment increasing the opening deficit by $0.4 million and deferred tax assets by $0.1 million. The lease liabilities were based on the present value of remaining rental payments under previous leasing standards for existing operating leases primarily related to real estate leases. Exit cost and straight-line lease liabilities that existed at the adoption date were reclassified against the ROU assets upon adoption. The amount recorded to opening deficit represents the initial impairment of ROU assets, net of the deferred tax impact.

Refranchising and Development Strategy

Following a refranchising strategy announced in October 2018, the Company has been migrating from a 90% franchised business model to one that is between 96% and 97% franchised and is substantially complete as of the end of 2019.

In addition to refranchising, the Company plans to upgrade the quality of its real estate portfolio through a series of like-kind exchanges. The use of refranchising proceeds and a moderate increase in leverage are expected to generate more compelling returns for stakeholders, including the return of capital.

The table below summarizes the Company's refranchising and development strategy results as of December 25, 2019, compared to the previously announced expectations.


3


Strategy to Date Refranchising and Development Summary
(Unaudited)
 
($ millions)
Metric
 
Anticipated Result
 
Strategy to Date
Restaurants to be Refranchised
 
115 - 125
 
113
Percent Franchised
 
96% - 97%
 
96%
Development Commitments
 
70 - 80
 
78
Multiple
 
4.5x - 5.5x
 
4.8x
Pre-Tax Refranchising Proceeds
 
$125 - $135
 
$128
 
 
 
 
 
Real Estate Sold:Purchased
 
25% - 30% of approximately 95 properties
 
6:5
Real Estate Proceeds
 
Approximately $30
 
$11

During the quarter ended December 25, 2019, nine company restaurants were sold to franchisees. Additionally, the Company purchased one piece of real estate for $1.9 million related to a series of like-kind exchange transactions.

The following table summarizes the current quarter and full year activity related to the Company's current refranchising and development strategy.
 
Quarter Ended
 
Year Ended
 
December 25, 2019
 
December 26, 2018
 
December 25, 2019
 
December 26, 2018
 
(Dollars in thousands)
Restaurants sold to franchisees
9

 
8

 
105

 
8

Gains (losses) on sales of company restaurants:
 
 
 
 
 
 
 
Cash proceeds
$
11,353

 
$
1,777

 
$
118,964

 
$
1,777

Receivables
(2,526
)
 

 
920

 

Less: Property sold
(2,527
)
 
(2,448
)
 
(30,511
)
 
(2,448
)
Less: Goodwill
(188
)
 
(62
)
 
(2,897
)
 
(62
)
Less: Intangibles
(35
)
 
(13
)
 
(2,260
)
 
(13
)
Less: Deferred gain

 

 
(1,350
)
 

Total gains (losses) on sales of company restaurants
$
6,077

 
$
(746
)
 
$
82,866

 
$
(746
)
 
 
 
 
 
 
 
 
Real estate parcels sold

 

 
6

 

Gains on sales of real estate:
 
 
 
 
 
 
 
Cash proceeds
$

 
$

 
$
10,680

 
$

Noncash consideration
$

 
$

 
$
3,000

 
$

Less: Property sold
$

 
$

 
$
(1,686
)
 
$

Less: Other assets
$

 
$

 
$
(120
)
 
$

Total gains on sales of real estate
$

 
$

 
$
11,874

 
$


Gains on the sales of company restaurants and real estate are included as a component of operating (gains), losses and other charges, net. In addition to the proceeds noted above, the Company also received front end fees and other transaction fees related to company restaurants sold to franchisees of approximately $0.4 million and $5.6 million during the quarter and full year, respectively.

As of December 25, 2019, the Company's assets held for sale balance included four company restaurants and two pieces of real estate at their carrying amounts of $1.9 million.

