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Denny's Corp (NASDAQ:DENN)
Q3 2020 Earnings Call
Oct 27, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Denny's Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

At this time, I'd like to turn things over to Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Curt Nichols -- Sr. Director, Investor Relations & Financial Analysis

Thank you, Kelly, and good afternoon, everyone. Thank you for joining us for Denny's third quarter 2020 earnings conference call. With me today from management are John Miller, Denny's Chief Executive Officer; Mark Wolfinger, Denny's President; and Robert Verostek, Denny's Senior Vice President and Chief Financial Officer.

Please refer to our website at investor.dennys.com to find our third quarter earnings press release along with any reconciliation of non-GAAP financial measures mentioned on the call today. This call is being webcast and an archive of the webcast will be available on our website later today.

John will begin today's call with a business update, Mark will then provide some comments about our franchisees and development, and Robert will provide a recap of our third quarter results and current trends before briefly commenting on our annual guidance for 2020. After that, we will open it up for questions.

Before we begin, let me remind you that in accordance with the safe harbor provision 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 the call today. Such statements are subject to risk, 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 25, 2019, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q.

With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.

John C. Miller -- Chief Executive Officer

Thank you, Curt, good afternoon everyone. I hope each of you have remained safe and healthy since we last shared an update on Denny's. While we experienced sequential performance improvement throughout the third quarter as we continue to evolve our business, we accomplished this despite the continued disproportionate impact of the COVID-19 pandemic on the full-service restaurant industry. In this dynamically changing environment, we have been focused on four key guest-centric themes, reassurance, value, comfort and convenience. I'll now touch on each of these.

We understand and appreciate the concerns around general health and the ability to have a safe restaurant dining experience will push us for some time. Therefore, it is important that we reassure our guest of a safe dining experience by consistently upholding our commitment to enhance cleanliness and sanitation procedures at all customer touch points.

The pace of communication to our restaurants has been unwavering as we have continually reminded operators of our enhanced protocols and shared best practices in the period of ever-changing state and local requirements. Following a tightening of dine-in restrictions in July, our broadcast media message in August featured a timely brand spot, highlighting our enhanced safety procedures, while also communicating options for curbside pickup, contactless delivery, drive-up ordering and outdoor seating.

Our second area of focus is value. Denny's is known for every day value. We bring value and will remain important in this economic environment and the guests seek to maximize their -- the impact of their dollars on quality food options for the whole family. We understand that value comes in different forms and at the start of the third quarter, we focused on the price-driven value of our well-known $2 $4 $6 $8 Value Menu as well as the convenience-based value of free delivery when ordering through our website or on the app.

We are currently featuring the abundant value Super Slam. At the same time, we have expanded our bundled value platform of shareable Family Pack. These family packs are awfully delicious, convenient and cost-effective way to feed a family of four.

Our third area of focus is comfort. We strive to ensure that Denny's is a place where our guests feel welcomed and valued whether dining with a large family or as a party of one, we believe our guests needs a Denny's expense as a time to build connections within an environment that is both inviting and comfortable. Our established Heritage restaurant image has received consistently positive guest feedback, largely due to its welcoming and relaxed feel.

Our operator -- our operations team has also reinforced the critical need for comfort by reminding our entire system of the rules we live by including the expectations, that number one, everyone is welcome to dine at Denny's, number 2, everyone is treated like our favorite guest and number 3, everyone is shown kindness and respect. After issuing multiple streamlined menus, we will begin using a full course within next week, providing more comfort food options even though the menu is 24% smaller than our pre-pandemic core menu.

Our fourth area of focus is convenience. We believe guests will continue to expect top technology to bring an enhanced value to their dining experience, whether in our restaurants or through off-premise options like our Denny's On Demand platform. At the start of the third quarter, we launched Apple Pay for our Denny's On Demand iOS mobile app and continue to promote outdoor dining solutions in trade areas that currently preclude or significantly restrict indoor service.

Currently over one-third of the domestic system is offering outdoor dining. We have also been rolling out curbside pickup parking signs to implement a better experience for our guest and team members who are promoting guest controlled digital ordering from the parking lot. Average weekly sales for all off-premise transactions are up over 95% since the beginning of the pandemic going from approximately 4,000 per week per store in February to approximately 7,800 per week per store in September. We've been pleased with our ability to sustain this higher level of off-premise sales even as easing restrictions across many parts of the country have yielded simultaneous growth in dine-in transactions.

Domestic systemwide same-store sales declined approximately 34% for the third quarter, driven by an improving monthly trend due to easing dine-in restrictions in many parts of the country in addition to the initiatives that I've noted.

In closing, I want to thank our leadership teams and franchisee partners for their continued engagement, steadfast resolve and unwavering commitment to this brand. Their collective efforts to reassure our guest, provide compelling value options and deliver the comfort our guests seek across technology-enabled and convenient platforms has contributed to the progress we made in the third quarter. These guest-centric themes will also remain in focus as we move forward.

With that, I will turn the call over to Mark Wolfinger, Denny's President, to discuss more about our franchisees and development. Mark?

