Is Denny’s Beginning a New Aggressive Growth Phase?

Denny’s is doing something it hasn’t done in 12 years.

Apr 1, 2014 at 11:00AM

In many areas of the country, it may seem like a Denny's Corporation (NASDAQ:DENN) location stands on every corner already. Where no Denny's stands, often an IHOP of DineEquity (NYSE:DIN) or a Bob Evans (NASDAQ:BOBE) substitute appears nearby. It may come as a surprise, but the over-50-year-old chain's growth may actually just be getting started.

Source:  Denny's

Grand-slam results
On Feb. 19, Denny's reported fiscal fourth-quarter results. Systemwide same-store sales popped 0.9%. Adjusted earnings per share jumped 18.7% to $0.08. Denny's posted the tenth quarter of positive same-store sales out of the last eleven as well as the third full year of growth in this statistic in a row.

CEO John Miller credited the gains to "improvements in food, service, atmosphere," and the company's "comprehensive approach." He believes Denny's "franchise-focused business provides financial stability and flexibility while enabling [it] to generate earnings growth and significant free cash flow." He emphasized that Denny's has successfully grown despite the "challenging economic environment" for consumers.


Source: Denny's

Expanding the lineup
You may not know this, but Denny's Corporation now has the largest number of international locations of any American family dining chain with 101 restaurants. This suggests the brand has been strong so far but it still has a long way to go.

The total of 101 restaurants looks like a rather small number for world coverage in comparison with the chain's total of around 1600 locations in just the United States alone. Meanwhile in 2013, Denny's had the largest number of openings in total and the largest restaurant count going back to 2001.

Denny's plans to aggressively expand in almost every market over time. It recently signed a 20 restaurant deal in Atlanta. Denny's opened its first locations in Chile and El Salvador, which implies that it will add many more there. It also signed a development agreement for 30 locations in the Middle East. The company has even started to expand to military bases. Denny's has a pipeline of additional expansion plans that it will reveal in the future.

The opposing teams
IHOP of DineEquity has also proved that breakfast and lunch diner-style restaurants remain popular if they resonate with the consumer. Last quarter, IHOP's same-store sales leaped by 4.5%, which even improved on the 3.6% jump in the quarter just before. Even more impressively, DineEquity claims the winter weather hurt sales a bit and otherwise they would have been even better.

Meanwhile, Bob Evans seems to be a different story, but the evidence is still there. The bad news was that system same-store sales dropped 1.8% last quarter and nosedived 6.7% in February. However, Bob Evans blamed that on "sustained and severe winter weather of a magnitude not seen in many years, particularly in our core Midwest markets." Perhaps the Florida locations, where weather wasn't a factor, give us more of a hint. Same-store sales rose 4.4%, in line with the result from IHOP, for the quarter and they rose 1.2% in February for that state.

Foolish final thoughts
Based on analyst estimates Denny's Corporation trades at a forward P/E of 18 based upon its current share price and estimated EPS of $0.35 for the FY ending December 2014. This is similar to the valuations assigned to both Bob Evans Farms, Inc. and DineEquity, Inc. Bob Evans currently trades at a forward P/E of 18 assuming estimated EPS of $2.75 for the year ending April 2015 and DineEquity, Inc.'s also trades for 18 times its estimated EPS of $4.30 for the FY ending December 2014.  

With Denny's Corporation's franchise-focused business model, the company has the potential to rapidly grow its earnings per share without taking on much risk or needing much capital. This seems to imply that shares in Denny's Corp. represent a compelling value due to its faster growth potential compared to competitors Bob Evans and DineEquity. Given that almost the entire world outside of the United States remains untapped, the opportunity is off the charts. Fools should laser-focus on the international growth story because as it accelerates it could make Denny's an out of the park home run in the long-term.

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