4



Business Outlook

The following full year 2020 (53 operating weeks) estimates are based on management's expectations at this time:

Domestic system-wide same-store sales** growth between 0% and 2%.
30 to 40 new restaurant openings, with a net system change of between (5) and 5 restaurants.
Total operating revenue between $453 and $459 million, including franchise and license revenue between $260 and $263 million.
Franchise Operating Margin* between 48.0% and 49.0% and Company Restaurant Operating Margin* between 18.0% and 19.0%.
Total general and administrative expenses between $66 and $69 million, including approximately $10 million related to share-based compensation expense.
Adjusted EBITDA* between $97 and $100 million.
Net interest expense between $17 and $19 million.
Effective income tax rate between 22% and 25% with cash taxes between $9 and $12 million.
Cash capital expenditures between $28 and $33 million, including between $13 and $18 million of anticipated real estate acquisitions through like-kind exchanges.
Adjusted Free Cash Flow* between $39 and $42 million.


*
Please refer to the Reconciliation of Net Income to Non-GAAP Financial Measures, as well as the Reconciliation of Operating Income to Non-GAAP Financial Measures included in the following tables. The Company is not able to reconcile the forward-looking non-GAAP estimates set forth above to their most directly comparable GAAP estimates without unreasonable efforts because it is unable to predict, forecast or determine the probable significance of the items impacting these estimates, including gains, losses and other charges, with a reasonable degree of accuracy. Accordingly, the most directly comparable forward-looking GAAP estimates are not provided. 

** Same-store sales include sales at company restaurants and non-consolidated franchised and licensed restaurants that were open the same period in the prior year. Total operating revenue is limited to company restaurant sales and royalties, advertising revenue, fees and occupancy revenue from non-consolidated franchised and licensed restaurants. Accordingly, domestic franchise same-store sales and domestic system-wide same-store sales should be considered as a supplement to, not a substitute for, our results as reported under GAAP.


Conference Call and Webcast Information

Denny’s will provide further commentary on the results for the fourth quarter ended December 25, 2019 on its quarterly investor conference call today, Tuesday, February 11, 2020 at 4:30 p.m. Eastern Time. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny’s website at investor.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.









5




About Denny’s

Denny's Corporation is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. As of December 25, 2019, Denny’s had 1,703 franchised, licensed, and company restaurants around the world including 144 restaurants in Canada, Puerto Rico, Mexico, the Philippines, New Zealand, Honduras, the United Arab Emirates, Costa Rica, Guam, Guatemala, the United Kingdom, El Salvador, Aruba, and Indonesia. For further information on Denny's, including news releases, links to SEC filings, and other financial information, please visit the Denny's investor relations website at investor.dennys.com.



The Company urges caution in considering its current trends and any outlook on earnings disclosed in this press release. In addition, certain matters discussed in this release may constitute forward-looking statements. These forward-looking statements, which reflect its best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny’s Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as “expect”, “anticipate”, “believe”, “intend”, “plan”, “hope”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, such as avian flu, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company’s SEC reports and other filings, including but not limited to the discussion in Management’s Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 26, 2018 (and in the Company’s subsequent quarterly reports on Form 10-Q). 



Investor Contact:
Curt Nichols
877-784-7167

Media Contact:
Hadas Streit, Allison+Partners
646-428-0629



6


DENNY’S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
 
 
(In thousands)
12/25/19
 
12/26/18
Assets
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
3,372

 
$
5,026

 
 
Investments
3,649

 
1,709

 
 
Receivables, net
27,488

 
26,283

 
 
Assets held for sale
1,925

 
723

 
 
Other current assets
16,299

 
13,859

 
 
 
Total current assets
52,733

 
47,600

 
Property, net
97,626

 
117,251

 
Financing lease right-of-use assets, net
11,720

 
22,753

 
Operating lease right-of-use assets, net
158,550

 

 
Goodwill
36,832

 
39,781

 
Intangible assets, net
53,956

 
59,067

 
Deferred income taxes
14,718

 
17,333

 
Other noncurrent assets, net
34,252

 
31,564

 
 
 
Total assets
$
460,387

 
$
335,349

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Current liabilities
 
 
 
 
 
Current finance lease liabilities
$
1,674

 
$
3,410

 
 
Current operating lease liabilities
16,344

 

 
 
Accounts payable
20,256

 
29,527

 
 