F. Mark Wolfinger -- President

Thank you, John. The continued progress you mentioned in October is encouraging and not only driven by easing dine-in restrictions, but also the resilient and a tenacious spirit of our franchisees. Currently, 99% of our domestic systems have opened with nearly 1,300 restaurants operating with open dining rooms. However, less than one-third of our domestic franchised restaurants are opening 24 hours a day, 7 days a week. While we cannot control state and local restrictions and the related impact on our sales trends, we have incentivized our franchisees to maximize their sales and profitability potential by expanding their operating hours.

For the fourth quarter, we have initiated two new programs. The first program provides an extension on the schedule payment of deferred fees and rent to those restaurants with closed dining rooms due to state or local restrictions as well as those restaurants that are operating at least 18 hours a day. The second program provides temporary royalty relief on late night sales to restaurants open 24 hours during the fourth quarter. As we've mentioned before, the Late Night daypart represented approximately 18% of our sales prior to the pandemic. We estimate that our overall same-store sales results in Q3 are impacted by approximately 8 to 10 percentage points from restaurants closed during this daypart.

As a reminder, the average restaurant requires approximately 70% of its 2019 sales in order to cover both fixed and variable cost items. We are pleased to say that during October approximately 60% of our domestic franchised restaurants are achieving the 70% of 2019 sales level. This is an improvement from approximately 45% during the third quarter.

On a related note, and as we would -- as would be expected, the pandemic has profit higher closures than our historical run rate. During the third quarter, 23 franchised restaurants have closed along with one company restaurant bringing the September year-to-date total to 55 closures, 6 of these closures were due to lease expirations, the remaining 49 closures related to franchised restaurants with AUVs, Average Unit Volumes, of less than $1 million, well below the franchise average prior to COVID-19.

The pandemic accelerated these closings that would -- that we had otherwise anticipated in the next several years. We do expect to have additional store closures in the near term, however, we anticipate most of these situations will prove to be an acceleration of future period closures and we remain confident in the sustainability and longevity of our portfolio. These closures were offset by five franchised restaurants that opened during the quarter, including three international restaurants, which brought our total number of restaurants to 1,664. These recent openings underscore the confidence and future opportunities our franchise see within the brand.

We look forward to returning net restaurant growth in the future and I'm confident we will do so backed by over 75 refranchising development commitments along with our existing domestic and international commitments. We also believe opportunities will exist to expand through conversions as we emerge from the pandemic.

I'll now turn the call over to Robert Verostek, Denny's Chief Financial Officer, to discuss the quarterly performance. Robert?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Thank you, Mark, and good afternoon, everyone. I will start with a brief review of our third quarter results, then share an update on our business outlook for fiscal year 2020. As John mentioned, we saw sequential improvement in our same-store sales results during the quarter. More specifically, domestic systemwide same-store sales declined 39% in July, 35% in August and 28% in September leading to a decline of 34% for the full quarter. These sales results were influenced by capacity restrictions and reduced operating hours. For example, with mostly closed dining room since mid-July, California restaurants weighed on the total third quarter same-store sales results by approximately 4 percentage points.

On the other hand, restaurants in Texas, which were operating under a 50% capacity limit throughout the quarter, provided nearly a point of benefit to our overall quarterly same-store sales results. Domestic restaurant operating with open dining rooms delivered a same-store sales decline of approximately 29% for the quarter compared to a decline of approximately 46% at those domestic restaurants operating with closed dining rooms. We have been pleased to see the improving top line trends continue into October, during which domestic systemwide same-store sales declined approximately 26%.

In addition to the weight of government-imposed dining room restrictions on our business, we have also discussed the impact of less than one-third of our system operating 24 hours during the pandemic. We are encouraged to see some franchisees extend their operating hours in October to take advantage of the incentives Mark described. Domestic restaurants, which were open 24 hours in October had a same-store sales decline of less than 20%. The number of domestic locations operating 24 hours has increased by approximately 10% during the month of October and currently represent slightly more than one-third of our store base.

Franchise and license revenue decreased 27.8% to $43.8 million primarily due to the impact of COVID-19 on sales at franchised restaurants. Franchise operating margin was $19.7 million or 45% of franchise and license revenue compared to $29.5 million or 48.7% in the prior year quarter. This margin decrease was primarily due to the impact of COVID-19 on sales at franchised restaurants. Company restaurant sales of $27.8 million were down 56.2% due to the impact of the pandemic as well as a 33 equivalent unit decline in our portfolio as a result of our 2019 refranchising and development strategy.

Company restaurant operating margin was $500,000 or 1.7% compared to $9.3 million or 14.6% in the prior year quarter. This was due to the sales decline and related deleveraging impact of COVID-19 as well as the reduced company restaurant portfolio achieved through our 2019 refranchising and development strategy, partially offset by approximately $1.5 million of favorable reserve adjustments and tax credits related to the CARES Act.

Total general and administrative expenses were $13.7 million compared to $16.4 million in the prior year quarter. The improvement was primarily driven by a reduction in core G&A of approximately 20% due to proactive cost savings initiatives and previously announced reductions in personnel due to COVID-19.

