Shares of Denny's Corp (NASDAQ:DENN) surged today after the company reported third-quarter earnings and said it would refranchise most of its company-owned stores, following in the footsteps of several other restaurant chains. Investors saw the move as a way to reduce costs and unlock steady cash flow. As a result, the stock jumped 22.6% on the day.
Denny's saw same-store sales tick up 1% in the quarter and adjusted earnings per share increase from $0.14 to $0.17, which missed estimates by $0.01. However, the bulk of investor attention was on the company's refranchising and development plan.
Management said the company plans to transition over the next 18 months from a 90% franchised business model to one that's 95%-97% franchised, meaning it will sell 90-125 restaurants. The company also said it would use the process to upgrade the quality of its real estate portfolio and proceeds from the restaurant sales and a moderate increase in leverage will be used to return capital to shareholders. This likely will occur in the form of share buybacks, as the company has been aggressively buying back shares and doesn't pay a dividend.
CEO John Miller explained the move, saying: "Our refranchising and development strategy will enable us to further evolve as a franchisor of choice that provides more focused support services, all while yielding a higher quality, more asset-light business model. As always, we remain committed to profitable system sales growth, driving market share gains, delivering strong returns on invested capital and generating compelling returns for shareholders, including the return of capital."
Looking ahead, the company expects same-store sales growth for 2018 of 1%-2% at company-owned restaurants and 0%-1% at franchised locations. It sees total revenue of $626 million-$634 million for the year, which compares to estimates of $632.3 million.
Investors have cheered past refranchising plans such as McDonald's, and the move should help the company unlock cash to buy back shares and ensure a steadier revenue stream. Denny's valuation looks a bit stretched at a price-to-earnings ratio of 27 after today's jump, however, given the company's otherwise slow growth.