Other current liabilities
57,307

 
61,790

 
 
 
Total current liabilities
95,581

 
94,727

 
Long-term liabilities
 
 
 
 
 
Long-term debt
240,000

 
286,500

 
 
Noncurrent finance lease liabilities
14,779

 
27,181

 
 
Noncurrent operating lease liabilities
152,750

 

 
 
Other
95,341

 
60,286

 
 
 
Total long-term liabilities
502,870

 
373,967

 
 
 
Total liabilities
598,451

 
468,694

 
 
 
 
 
 
 
Shareholders' deficit
 
 
 
 
 
Common stock
1,094

 
1,086

 
 
Paid-in capital
603,980

 
592,944

 
 
Deficit
(189,398
)
 
(306,414
)
 
 
Accumulated other comprehensive loss, net of tax
(33,960
)
 
(4,146
)
 
 
Treasury stock
(519,780
)
 
(416,815
)
 
 
 
Total shareholders' deficit
(138,064
)
 
(133,345
)
 
 
 
Total liabilities and shareholders' deficit
$
460,387

 
$
335,349

 
 
 
 
 
 
 
Debt Balances
(In thousands)
12/25/19
 
12/26/18
Credit facility revolver due 2022
$
240,000

 
$
286,500

Finance lease liabilities
16,453

 
30,591

 
Total debt
$
256,453

 
$
317,091


7


DENNY’S CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
 
 
 
 
 
 
 
 
 
Quarter Ended
(In thousands, except per share amounts)
12/25/19
 
12/26/18
Revenue:
 
 
 
 
Company restaurant sales
$
48,803

 
$
104,389

 
Franchise and license revenue
65,033

 
55,160

 
 
Total operating revenue
113,836

 
159,549

Costs of company restaurant sales, excluding depreciation and amortization
40,147

 
87,503

Costs of franchise and license revenue, excluding depreciation and amortization
33,261

 
28,517

General and administrative expenses
15,359

 
15,690

Depreciation and amortization
4,227

 
7,074

Operating (gains), losses and other charges, net
(5,721
)
 
1,005

 
 
Total operating costs and expenses, net
87,273

 
139,789

Operating income
26,563

 
19,760

Interest expense, net
3,570

 
5,421

Other nonoperating (income) expense, net
(652
)
 
1,496

Income before income taxes
23,645

 
12,843

Provision for income taxes
5,086

 
1,340

Net income
$
18,559

 
$
11,503

 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share
$
0.32

 
$
0.19

Diluted net income per share
$
0.31

 
$
0.18

 
 
 
 
 
 
Basic weighted average shares outstanding
58,406

 
62,135

Diluted weighted average shares outstanding
60,343

 
64,301

 
 
 
 
 
 
Comprehensive income
$
26,506

 
$
4,816

 
 
 
 
General and Administrative Expenses
Quarter Ended
(In thousands)
12/25/19
 
12/26/18
Corporate administrative expenses
$
12,923

 
$
13,187

Share-based compensation
(448
)
 
2,377

Incentive compensation
2,096

 
1,650

Deferred compensation valuation adjustments
788

 
(1,524
)
 
Total general and administrative expenses
$
15,359

 
$
15,690








8


DENNY’S CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
 
 
 
 
 
 
 
 
 
Fiscal Year Ended
(In thousands, except per share amounts)
12/25/19
 
12/26/18
Revenue:
 
 
 
 
Company restaurant sales
$
306,377

 
$
411,932

 
Franchise and license revenue
235,012

 
218,247

 
 
Total operating revenue
541,389

 
630,179

Costs of company restaurant sales, excluding depreciation and amortization
258,396

 
348,782

Costs of franchise and license revenue, excluding depreciation and amortization
120,326

 
114,296

General and administrative expenses
69,018

 
63,828

Depreciation and amortization
19,846

 
27,039

Operating (gains), losses and other charges, net
(91,180
)
 
2,620

 
 
Total operating costs and expenses, net
376,406

 
556,565

Operating income
164,983

 
73,614

Interest expense, net
18,547

 
20,745

Other nonoperating (income) expense, net
(2,763
)
 