Additionally, we recorded approximately $800,000 in tax credit related to the CARES Act. These results collectively contributed to adjusted EBITDA of $8.0 million. Depreciation and amortization expense was approximately $300,000 lower at $4.0 million primarily resulting from a lower number of equivalent company restaurants. Interest expense was approximately $4.4 million compared to $4.2 million in the prior year quarter with the increase primarily due to the amortization of dedesignated interest rate swap losses from accumulated other comprehensive loss net.

The provision for income taxes was $0.8 million, yielding an effective income tax rate of 11.2%. Adjusted net income per share was $0.01 compared to adjusted net income per share of $0.18 in the prior year quarter. Adjusted free cash flow after cash interest, cash taxes and cash capital expenditures was $2.1 million compared to $3.7 million in the prior year quarter, primarily due to a reduction in adjusted EBITDA, offset by lower capital expenditures. Cash capital expenditures, which included maintenance capital were $1 million compared to $10.6 million in the prior year quarter, primarily due to prior year real estate acquisitions and facilities maintenance related to our 2019 refranchising and development strategy.

During the quarter, we raised $69.6 million in net proceeds from a public offering of common stock, which we subsequently utilized to pay down our credit facility. We ended the quarter with approximately $246 million of total debt outstanding, including $230 million under our credit facility. Additionally, after considering cash on hand and remaining capacity under our credit facility, we had approximately $104 million of total available liquidity after considering the liquidity covenant. As a reminder, in May of this year, we entered into the second amendment to our existing credit facility which temporarily brings certain financial covenants including the leverage ratio, which was 5.7 times at the end of the quarter.

As same-store sales improved sequentially throughout the quarter so did adjusted free cash flow. In September, we generated cash of between $1 million and $3 million. This compares to what would have been a slightly positive adjusted free cash flow in fiscal June after excluding the impact of $3 million of royalty abatements extended to our franchise partners during that month.

Let me now take a few minutes to expand on the business outlook section. Based on third quarter results and our expectation that the current business conditions will not materially decline, we anticipate the following annual guidance ranges. It is important to note that fiscal year 2020 includes 53 weeks of activity. We expect domestic systemwide same-store sales of between 70% and 75% of prior year. We anticipate total general and administrative expenses of between $51 million and $54 million, including $7 million of share-based compensation expense. As a reminder, share-based compensation expense does not impact adjusted EBITDA.

We expect an adjusted EBITDA of at least $28 million. And additionally, we anticipate cash tax refunds of between $5 million and $7 million related to prior year overpayments of estimated taxes. Cash capital expenditures are anticipated to be between $6 million and $8 million. Adjusted free cash flow, inclusive of the anticipated tax refund is expected to be at least $10 million.

Finally, I want to mention how proud I am of how our management team remains focused on managing business cost while supporting Denny's recovery through the challenges of the COVID-19 pandemic. In doing so, we have and will continue to leverage the strength of our asset-light business model and fortify balance sheet to ensure the success of our dedicated franchisees and this brand.

That wraps up our prepared remarks, I will now turn the call over to the operator to begin the Q&A portion of our call.

Questions and Answers:

Operator

[Operator Instructions] We'll hear first today from Nick Setyan with Wedbush Securities.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you, and thank you for all the detail around dining rooms and trans through Q4. Any chance you could help us a little bit more by maybe just focusing on the company-owned units just because the EBITDA from the company-owned units is such a big part of the profitability. Maybe just percentage of company-owned units that are still equivalent to the dining rooms capacity at the units that are opened, maybe the trend of the company-owned units in the quarter-date period. All of that would help.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Hey, Nick. Yeah, I appreciate that and appreciate the question. Again I -- we didn't really break out that data in that way. I can tell you, as we noted in previous calls and in previous investor calls that we've done that the company portfolio still trails and it was trailing and still trails the balance of the franchise system with regard to results, particularly, in those areas that would be considered tourist areas. Our drive locations, our Disney locations and Nevada locations. So they do trail with regard to that, they had and they still do. With regard to all of those various specific breakouts I don't actually have that information sitting in front of me. And maybe, we can figure out how to get that to you. I'm looking at Curt over here, how to give that to you in a -- without specific information going to one person, so.

Nick Setyan -- Wedbush Securities -- Analyst

Got it. Appreciate it...

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Other -- Yeah, other than that Nick, I apologize that we don't. Again, not trying to be kindest and we -- again, to your point, we've really tried to break out as much details as we possibly could. All I can tell you that all of our company units are open, they remain -- none of them are in a temporarily closed status. So they are all opened and they would be and to the extent that they are allowed to have on-premise dining, all of them would be taking advantage of that. If a county or state allows for on-premise signings we would certainly -- a company unit would certainly be open.

Nick Setyan -- Wedbush Securities -- Analyst

Perfect. Understood. In terms of I guess that some of the peers out there have still cautioned around the potential for a reversal of the capacities given the potential of the second wave and trends we're seeing out there. I guess, what steps are you taking in case we do have to go back instead of forward?

