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1 Reason Denny’s Will Struggle In 2014

By John Maxfield - Mar 16, 2014 at 10:07AM

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Here's why Denny's sales are likely to disappoint in 2014.

Making predictions is generally a fool's errand (small "f"). But when it comes to Denny's ( DENN 2.20% ) top-line performance in 2014, there's plenty of reason to worry.

I don't say this because Denny's is in imminent danger. In fact, nothing could be further from the truth. Over the last 11 quarters, the chain has consistently reported positive same-store sales. Most recently, its full-year comparable sales notched higher by 0.5% in 2013 compared to 2012.

Is this amazing? No. But it certainly beats full-service competitors like Olive Garden and Red Lobster, both of which recently reported their worst quarterly comparable sales in years, if not ever -- click here to read about Olive Garden's recent struggles and here for Red Lobster's.

The problem for Denny's is more transient in nature. As the company explained in its latest earnings release:

The highest volume company operated restaurant located on the Las Vegas Strip is closed for reconstruction and expected to reopen in early 2015. The landlord is redeveloping the location to include a completely rebuilt Denny's restaurant to be funded by the landlord. In 2013, this restaurant generated $7.9 million of sales and $2.9 million of pre-tax operating income.

Now, to be fair, the temporary closure of a single restaurant wouldn't normally be a problem for Denny's. There are after all a total of 1,600 Denny's locations across the United States, 163 of which the company owns and operates itself. By this measure, one unit is a drop in the bucket.

But the problem is that Denny's restaurant on the Las Vegas Strip isn't its typical outlet. Not only is it the company's largest restaurant, as the quote above explains, it's the largest by a long shot.

It's $7.9 million in revenue last year makes it nearly four times bigger than the average company-owned unit, which generated roughly $2 million in annual sales. And it's more than five and half times larger than the average franchised location, which generates annual revenue of approximately $1.4 million.

Looking at it from another angle, the Las Vegas location alone equates to 2.4% of the company's total revenue from company-owned stores. And even after revenue from franchised and licensed locations are thrown into the pot, it still accounts for 1.7% of the whole.

The point here is that Denny's revenue figure will suffer this year. But assuming all else goes well, then it's nothing to be concerned about. In short, it's a temporary and necessary investment in the future.

Note: A previous version of this article gave inaccurate information on Denny's Las Vegas Strip location in comparison to its other restaurants. The error has been corrected.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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