619

Income before income taxes
149,199

 
52,250

Provision for income taxes
31,789

 
8,557

Net income
$
117,410

 
$
43,693

 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share
$
1.96

 
$
0.69

Diluted net income per share
$
1.90

 
$
0.67

 
 
 
 
 
 
Basic weighted average shares outstanding
59,944

 
63,364

Diluted weighted average shares outstanding
61,833

 
65,562

 
 
 
 
 
 
Comprehensive income
$
87,596

 
$
41,863

 
 
 
 
General and Administrative Expenses
Fiscal Year Ended
(In thousands)
12/25/19
 
12/26/18
Corporate administrative expenses
$
50,319

 
$
52,439

Share-based compensation
6,694

 
6,038

Incentive compensation
9,425

 
6,388

Deferred compensation valuation adjustments
2,580

 
(1,037
)
 
Total general and administrative expenses
$
69,018

 
$
63,828



9


DENNY’S CORPORATION
Reconciliation of Net Income to Non-GAAP Financial Measures
(Unaudited)

The Company believes that, in addition to GAAP measures, certain other non-GAAP financial measures are appropriate indicators to assist in the evaluation of operating performance on a period-to-period basis. The Company uses Adjusted EBITDA, Adjusted Free Cash Flow, Adjusted Net Income and Adjusted Net Income Per Share internally as performance measures for planning purposes, including the preparation of annual operating budgets, and for compensation purposes, including bonuses for certain employees. Adjusted EBITDA is also used to evaluate the ability to service debt because the excluded charges do not have an impact on prospective debt servicing capability and these adjustments are contemplated in our credit facility for the computation of our debt covenant ratios. We define Adjusted Free Cash Flow for a given period as Adjusted EBITDA less the cash portion of interest expense net of interest income, capital expenditures, and cash taxes. Management believes that the presentation of Adjusted Free Cash Flow provides useful information to investors because it represents a liquidity measure used to evaluate, among other things, operating effectiveness and is used in decisions regarding the allocation of resources. However, each of these non-GAAP financial measures should be considered as a supplement to, not a substitute for, operating income, net income or other financial performance measures prepared in accordance with U.S. generally accepted accounting principles.
 
Quarter Ended
 
Fiscal Year Ended
(In thousands, except per share amounts)
12/25/19
 
12/26/18
 
12/25/19
 
12/26/18
Net income
$
18,559

 
$
11,503

 
$
117,410

 
$
43,693

Provision for income taxes
5,086

 
1,340

 
31,789

 
8,557

Operating (gains), losses and other charges, net
(5,721
)
 
1,005

 
(91,180
)
 
2,620

Other nonoperating (income) expense, net
(652
)
 
1,496

 
(2,763
)
 
619

Share-based compensation
(448
)
 
2,377

 
6,694

 
6,038

Deferred compensation plan valuation adjustments
788

 
(1,524
)
 
2,580

 
(1,037
)
Interest expense, net
3,570

 
5,421

 
18,547

 
20,745

Depreciation and amortization
4,227

 
7,074

 
19,846

 
27,039

Cash payments for restructuring charges and exit costs
(529
)
 
(249
)
 
(2,581
)
 
(1,050
)
Cash payments for share-based compensation

 

 
(3,559
)
 
(1,934
)
Adjusted EBITDA
$
24,880

 
$
28,443

 
$
96,783

 
$
105,290

 
 
 
 
 
 
 
 
Cash interest expense, net
(3,332
)
 
(5,127
)
 
(17,551
)
 
(19,595
)
Cash paid for income taxes, net
(6,294
)
 
(907
)
 
(24,147
)
 
(3,254
)
Cash paid for capital expenditures
(3,193
)
 
(4,731
)
 
(25,295
)
 
(32,441
)
Adjusted Free Cash Flow
$
12,061

 
$
17,678

 
$
29,790

 
$
50,000

 
 
 
 
 
 
 
 