John C. Miller -- Chief Executive Officer

Yeah. Yeah, Nick, it's John. So well, that's true there is -- day-by-day there are cautions and two steps forward one step back there are parts of the country that are taking a more conservative view, which is in Illinois right now with some curfews have been put in place in the city and throughout the CDC has put out some new definitions about distance and exposure. On the other hand, places that have been conservative and were opened are starting to open up more. A few in the counties had some updates out of them just a couple of hours ago within a moment ago, our additional stores that have been takeout only will be added to dining room.

So I think at the heart of the question though it's our communication or how do we handle these things. So we'd have a daily fee that goes to our franchisees, which we'll call an off-shut day that sort of give announcements on what's opening, what's dangerous, where COVID is spiking, we're literally sort of communicating daily with our franchise system on sort of what to expect next, how to see around the next corner.

Looking in innovating on a daily basis about late-night hours and how to prepare to extend hours if they haven't yet in the results of those that have. And we're getting real time weekly updates to our steering body, which is the head of our Franchisee Association Board, it looks like they're all of the advisory councils, plus sort of an extended steering body of very engaged franchisees would help sort of guide best practices in their local communities and assist brand strategies and also, frankly the challenges that we've been aggressive and not aggressive enough.

And through that daily communication and weekly council, w'e're going to say, hey, let's make sure our dining room set up, let's investigate heaters, let's look at plexiglass between tables. Looks like that -- and clearly, that won't be allowed, don't bothered there just yet. So we're literally by geography making regular daily coaching calls and trying to be as prepared as possible.

Headwinds, yes to that, Nick, and one of those is for late-night hours. Our franchisees have the willing desire, sometimes they're going -- looking to wait a few more weeks, there is a little bit of the investment hurdle to get over, to retrain late-night crew, finally get them on board and train them during the day shift and cut them loose at night. So there are some of those headwinds we have 24 hour concepts many not, but we're working through it. And as Mark pointed out in his talking points, our franchisees are adding those extended hours so each read more being added.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Hey, Nick, just going back, Curt was able to -- I just want to give you a little bit of additional information on top of what John just shared about the 24 hours. This is as of today. Right. So not a specific. This is not as of the balance sheet date, but as of today with regard to company units. Again, this is a breakout of company unit, 66 company units web-in are opened at 25% capacity, 13 are opened at 50% capacity, 12 our opened with 75% capacity, 18% are within that social distancing status, which is I think that's 6-foot radius definition and then, 12% are off-premise only. So that's kind of the breakout of the various status of on-prem and off-prem only. So hopefully that adds a little bit more for you.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you very much. It's very helpful.

Operator

We'll hear next from Todd Brooks with C.L. King & Associates.

Todd Brooks -- C.L. King & Associates -- Analyst

Good afternoon, everybody. Just a few quick questions. One...

John C. Miller -- Chief Executive Officer

Todd...

Todd Brooks -- C.L. King & Associates -- Analyst

Hi, how are you? Do we walk through the mechanics of the royalty relief that you've talked about in Q4 for those franchisees that you -- we opened, and the 24/7 operating model? Just what the either anticipated drag is or if you look at a per unit that reopens type of royalty relief hit, I think you would expect? That would be helpful.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah. Todd, this is Robert. So with regard to that, the mechanics are pretty straightforward with regard to that relief. If a unit, it moves to 24/7, is open 24/7, our late night -- in during our Late Night daypart, they receive a 3 percentage point decrease in royalty rate isolated to those hours for the fourth quarter. So again, it's not -- it's just isolated from that 10 a.m. -- our 10 p.m. to 5 a.m. daypart for units that are open during that timeframe.

So with regard to drag, the way we visualize it, it actually is not to me, is the converse of a drag. While we have -- we will be giving up some royalties -- we -- the royalties we wouldn't have been receiving otherwise. So it actually is a way to build that and build back to our 24/7 daypart more quickly.

As you noticed in my comments, even in the month of October those 24/7 units were -- their same-store sales performance decline was less than 20%. So we really believe in getting them there. As John noted in the previous follow-up question, there are some cost of getting these units back up and 24/7, and thus the -- our willingness to put our money where our mouth is to help incentivize those units getting opened more quick but it's isolated the Q4, it's isolated to the 10 p.m. to 5 a.m. daypart and it's isolated to units that get opened 24/7.

Todd Brooks -- C.L. King & Associates -- Analyst

Okay. Very helpful, thanks. And then, if we look at franchisees that you reopened for the late night and assuming they can get back to kind of a down 20% type of same-store sales level, what is the overall margin looking like for that franchisee if it gets back to that level?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

That's a really good question, Todd, so let me try to get it to this way. So when we talked about company units, which were there -- which were the -- and we originally guided earlier this year, we guided the 18% to 19% for company operating margins and those are on the bigger company units right. There are units that are approaching $3 million in sales, so it would be less than that. So you have that, so the 100% sales you kind of have that target reference for the company. We've also said and we -- I think we reiterated again today that the breakeven level of margin, our average per unit is approximately 70% of systemwide sales.

