Tag Archives: DENN



 Denny’s, under the capable leadership of CEO, John Miller, has done a capable job in the last decade, first stabilizing, then building upon the brand’s long tenured reputation. Virtually all the operating metrics have steadily improved as the chain has transitioned to the asset light model. The stock, DENN, which was in the low single digits 15-20 years ago, bottoming below $2.00 per share in early ’09, has obviously rewarded long term shareholders handsomely. Today the Company is able to apply free cash flow and remaining borrowing power to shrink the capitalization further. At the same time, the benefits of the refranchising program and the asset light operating model can increase operating cash flow at a steady rate as international unit growth leads the way, to be augmented by corporate efficiencies.  DENN, based on a multiple of EBITDA now sells at a 10-15% discount from its fairly well positioned asset light publicly held peers such as DNKN, QSR, or WEN. While there are some statistically less expensive peers such as DIN (with troubled Applebee’s) and RRGB (where do we start?), those situations are far more challenged than DENN. We therefore consider that DENN can continue to provide above average returns to its shareholders, especially with the operating risks (in a tough economy) mitigated by the transition to an asset light model.


 Denny’s Corporation is one of America’s largest full-service restaurant chains. As of December 25, 2019, Denny’s consisted of 1,703 franchised, licensed, and company operated restaurants in the world with combined total annualized sales of about $3 billion. Franchised and licensed units now represent 96% of this total. Denny’s is known as “America’s Diner” and is open 24/7 in most locations. They are best known for their value menu of $2-$4-$6-$8 and the Breakfast Grand Slam which was first introduced in 1977. The strongest statewide presence is in California (384 stores systemwide), Texas (196 locations) and Florida (131 units). Canada with 77 locations, Puerto Rico with 15, Mexico has 11 and the Phillipines with 10 are the top four regions out of the 144 total internationally. Relative to Company operated stores, California with 25, Florida with 9, and Nevada with 7 are the largest markets.

This more than 50 year old brand has been refurbished in the last decade. Investment highlights include: 9 consecutive years of domestic system-wide same store sales growth, 380 new restaurants open since 2011 (over 20% of the system), 74 international locations opened since 2011, Adjusted Free Cash Flow over the 8 years ending 12/18 has allowed for $520M of stock repurchased from 11/10 to 12/19, and the conversion to an asset light operating model is essentially complete. It is important that 35 franchisees with more than 10 restaurants each comprise over 60% of the franchise system. Franchised restaurants have had a 2% CAGR since 2011, and the franchisor’s (non-GAAP) operating margin from this segment has grown steadily to $104M in calendar 2018.

As noted above, $520M of share repurchases have been an important part of “returning cash to shareholders”, in addition to the stock going up by 10x in value over the last ten years. $96M was spent in this regard in 2019 and about $282M remains authorized.



The AUV at Company store was essentially flat (+0.9%) in fiscal 2018. Franchisees’ AUV was up 1.6%.  In calendar 2018, Cost of Goods Sold decreased by 70 basis points due to leverage gained from menu price increases and lower commodity costs. Payroll and Benefits increased by 70 basis points due primarily as a result of a 40 basis points increase from minimum wage rate increases and a 30 basis points increase in Incentive Compensations. Occupancy costs increased 30 basis points which was primarily due to a rise in general liability costs. Other Store Expenses increased by 100 basis points as a result of 10 basis points increase in utilities, 20 basis points increase in repairs and maintenance, 10 basis points reduction in marketing costs and a 90 basis points increase in other direct costs – mainly an increase in third-party delivery fees. Store Level EBITDA decreased 130 basis points as a result of the increases in Occupancy and other direct expenses.

In the nine months ending 9/30/19, CGS was down 10 bp to 24.4%, labor was well controlled, down 110 bp to 39.0%, higher was Occupancy which was up 40 bp and Other Expense, up 50bp. The result was an improvement of store level EBITDA, up 30 bp to 15.3% of revenues.


Denny’s has been on an aggressive refranchising program, which resulted in 105 locations transacted in calendar 2019, bringing the franchised/licensed total to 96% of the system. The success in this area over the last twelve months should result in a net benefit of $9-10M of Adjusted Free Cash Flow. In conjunction with this effort, there are currently development commitments for 78 new locations.