 
Quarter Ended
 
Fiscal Year Ended
(In thousands, except per share amounts)
12/25/19
 
12/26/18
 
12/25/19
 
12/26/18
Net income
$
18,559

 
$
11,503

 
$
117,410

 
$
43,693

Gains on sales of assets and other, net
(6,111
)
 
246

 
(93,608
)
 
(513
)
Impairment charges

 

 

 
1,558

Tax effect (1)
1,571

 
(40
)
 
24,057

 
(171
)
Adjusted Net Income
$
14,019

 
$
11,709

 
$
47,859

 
$
44,567

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
60,343

 
64,301

 
61,833

 
65,562

 
 
 
 
 
 
 
 
Diluted Net Income Per Share
$
0.31

 
$
0.18

 
$
1.90

 
$
0.67

Adjustments Per Share
$
(0.08
)
 
$

 
$
(1.13
)
 
$
0.01

Adjusted Net Income Per Share
$
0.23

 
$
0.18

 
$
0.77

 
$
0.68

(1)
Tax adjustments for the gains on sales of assets and other, net for the three months and year ended December 25, 2019 are calculated using an effective rate of 25.7%. Tax adjustments for the three months and year ended December 26, 2018 are calculated using the Company's 2018 year-to-date effective tax rate of 16.4%.

10


DENNY’S CORPORATION
Reconciliation of Operating Income to Non-GAAP Financial Measures
(Unaudited)

The Company believes that, in addition to GAAP measures, certain other non-GAAP financial measures are appropriate indicators to assist in the evaluation of restaurant-level operating efficiency and performance of ongoing restaurant-level operations. The Company uses Total Operating Margin, Company Restaurant Operating Margin and Franchise Operating Margin internally as performance measures for planning purposes, including the preparation of annual operating budgets, and these three non-GAAP measures are used to evaluate operating effectiveness.

We define Total Operating Margin as operating income excluding the following three items: general and administrative expenses, depreciation and amortization, and operating (gains), losses and other charges, net. We present Total Operating Margin as a percent of total operating revenue. We exclude general and administrative expenses, which includes primarily non-restaurant-level costs associated with support of company and franchised restaurants and other activities at our corporate office. We exclude depreciation and amortization expense, substantially all of which is related to company restaurant-level assets, because such expenses represent historical sunk costs which do not reflect current cash outlays for the restaurants. We exclude special items, included within operating (gains), losses and other charges, net, to provide investors with a clearer perspective of the Company’s ongoing operating performance and a more relevant comparison to prior period results.

Total Operating Margin is the total of Company Restaurant Operating Margin and Franchise Operating Margin. We define Company Restaurant Operating Margin as company restaurant sales less costs of company restaurant sales (which include product costs, company restaurant level payroll and benefits, occupancy costs, and other operating costs including utilities, repairs and maintenance, marketing and other expenses) and present it as a percent of company restaurant sales. We define Franchise Operating Margin as franchise and license revenue (which includes franchise royalties and other non-food and beverage revenue streams such as initial franchise fees, advertising revenue and occupancy revenue) less costs of franchise and license revenue and present it as a percent of franchise and license revenue.

These non-GAAP financial measures provide a meaningful comparison between periods and enable investors to focus on the performance of restaurant-level operations by excluding revenues and costs unrelated to food and beverage sales in addition to corporate general and administrative expense, depreciation and amortization, and other gains and charges. However, each of these non-GAAP financial measures should be considered as a supplement to, not a substitute for, operating income, net income or other financial performance measures prepared in accordance with U.S. generally accepted accounting principles. Total Operating Margin, Company Restaurant Operating Margin and Franchise Operating Margin do not accrue directly to the benefit of shareholders because of the aforementioned excluded costs, and are not indicative of the overall results for the Company.