So again, if you take the haircut from a company volume unit of $3 million to a franchised average unit volume of 170 and looking at the FTBs and it's probably a mid-teens number both for just for hypothesis, for illustrative purposes let's say that, that's 15%. I think it would be somewhat linear between the 70% and 100% level. So if they were to achieve 85% that would be likely somewhere at mid to upper-single digits range. Again, that is really big thumb in the air type of analysis with regard to that, but we need to get these units opened 24/7. We need to get California open to on-premise dining, we need to get back to 85% and then 90-plus percent of sales to drive back to that double-digit to mid-teens type of margins. But it's still going to be a mid-single digit number, so.

Todd Brooks -- C.L. King & Associates -- Analyst

Okay, very helpful. And then the final question I have is within the guidance and kind of assuming, do we get back to 70% to 75% of last year's sales volumes for the full year? What are the assumptions around the two moving parts that get you to that level? What are you assuming as far as further openings of the closed California stores? And then, how much of the base are you assuming reopens in that 24/7 model over the course of the fourth quarter? Thanks.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah. Todd, so I think those are probably the best way to look at that is if you look at the October results you'd, I -- we quoted I think it was in my script that those were down off 26%. So we were conversely now to suggest that we have 74% in the month of October of the prior year sales. So we are somewhat in that range at least for Q4. If the -- as my statement said, as long as things don't materially decline with the caveat to the forecast, the only things that'll materially decline were already kind of in that range.

So -- and that is, I think, if we do the count, if you look at California right now, we are about -- it is probably about 50-50 more than 50% of California had on-premise dining currently and looking at it by county for our units, that's public information. So I think the more units they get opened 24/7, the better off we are, the more units that have California on-prem dining the better we are. But the reality is, is where October was, where the one-third of the north of -- slightly north of one-third of the units opened 24/7 and there maybe slightly north of half is from California units opened on-prem, we were in that kind of that 70 -- that -- right at that 75% sales already, so.

Todd Brooks -- C.L. King & Associates -- Analyst

Okay, great. Thanks, Robert.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yes, sir.

Operator

And from[Phonetic] Truist Securities, we'll hear next from Jake Bartlett.

Jake Bartlett -- Truist Securities -- Analyst

Great, thanks for taking the questions. My thoughts was just actually building -- I just want to make sure I understand that the comments about the guidance and if I count the 26% same-store sales in the fourth quarter, I get roughly down 30%, 31% per same-store sales. So is there some sort of weighting difference that we should be aware of? I mean, I guess if you maybe could be more explicit about what it implied for the fourth quarter as a whole?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

So, yeah. Jake, there are -- and thank you for the question. So you got a six-week period in December, so that would be influencing these numbers still again you have that type of impact within there, so it's weighted heavier. Those numbers will likely be weighted heavier just because you have more units opened during that timeframe. Earlier in the year, we, candidly, we were, from this thing first hit, at one point in time I think we were down to seven units that were opened and operating.

So there is a probably an outsized impact due to that 14-week period and the number of units that are on-prem. I don't think we specifically imply -- that's why we gave the range candidly of 70% to 75% to not necessarily get pinned down to a very specific number. Again, we hope California opens up, we hope that 24-hour incentive helps to move franchisees to get to 24/7. But the reality is that some of this is out of our control, Illinois is an example of that to the other side, thus, the range and not really wanting to get tied down to a -- to kind of a specific range for Q4.

Jake Bartlett -- Truist Securities -- Analyst

Got it. I appreciate that. Maybe, I -- just to make sure if we think about kind of where we are in October. Would -- as you think, would that be in the middle of the range for the annual guidance or I don't know, just we can -- I can -- you can -- I can do the weighting I guess separately, but is that in the ballpark that where you are currently would keep you kind of in the middle of the guidance?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah, it's an interesting question, Jake. I don't know if I've done that math myself. I know that the 26% for October, the down 26% for down October, again, we don't expect to materially decline from that, but again we hope to build from that -- from that point. But I don't know if -- I haven't -- candidly haven't done the math myself to understand what that midpoint would suggest for that 70% to 75%, I apologize for that.

Jake Bartlett -- Truist Securities -- Analyst

No, don't worry...

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Maybe it's something you can take forward with Curt and Kayla in the follow-up.

Jake Bartlett -- Truist Securities -- Analyst

Yeah, sounds great. But my other question was on -- well, I appreciate the detail about same-store sales that the stores would open dining rules and then those with off-premise only. I had a question, looking at -- in October, off-premise only stores were down 33%, a really significant increase from July of down 55%, is that including stores where you have off-premise or -- sorry, outdoor dining or -- what accounts for just such a huge improvement for off-premise only? And I guess, in the context of the $7,800 a week for off-premise. I'm just trying to materially reconcile that $7,800 with the down 33% same-store sales?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah. So Jake, you're spot on that. Off-premise only in our definition would include units that had patios in the such. So off-premise means that they cannot seat inside our restaurants, although, they may be under a tent in the parking lot. So the -- I think that really what you're pointing out there is really a testament to our operations team and our franchisees and their entrepreneurial spirit to maximize every guest opportunity to serve them.

