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Denny's Grand-Slams Its Way Out of 2018

By Nicholas Rossolillo – Updated Apr 22, 2019 at 3:54PM

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Restaurants aren’t perfect, but Denny’s is competing in the top half of the pack.

American classic diner Denny's (DENN 4.78%) recently reported its full-year 2018 results, capitalizing on a rebounding restaurant industry and a generous consumer that's been spending lots of money on eating out. Since the start of 2018, the stock is up 32%, making it one of the better performers in a hypercompetitive sector.

After another quarter of solid results, there could be more left in the tank for the casual-dining brand -- but some patience will be required.

The 2018 high points

Metric

Full-Year 2018

Full-Year 2017

YOY Change

Adjusted revenue

$547.3 million

$529.2 million

3.4%

Adjusted earnings per share

$0.68

$0.58

17.2%

Company-owned same-store sales

1.8%

1%

N/A

Franchised same-store sales

0.6%

1.1%

N/A

Data source: Denny's. Adjusted revenue excludes impacts from revenue recognition changes. YOY = year over year.  

Denny's had several things going against it this year. Revenue and expense recognition changes associated with corporate tax reform at the end of 2017 created some uncertainty surrounding results. The restaurant industry overall has also been dealing with wage and food cost inflation, which weighs down the bottom line. Then there were ongoing remodels of outdated locations, which also bogged down the numbers.

Nevertheless, earnings adjusted for one-time items notched a double-digit increase, because of cost controls, a lower tax rate, and higher same-store sales -- a combination of average guest ticket size and foot traffic. In fact, Denny's posted its eighth straight year of higher same-store sales, with the total company figure rising 0.8% during the year. While same-store figures were in line with the restaurant industry overall, what's impressive is that the chain was still positive even during the "restaurant recession" of 2016 and 2017. Though flat-at-best foot traffic is still being managed through menu price increases, the positive figures have meant overall rising profitability for Denny's over the past decade.

A stack of pancakes with butter and syrup and a side of bacon.

Image source: Getty Images.

What's next for Denny's?

For 2019, management sees same-store sales rising as much as 2% over 2018, though profits could come in lower as the company continues to update aging stores and transition more of its company-owned and -operated locations to franchisees. Through the first half of 2020, the diner plans to move from a 90%-franchised model to at least 95% franchised, selling anywhere from 90 to 125 of its 179 wholly owned stores to new and existing franchisees.

Check out the latest Denny'searnings call transcript.

That transition could cause some near-term pain, but offloading operating expenses to franchisees and relying on higher-profit margin royalty fees should boost the bottom line over the long term. Think McDonald's, which started down a similar path a few years ago.

To be fair and transparent, I've been grumpy about restaurant stocks for a while, and some of the industry's troubles with overall declining foot traffic resulting from overexpansion is probably weighing on Denny's, too. However, Denny's is not part of the "growth-at-any-cost" plague, as it plans to keep its number of locations to net zero once again in 2019. Nevertheless, while this isn't a growth stock, the company does have a plan to unlock value over the long term. In the meantime, there's $128 million left on the current share-repurchase plan, a significant sum that could boost earnings per share in the year ahead, as the company's total market cap is currently just $1.1 billion.

I'm not ready to go as far as to buy the stock, but with another solid year in the books and Denny's embarking on a plan to offload the operating tasks of more of its stores, I think the company is worth keeping an eye on.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Denny's Corporation Stock Quote
Denny's Corporation
DENN
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