It's comforting for investors when a company you're invested in makes money while you sleep. In the case of Denny's (NASDAQ:DENN) with its open-24-hours restaurants, it's a literal truth. The company still turns dollar pancakes into dollar bills despite the soft economy and competition from other breakfast-serving chains, such as McDonald's (NYSE:MCD) and Burger King (UNKNOWN:BKW.DL).
Denny's reported third-quarter results on Oct. 28, and the company announced that revenue dropped 3% to $117 million. Despite this, same-store sales improved 1.2%, and adjusted earnings per share improved 5.6% to $0.08. It was the ninth quarter out of the last ten that saw positive same-store sales growth. Overall sales were down mainly because 12 company-owned restaurants were sold to franchisees. Moves such as that are expected to lower sales, but result in higher overall profit along with decreased risk.
Denny's brought in $11.6 million in excess cash, or free cash flow, in the quarter. It used most of this cash to buy back shares, and spent $10.2 million buying back 1,781,040 shares. This comes out to around 2% of the shares outstanding bought back in a single quarter. Denny's has now spent $69.2 million buying back 15.3 million shares over the last three years. This is despite having $175.3 million in debt still outstanding.
This suggests management thinks that the stock price is so undervalued and the future so bright, it's better to buy shares back as much as possible than to pay down its debt and reduce interest expenses. The actual buying back of shares also serves to raise the EPS by lowering the share count.
Denny's didn't mention much about 2014 (other than the message the aggressive buybacks told us). However, in the conference call CEO John Miller stated that Denny's will "continue to grow the top line." Miller also stated, "Next year with commodities, we think will be a favorable year, better than this year." This implies greater profit margins from sales and greater bottom line increases. Denny's ended the call stating that it would give full year guidance with the next earnings report.
Miller stated that the company was able to "grow sales despite the challenging economic environment." The economy blame game keeps popping up among restaurant chains. When McDonald's posted just a small gain of 0.7% in the US, it blamed this on "broad-based challenges of the current environment." It further warned, "The Company expects the dynamics of the current environment to persist" while forecasting flat sales for the month of October.
Burger King reported similar challenges as its same-store sales only grew by 0.9%. It too blamed the economy, stating it as, "...continued softness in consumer spending and ongoing competitive headwinds." Despite this, however, Burger King isn't even flinching. It has opened 592 new restaurants in the last 12 months alone and it isn't about to stop opening new ones any time soon. It is encouraging to know that Denny's is still growing successfully during tough times, and multiple chains expect the environment to improve in the future which is evidenced by more store openings and stock buybacks.
Possible Denny's headwind
McDonald's mentioned in its conference call that it intends to go after the late-night crowd, a time period popular with Denny's customers. CEO Don Thompson stated:
Breakfast has performed positively for us in the marketplace. We've got a broader strategy around how we engage Millennials and own the night, as we call it, because that's a big opportunity for us. And again, we continue to look at our menu mix across the board.
It's a risk for Denny's if McDonald's can successfully tempt 3-AM diners away from grand slams and over to McGriddles.
Foolish final thoughts
Follow the same-store sales, net income, and stock buybacks. As long as Denny's continues to pull in cash resulting from increased sales of restaurants, its stock buybacks will likely only get more aggressive. This means you can count on EPS growing because of two forces: higher profits and lowered share count. All put together, you have the ingredients of a winner.