I've seen pictures, Jake, of these set ups where there are full tents, where there is artificial turf, where there are misters and electricity and Muzak, and they're pretty impressive tight set ups and it really, to your point, I think you caught on to one of the areas that was really, really a good thing. I think we have about 300 units or so that are taking advantage of those type of opportunities.

So again, you're spot on that, that is really the reason why you can go from early on with the off-premise being really a dire number to where we are today. With again, really on the back of our ops team educating and helping our franchisees and our franchisees really maximizing the guest experience.

Jake Bartlett -- Truist Securities -- Analyst

Got it, that's really -- that's impressive. I guess, as we think about that is there any seasonality to that? I know in California it remains beautiful all year round and you can see outside, but is there any -- could that change as such you go to the winter -- winter months, that capacity?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

I think it really points to our small states, Jake. I do think that we will continue in large part to be able to execute against the strategy and again if you think California, Arizona, Texas, Florida, we will likely have this opportunity and frankly where this opportunity really never existed in the Mid-west, it wasn't as prolific as where we thought we'd be able to take advantage of it and on an extended time frame.

John C. Miller -- Chief Executive Officer

Yeah, I think the positive momentum of by the way and real quick is while you have people willing to dine in real pretty weather or a mild weather or light jacket weather, there are days that are really hot, it creates burden in California and there's been a lot of smoke in the air and there's -- so again, scrappy franchise system and we're not the only brand that's done some of these things obviously so credit to sort of the nature of our industry, but also there have been headwinds to our success for those to be -- some of those things are updating. So with positive news and negative news of one of 50 other, I think we're obviously just -- we should continue to be doing small states. Their view is that our operators only know how to do curbside and drive-thru where people pull up an order or pull up an order they have already ordered to go to pick up on the way somewhere feeling legally into the habit after a lot of exterior size than the like. So, well that's not the same as dine-in, make no mistake about it, extended hours and extended capacity are the best thing that can happen to full-service Denny's included. These things do mitigate it to some degree.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah, just taking on to that really quick, Jake, I've been reminded in the room that that it's probably bit off-prem or a tent in type dining, patio dining probably becomes more available in states such as Arizona as the weather becomes more tempered as opposed to summer -- the summertime when those temperatures are well above 100, so there's gives and takes across that as John just alluded.

Jake Bartlett -- Truist Securities -- Analyst

Great. Well, sitting in Massachusetts, I'm jealous. Thanks a lot. Thanks for taking the questions.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Thanks, Jake.

Operator

We'll hear now from James Rutherford with Stephens.

James Rutherford -- Stephens Inc. -- Analyst

Hey, thanks for taking the questions and I really appreciate all the detail you gave on the operating centers per units in the comps here, it's really helpful our side. I had a question about the comment about heightened near term closures, I think this has been a little bit of a theme for a couple of quarters now. I just was hoping you could help us think about the potential magnitude of that. I mean, it seems that with improving comps, the unit closures would maybe slow sequentially but given it from either based on these expirations, I just wanted to clarify that comment, please.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah, James, thanks for the comment about the detail. We try to be really helpful here presenting [Technical Issues] sometimes. With regard to closures, I think one of the interesting things that really kind of teased out of the data here as we were preparing for this call and we pointed it out in the script is that 90% of the closures that we've experienced to-date have been below $1 million in AUV so that kind of represents a pull forward of potential closures.

Now the other piece of information I'll share, this was not in the script, but is a relevant piece of information to have for this discussion is that based on 2019, average unit volumes, there still are 50 to 75 units that fall in that sub-million dollar category. So listen, we've talked throughout time about having that sub -- less than probably 200 units that were $1 million and lastly, it -- we're working on road shows and such, this is probably a more concrete example from us or a specific detail from us that nearly 50 of the ones we closed already this year had that volume of $1 million or less and we still have 50 to 75 that fall into that category.

Thus, the idea of -- while comps are still improving and we pointed out that 60% of our franchisee -- franchised units that are open are above that kind of that breakeven 70% threshold level, that doesn't mean that there won't still be near-term pressure on closures than -- and likely, probably into that set that I just described. Now, we do believe ultimately -- again, this is the dichotomy between nearer term and longer term, that nearer-term that we will expect more closures, but longer term, these are probably pull forward of closures that would have happened otherwise in later '21 or '22 and beyond.

So while you get the idea that net unit growth is probably bolstered by our -- by getting back in development commitments from our 2019 refranchising strategy and when that comes back above we did extend those commitments by a year when the pandemic hit. So when you're looking out a year from now and to pull forward these closures, we are bullish but nearer-term we still probably need to wait through some additional closures.

James Rutherford -- Stephens Inc. -- Analyst

Got it. That's helpful. Circling back on the outdoor dining discussion from a minute ago, maybe I missed it, but could you help quantify the level of outdoor dining sales you're seeing in those 300 or so units that are offering that today?

John C. Miller -- Chief Executive Officer

Hey. Yeah, it is a mix that -- you'll have stores with outdoor dining blowing away another store with outdoor dining, you have another one. So each trade area has their different after five dynamics, lunch dynamics and breakfast to late night dynamics. I would say on the whole outdoor dining versus non-outdoor dining in markets that are takeout only, we outperform on the averages but it's a fairly random array of results.

