One of the most enduring of restaurant breakfasts is the Grand Slam from Denny's (NASDAQ:DENN). Pancakes, eggs, bacon, or sausage. Simple, filling, inexpensive, and available all day. Unfortunately for this company, not as many people are eating it.
Denny's reported earnings late last week, with a 1.3% decline in revenue and a 10% drop in net income compared to last year. Earnings per share, though, were flat at $0.02 because of a slight decrease in share count and rounding to the nearest penny.
Nelson Marchioli, president and chief executive officer, said in the earnings release, "Our second quarter results were impacted by pressures on our consumer demographic from rising gas prices and interest rates that contributed to softer than anticipated sales." That may have contributed to the decline in revenues, but it's interest payments that are hurting this company.
Operating income for the company was actually up by $1.3 million compared to last year. Yet, net income was $215,000 less. The swing of $1.5 million was mostly because of a $1.2 million increase in the company's interest expense.
For both this quarter and last year's second quarter, the interest coverage ratio (earnings before interest and taxes divided by interest payment) was 1.16, showing the operating income barely covered its interest payments. Interest payments continue to be the bane of this company, as seen in the table below. Even when you add back depreciation and amortization, the ratio is still dangerously low.
|
1/1/05 |
4/1/05 |
7/1/05 |
10/1/05 |
1/1/06 |
4/1/06 | |
|---|---|---|---|---|---|---|
|
EBIT / |
0.7x |
1.1x |
1.1x |
1.2x |
0.8x |
1.1x |
|
EBITDA / |
1.7x |
2.1x |
2.1x |
2.2x |
1.9x |
2.0x |
Marchioli also said, "Our new Super Slam breakfasts ... were launched in late June and are proving to be especially popular." For the sake of the company and its investors, I hope that and other promotions or new menu items will help increase revenue and earnings. Otherwise, in today's higher interest rate environment, the company might end up drowning in its debt.
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Fool contributor Jim Mueller and his wife like visiting Denny's. Jim usually orders a sandwich during lunch and dinner, but his wife, like many people, always orders breakfast. They do not own shares in this company. The Motley Fool has a strict disclosure policy.