 
Quarter Ended
 
Fiscal Year Ended
(In thousands)
12/25/19
 
12/26/18
 
12/25/19
 
12/26/18
Operating income
$
26,563

 
$
19,760

 
$
164,983

 
$
73,614

General and administrative expenses
15,359

 
15,690

 
69,018

 
63,828

Depreciation and amortization
4,227

 
7,074

 
19,846

 
27,039

Operating (gains), losses and other charges, net
(5,721
)
 
1,005

 
(91,180
)
 
2,620

  Total Operating Margin
$
40,428

 
$
43,529

 
$
162,667

 
$
167,101

 
 
 
 
 
 
 
 
Total Operating Margin consists of:
 
 
 
 
 
 
 
 Company Restaurant Operating Margin (1)
$
8,656

 
$
16,886

 
$
47,981

 
$
63,150

 Franchise Operating Margin (2)
31,772

 
26,643

 
114,686

 
103,951

  Total Operating Margin
$
40,428

 
$
43,529

 
$
162,667

 
$
167,101

(1)
Company Restaurant Operating Margin is calculated as operating income plus general and administrative expenses; depreciation and amortization; operating (gains), losses and other charges; and costs of franchise and license revenue; less franchise and license revenue.
(2)
Franchise Operating Margin is calculated as operating income plus general and administrative expenses; depreciation and amortization; operating (gains), losses and other charges; and costs of company restaurant sales; less company restaurant sales.


11


DENNY’S CORPORATION
Operating Margins
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
(In thousands)
12/25/19
 
12/26/18
Company restaurant operations: (1)
 
 
 
 
 
 
Company restaurant sales
$
48,803

100.0
 %
 
$
104,389

100.0
%
 
Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
11,849

24.3
 %
 
25,240

24.2
%
 
 
Payroll and benefits
18,331

37.6
 %
 
40,982

39.3
%
 
 
Occupancy
3,030

6.2
 %
 
6,063

5.8
%
 
 
Other operating costs:
 
 
 
 
 
 
 
 
Utilities
1,443

3.0
 %
 
3,657

3.5
%
 
 
 
Repairs and maintenance
1,050

2.2
 %
 
2,114

2.0
%
 
 
 
Marketing
1,838

3.8
 %
 
3,741

3.6
%
 
 
 
Other direct costs
2,606

5.3
 %
 
5,706

5.5
%
 
Total costs of company restaurant sales
$
40,147

82.3
 %
 
$
87,503

83.8
%
 
Company restaurant operating margin (non-GAAP) (2)
$
8,656

17.7
 %
 
$
16,886

16.2
%
 
 
 
 
 
 
 
 
 
Franchise operations: (3)
 
 
 
 
 
 
Franchise and license revenue:
 
 
 
 
 
 
Royalties
$
29,071

44.7
 %
 
$
25,682

46.6
%
 
Advertising revenue
21,562

33.2
 %
 
19,922

36.1
%
 
Initial and other fees
2,291

3.5
 %
 
1,780

3.2
%
 
Occupancy revenue
12,109

18.6
 %
 
7,776

14.1
%
 
Total franchise and license revenue
$
65,033

100.0
 %
 
$
55,160

100.0
%
 
 
 
 
 
 
 
 
 
 
Costs of franchise and license revenue:
 
 
 
 
 
 
Advertising costs
$
21,561

33.2
 %
 
$
19,923

36.1
%
 
Occupancy costs
7,788

12.0
 %
 
5,226

9.5
%
 
Other direct costs
3,912

6.0
 %
 
3,368

6.1
%
 
Total costs of franchise and license revenue
$
33,261

51.1
 %
 
$
28,517

51.7
%
 
Franchise operating margin (non-GAAP) (2)
$
31,772

48.9
 %
 
$
26,643

48.3
%
 
 
 
 
 
 
 
 
 
Total operating revenue (4)
$
113,836

100.0
 %
 
$
159,549

100.0
%
Total costs of operating revenue (4)
73,408

64.5
 %
 
116,020

72.7
%
Total operating margin (non-GAAP) (4)(2)
$
40,428

35.5
 %
 
$
43,529

27.3
%
 
 
 
 
 
 
 
 
 
Other operating expenses: (4)(2)
 
 
 
 
 