James Rutherford -- Stephens Inc. -- Analyst

Fair enough. Fair enough. And I just wanted to check it off my list here. One last question from me is on the G&A guidance, it implies a pretty big step-up of G&A in the fourth quarter, is that all stock based compensation or is the underlying cash G&A movements in the fourth quarter?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Now James, that's another excellent question. That is largely focused right into that stock-based compensation or you saw the 8-K that we issued within the last month that was focused around our -- the intent of the 2018 and 2019 incentive plans and the accounting that was required coming from that, a lot of that had been reversed off in previous periods. And with that modification that was detailed in that 8-K, the accounting required that we book additional expense, so much of that increase that you noted will be focused into the stock-based comp. The benefits from the cost rationalization, both in our tightened approach to travel, which is virtually nil at this current time to the impact to the personnel we -- back in May, we impacted approximately 50 people permanently dislocating family -- 50 or so of our family and friends from here, those benefit in that core G&A. As you recall, we break out our G&A in detail between core short-term incentive, long-term incentive in this deferred comp accounting machinations that we have to work through that core will continue to benefit from the actions that we've taken.

James Rutherford -- Stephens Inc. -- Analyst

Excellent, thanks for the detail.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Thanks, James.

Operator

And from Oppenheimer, we'll hear from Michael Tamas.

Michael Tamas -- Oppenheimer -- Analyst

Hi, thanks. Hope everyone is well. You mentioned about a third of the units are open for 24 hours in October. So I was just wondering, can you kind of talk about what percentage of units could actually be open for late night given the various restrictions and I think there are some curfews going in around the country? So that's the first part, thanks.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah, Michael, I -- we answered a couple of the points. So we are about -- we are north of a third -- slightly north of a third, we picked up about 10% in the month of October when we initiated that incentives, so we continue. Literally, I've been on calls personally with some of our larger franchisees walking through the data with them to talk about that. I -- at my fingertips, right now, is piece of information we may be able to get to. But at my fingertips, I don't know the local or state restrictions with regard to hours, but it is far beyond the third that we have now, I would -- we wouldn't -- I don't know the specific number, but it's far beyond the third that we talk about.

John C. Miller -- Chief Executive Officer

Yeah. 1,287 stores have open dining rooms, those are likely to go first because of the staffing that comes, the dining rooms being open comes so easy to make the hurdle into the late night hours. But that's not necessarily true in every location, there will be some stores that are already 24 hours, that have no in-store -- in-store dining. So there is not a hard and fast rule, but I think that's a pretty good guide with that 1,287 and sort of the step change will happen there first.

Michael Tamas -- Oppenheimer -- Analyst

Got it. Thanks for that. What do you think was the trigger to get that 10% of extra stores opened in October and what do you think pushes franchisees over the edge over the next coming weeks and months to reopen right now and is there any commitment beyond the fourth quarter to stay open to get that royalty relief as well or did it just on in the quarter and whatever happens after that does not impact that? Thanks.

John C. Miller -- Chief Executive Officer

The incentive and support go a long way, but I think to control sales improvement income, competence improvement from staffing improvements from cash flow solutions and late night hour extension. So I mean part of it is usually the incentives from the franchise or part of it is daily communications, the business case for late night hours, the bias for younger audiences from the Denny's On Demand and high trials for after 5 and late night, all those things point toward adding back these brand equities we have as 24-hour brand.

Michael Tamas -- Oppenheimer -- Analyst

Got you. And then on units that are open for in-store dining, is there an opportunity through partition or taking advantage of slower dayparts to sort of increase the level of sales? It sort of seems like between September and October your indoor dining, open restaurant sort of leveled off there. So just trying to figure out what the opportunity is going forward. Thanks.

John C. Miller -- Chief Executive Officer

Sure. Part of our -- as we control the daily communications and we explore all these kinds of options that may extend capacity or give consumers more confidence, it's been a long time now since I read my script several minutes ago. This area complement and sort of security, safety has been a big topic of our conversation and sharing the consumer. And so there are areas where that -- people really have taken to this plexiglass between those two tables and for separators or foot pedals on back-in doors, sanitation stations around the dining room. And there are others that have not responded as much to it or there has been sort of buying some of those against it. And so, it sort of varies by area across the country. We had a very high adoption rate in the Denny's system, a lot of stores put those systems in pretty quickly and then, it slowed, it does take some investment. I think it's -- I don't have a number, Curt, do you have the number?

Curt Nichols -- Sr. Director, Investor Relations & Financial Analysis

No.

John C. Miller -- Chief Executive Officer

I think, it's over 400 who have plexiglass but I don't want to -- and probably, Michael, you might want to verify the accuracy in that comment.

Michael Tamas -- Oppenheimer -- Analyst

Got you. Fair enough. All right, thank you.

John C. Miller -- Chief Executive Officer

Thanks, Michael.

Operator

[Operator Instructions] We'll hear now from Brett Levy with MKM Partners.

