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.
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.
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.