 
General and administrative expenses
$
15,359

13.5
 %
 
$
15,690

9.8
%
 
Depreciation and amortization
4,227

3.7
 %
 
7,074

4.4
%
 
Operating (gains), losses and other charges, net
(5,721
)
(5.0
)%
 
1,005

0.6
%
 
Total other operating expenses
$
13,865

12.2
 %
 
$
23,769

14.9
%
 
 
 
 
 
 
 
 
 
Operating income (4)
$
26,563

23.3
 %
 
$
19,760

12.4
%
 
 
 
 
 
 
 
 
 
(1)
As a percentage of company restaurant sales.
(2)
Other operating expenses such as general and administrative expenses and depreciation and amortization relate to both company and franchise operations and are not allocated to costs of company restaurant sales and costs of franchise and license revenue. As such, operating margin is considered a non-GAAP financial measure. Operating margins should be considered as a supplement to, not as a substitute for, operating income, net income or other financial measures prepared in accordance with U.S. generally accepted accounting principles.
(3)
As a percentage of franchise and license revenue.
(4)
As a percentage of total operating revenue.


12


DENNY’S CORPORATION
Operating Margins
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended
(In thousands)
12/25/19
 
12/26/18
Company restaurant operations: (1)
 
 
 
 
 
 
Company restaurant sales
$
306,377

100.0
 %
 
$
411,932

100.0
%
 
Costs of company restaurant sales:
 
 
 
 
 
 
 
Product costs
74,720

24.4
 %
 
100,532

24.4
%
 
 
Payroll and benefits
118,806

38.8
 %
 
164,314

39.9
%
 
 
Occupancy
18,613

6.1
 %
 
23,228

5.6
%
 
 
Other operating costs:
 
 
 
 
 
 
 
 
Utilities
10,359

3.4
 %
 
14,347

3.5
%
 
 
 
Repairs and maintenance
6,792

2.2
 %
 
7,761

1.9
%
 
 
 
Marketing
11,195

3.7
 %
 
15,008

3.6
%
 
 
 
Other direct costs
17,911

5.8
 %
 
23,592

5.7
%
 
Total costs of company restaurant sales
$
258,396

84.3
 %
 
$
348,782

84.7
%
 
Company restaurant operating margin (non-GAAP) (2)
$
47,981

15.7
 %
 
$
63,150

15.3
%
 
 
 
 
 
 
 
 
 
Franchise operations: (3)
 
 
 
 
 
 
Franchise and license revenue:
 
 
 
 
 
 
Royalties
$
108,813

46.3
 %
 
$
101,557

46.5
%
 
Advertising revenue
81,144

34.5
 %
 
78,308

35.9
%
 
Initial and other fees
6,541

2.8
 %
 
6,422

2.9
%
 
Occupancy revenue
38,514

16.4
 %
 
31,960

14.6
%
 
Total franchise and license revenue
$
235,012

100.0
 %
 
$
218,247

100.0
%
 
 
 
 
 
 
 
 
 
 
Costs of franchise and license revenue:
 
 
 
 
 
 
Advertising costs
$
81,144

34.5
 %
 
$
78,309

35.9
%
 
Occupancy costs
25,806

11.0
 %
 
22,285

10.2
%
 
Other direct costs
13,376

5.7
 %
 
13,702

6.3
%
 
Total costs of franchise and license revenue
$
120,326

51.2
 %
 
$
114,296

52.4
%
 
Franchise operating margin (non-GAAP) (2)
$
114,686

48.8
 %
 
$
103,951

47.6
%
 
 
 
 
 
 
 
 
 
Total operating revenue (4)
$
541,389

100.0
 %
 
$
630,179

100.0
%
Total costs of operating revenue (4)
378,722

70.0
 %
 
463,078

73.5
%
Total operating margin (non-GAAP) (4)(2)
$
162,667

30.0
 %
 
$
167,101

26.5
%
 
 
 
 
 
 
 
 
 
Other operating expenses: (4)(2)
 
 
 
 
 