Brett Levy -- MKM Partners -- Analyst

Great, thanks, and appreciate you taking the question and appreciate the detail that you provided us. I guess, if we could follow through -- I'll start with a top-line question and move down a little. Appreciate the color on California and Texas, but would you be able to give us any sense of what the top quartile or top 10% of your system are doing? And if or how many are generating positive comps?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Hey, Brett, this is Robert. With regard to that, we really tried to break it out to give you a couple of guard rails with regard to kind of Texas and California again being the -- we have nearly 400 units in California and 200 units in Texas and that represents nearly, what is that, 40% of the system right there, roughly 35% to 40%. So again, we thought that that was pretty good guard rail. The challenge with what we're dealing with right now is the data just moves so quickly depending upon the day, depending on which units are allowed to open, are allowed to close, I didn't cut it for you one way today and is a need tomorrow. So it really kind of look to provide kind of the best overlay that will give you a sense of the direction.

And we want to keep turning back and because this is true, the more that we can get as the restrictions ease, I mean we get to more on-premise dining, there is a absolute linear correlation to the improvement in same-store sales and that holds also for 24/7. It's a very linear correlation between that, so we are highly focused on those two pieces. And again, it goes to California, is just north of half the units being opened, the more of those get opened, the better off we are and it really is that linear. The fewer the restrictions, there are more 24/7 that better the result more, so.

Brett Levy -- MKM Partners -- Analyst

Along those lines, can you give any color on how the Southeast is doing given that that was obviously important among the earliest and they are among the weak stringent in terms of restraints?

John C. Miller -- Chief Executive Officer

Yeah, Texas is doing a little better than Florida is the best I can do at the moment and California, worst in both. California and Washington represents to bigger challenges and Florida, Arizona, Texas represents the better news.

Brett Levy -- MKM Partners -- Analyst

Okay, that's fair enough. Now, when we think about G&A, how should we think about both the levels of what you layer on as you start to see sales recover into '21 and just the pace at which I mean your spending should materialize whether it's anything from the travelers range to just additional spending on that corporate?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah. Hey Brett, this is Robert again. With regard to that, we have be -- we have always been quite good at controlling our G&A, as you would expect and as you enter into a pandemic, you become hyper-focused on the things that you can actually control, clearly G&A is one of those areas. So I think that you will see us continue to focus on that area as restrictions ease and we move through '20 and into '21, it's just part of our DNA. It would hit all of the important part of our DNA to control this line and I think you will see a continued focus on reforming that [Technical Issues] you have more implements out there, you can pick when this pandemic abates and I can't tell you when that is, but I'm fairly certain that it's extended some point into 2021, which will require us to continue to be diligent with our G&A spending.

Brett Levy -- MKM Partners -- Analyst

And it is my final question similar on the capex side. When do you first be returning to more of the project-oriented pursuits, whether it's talking to your franchisees about upgrading the existing process for really accelerating to build out?

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Yeah, Brett, so with regard to that, the biggest expenditures that we were going through other than some of these real estate acquisitions that we're getting caught up in a 10/31 that made the free cash flow will look a little funny, but we've tried to talk through that in detail to get there. There's other biggest expenditure was really into the remodels and we were right on the cusp of launching in to what we call the Heritage 2.0, we had tested that and we were getting ready to launch into that.

With regard to our franchisees, we did, and we have already communicated to them and offered relief that they would not need to complete remodels prior to 2022, so with regard to that. Now, to the extent that we can get back to producing cash flow and can pay out of that, we are very bullish on results from our Heritage 2.0, but I think that would be predicated upon getting back to some level of sales normality at some point in time. But again, we are very bullish on our remodel scheme and want to get back there. The franchisees have been given a more response through the end of 2022 or through the beginning -- sorry, the beginning of 2022 and we will have the flex from a company perspective, what's been the timeframe to what we -- if we have a really normal is.

John C. Miller -- Chief Executive Officer

Little update with some reconnaissance here, 575 units have plexiglass installed currently.

Brett Levy -- MKM Partners -- Analyst

Thank you very much.

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

And just one other cleanup, no, for everyone on the phone with regard to the 50 to 75 units that are sub $7 million. Again, I -- just be clear that that was a nearer-term comment that was not necessarily isolated into Q4, it is a relative near-term versus the longer-term.

Operator

And with no other questions, I'd like to turn things back to Curt for any closing remarks.

Curt Nichols -- Sr. Director, Investor Relations & Financial Analysis

Thank you, Kelly. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in February, during which we will discuss our fourth quarter 2020 event. Thank you all and have a great evening.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Curt Nichols -- Sr. Director, Investor Relations & Financial Analysis

John C. Miller -- Chief Executive Officer

F. Mark Wolfinger -- President

Robert P. Verostek -- Senior Vice President, Chief Financial Officer

Nick Setyan -- Wedbush Securities -- Analyst

Todd Brooks -- C.L. King & Associates -- Analyst

Jake Bartlett -- Truist Securities -- Analyst

James Rutherford -- Stephens Inc. -- Analyst

Michael Tamas -- Oppenheimer -- Analyst

Brett Levy -- MKM Partners -- Analyst

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