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Why Denny's Stock Fell Hard This Morning

By Jon Quast – Updated Jul 1, 2020 at 11:07AM

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The company is offering new shares at a discount to raise cash.

What happened

Shares of Denny's Corporation (DENN 0.16%) fell sharply on Wednesday morning, after the casual dining restaurant chain announced the pricing of its new public share offering. As of 10:30 a.m. EDT, the stock was down 9%.

Considering Denny's public offering priced at $9.15 per share, today's drop appears totally justified. That's not encouraging for Denny's shareholders, down more than 50% year to date.

DENN Chart

DENN data by YCharts

So what

Denny's was hit hard by the COVID-19 pandemic. As a primarily dine-in chain, it couldn't easily pivot to an off-premise operating model. Sure, to-go orders more than doubled from February to April, but it's still not much. The company's overall sales were down more than 80% at the low point, and the company was burning through $5 million to $7 million per month.

Denny's has reopened most of its locations now. However, even with 94% of its restaurants open, sales were still down 40% year over year during the week ending June 10 -- the most recent week we have data for. It seems consumer discretionary spending just isn't returning very fast for sit-down restaurants. Needless to say, Denny's is still distressed, and it needs some cash.

That's why Denny's is offering 8 million shares of its common stock, with the option for the underwriter to sell an additional 1.2 million shares. This will bring in $69.6 million for the company, and up to $80.1 million if the extra shares get sold. Considering it ended the first quarter with only $39.2 million in cash and debt of $318 million, this extra liquidity is useful.

A frustrated man puts his hands on his face with a down stock chart in the background.

Image source: Getty Images.

Now what

I don't think Denny's stock is reacting to the extra shares as much as it's reacting to the pricing. It's true the extra shares dilute shareholder value. But at $9.15 per share, it priced significantly below 52-week highs and even lower than where the stock traded just yesterday, when the offering was announced. 

Public offerings are but one tool in a public company's arsenal to raise funds, and pricing new shares at a discount isn't a particularly attractive option. By Denny's choosing this route, it indicates more attractive options weren't available. It's a reminder the company has a ways to go on the road to recovery.

Jon Quast has 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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