 
General and administrative expenses
$
69,018

12.7
 %
 
$
63,828

10.1
%
 
Depreciation and amortization
19,846

3.7
 %
 
27,039

4.3
%
 
Operating gains, losses and other charges, net
(91,180
)
(16.8
)%
 
2,620

0.4
%
 
Total other operating (income) expenses
$
(2,316
)
(0.4
)%
 
$
93,487

14.8
%
 
 
 
 
 
 
 
 
 
Operating income (4)
$
164,983

30.5
 %
 
$
73,614

11.7
%
 
 
 
 
 
 
 
 
 
(1)
As a percentage of company restaurant sales.
(2)
Other operating expenses such as general and administrative expenses and depreciation and amortization relate to both company and franchise operations and are not allocated to costs of company restaurant sales and costs of franchise and license revenue. As such, operating margin is considered a non-GAAP financial measure. Operating margins should be considered as a supplement to, not as a substitute for, operating income, net income or other financial measures prepared in accordance with U.S. generally accepted accounting principles.
(3)
As a percentage of franchise and license revenue.
(4)
As a percentage of total operating revenue.


13


DENNY’S CORPORATION
Statistical Data
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Changes in Same-Store Sales (1)
Quarter Ended
 
Fiscal Year Ended
(increase vs. prior year)
12/25/19
 
12/26/18
 
12/25/19
 
12/26/18
 
Company Restaurants
0.5
%
 
2.1
%
 
1.9
%
 
1.8
%
 
Domestic Franchised Restaurants
1.8
%
 
1.2
%
 
2.0
%
 
0.6
%
 
Domestic System-wide Restaurants
1.7
%
 
1.4
%
 
2.0
%
 
0.8
%
 
 
 
 
 
 
 
 
 
 
Average Unit Sales
Quarter Ended
 
Fiscal Year Ended
(In thousands)
12/25/19
 
12/26/18
 
12/25/19
 
12/26/18
 
Company Restaurants
$
695

 
$
584

 
$
2,477

 
$
2,300

 
Franchised Restaurants
$
427

 
$
408

 
$
1,669

 
$
1,615

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Franchised
 
 
 
 
Restaurant Unit Activity
Company
 
 & Licensed
 
Total
 
 
Ending Units September 25, 2019
77

 
1,629

 
1,706

 
 
 
Units Opened

 
9

 
9

 
 
 
Units Refranchised
(9
)
 
9

 

 
 
 
Units Closed

 
(12
)
 
(12
)
 
 
 
 
Net Change
(9
)
 
6

 
(3
)
 
 
Ending Units December 25, 2019
68

 
1,635

 
1,703

 
 
 
 
 
 
 
 
 
 
 
 
Equivalent Units
 
 
 
 
 
 
 
 
Fourth Quarter 2019
70

 
1,634

 
1,704

 
 
 
Fourth Quarter 2018
179

 
1,531

 
1,710

 
 
 
 
Net Change
(109
)
 
103

 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Franchised
 
 
 
 
Restaurant Unit Activity
Company
 
 & Licensed
 
Total
 
 
Ending Units December 26, 2018
173

 
1,536

 
1,709

 
 
 
Units Opened

 
30

 
30

 
 
 
Units Refranchised
(105
)
 
105

 

 
 
 
Units Closed

 
(36
)
 
(36
)
 
 
 
 
Net Change
(105
)
 
99

 
(6
)
 
 
Ending Units December 25, 2019
68

 
1,635

 
1,703

 
 
 
 
 
 
 
 
 
 
 
 
Equivalent Units
 
 
 
 
 
 
 
 
Year-to-Date 2019
124

 
1,578

 
1,702

 
 
 
Year-to-Date 2018
179

 
1,538

 
1,717

 
 
 
 
Net Change
(55
)
 
40

 
(15
)
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Same-store sales include sales at company restaurants and non-consolidated franchised and licensed restaurants that were open the same period in the prior year. Total operating revenue is limited to company restaurant sales and royalties, advertising revenue, fees and occupancy revenue from non-consolidated franchised and licensed restaurants. Accordingly, domestic franchise same-store sales and domestic system-wide same-store sales should be considered as a supplement to, not a substitute for, our results as reported under GAAP.





14