The annual numbers are shown above. In the most recent quarter, ending 12/25/19, SSS were up 0.5% for company stores, up 1.8 for domestic franchised restaurants, and up 1.7% for systemwide domestic units.

 RECENT DEVELOPMENTS: (Per 1/13 release of preliminary sales results)

 In recent developments, Denny’s is one of the industry leaders on several initiatives. Menu innovation has included the early offering of plant-based protein alternatives featuring Beyond Meat products, with a launch in L.A. in October, 2019, and a systemwide launch in January, 2020. Off-premise options have been focused upon, to the point where off-premise sales has grown 67% to 12% of total sales since the launch of Denny’s on Demand in mid-2017. As part of that effort, 89% of the domestic system offers delivery.

In addition to the always crucial attention to operating details such as menu development, cost control, training, marketing and other areas, there continues to be relatively low hanging financial fruit to be harvested. The improvement in net cash flow from the ’19 refranchising effort is expected to be $9-10M. This is a result of lower EBITDA from the stores sold ($23-30M), more than offset by incremental royalties ($9-12M), incremental rent ($3-4M), and new cost savings initiatives ($11-13M) relative to the franchise system.

The corporate debt as a percentage of trailing twelve months EBITDA at 9/30/19 was temporarily lower at 2.3x, from a high of 3.0x a year ago and the target is 2.5-3.5x. While operating results have not yet been reported for calendar 2019, Adjusted EBITDA for the nine months ending 9/19 was $71.9M, down from $76.8M. It should be noted that Adjusted EBITDA, while only slightly higher the last several years at just over $100M, has been up every year since $2013, when it was $78M, as systemwide sales have grown by about $500M since 2011.

Guidance for 2020 has not been provided, presumably to be provided with the full 2019 report, due on or about February 11th.

CONCLUSION: Provided at the beginning of this article






The long term investment appeal of well established franchising companies is accepted by the investment community. Most of the prominent franchisors’ equities sell at price to trailing twelve month EBITDA multiples in the mid to high teens (Denny’s (DENN), Dine Brands (DIN), Dunkin’ Brands (DNKN), Pollo Loco (LOCO), McDonald’s (MCD), Restaurant Brands (QSR), Wendy’s (WEN), even higher in a couple of instances Domino’s (DPZ), Shake Shack (SHAK), Wingstop (WING), lower in a number of “challenged” situations like Jack in the Box (JACK), Red Robin (RRGB), Brinker (EAT), Fiesta Rest. (FRGI).

The attraction of asset light franchisors revolves around the presumably free cash flow for franchisors, a steady stream of royalty income unburdened by capital expenditures to build stores. The operating leverage is at the store level.  Franchisees are responsible for building the stores, then controlling food costs, labor, rent and all the other operating line items. Franchisors receive the royalty stream and have the obligation of supporting the system with brand development, site selection advice, marketing support, and operating supervision. These supporting functions, it should be noted, are optional to a degree, and we have written extensively about system support sometimes being short changed by corporate priorities such as major stock buybacks.


We acknowledge that in every franchise system there will be some operators less satisfied than others. In the same way, customer reviews on Yelp or Facebook are more frequently written by critics. Bad news is more noteworthy and more customers are inclined to criticize than applaud, so we have to listen to the complaints but dig further for the reality. With that in mind, we hear the following from franchisees of various restaurant systems:

“I’ve been in this business for thirty years, and I’ve never seen it this bad. Everyone is making money but me; the landlords, the franchisor, the banks. My margins have been killed, and I’m up against my lending convenants”.

“All the franchisors want to do is build sales to build their royalties. The dollar deals are trading people down. My franchisor doesn’t care about my margins. I can’t maintain my margins, especially with the increasing cost of labor, let alone build it”.

“The franchisor is putting pressure on me to sell, even though I’ve always been considered a good operator, with high performance scores. I’m up to date on my development agreement, but they want somebody else to take me out, and the new buyer will agree to what I consider to be a ridiculously aggressive development contract”.

“The franchisor has replaced experienced long term field support with lower priced (and inexperienced) younger people. They’re cutting corporate overhead, but these kids, who never ran a store, are telling me to how to control costs.””

“I’m doing my best with the development objectives, but it is almost impossible to build stores with today’s economics. Rents are too high, labor costs are killing me, and I can’t raise prices in this promotional environment”.

“As if things aren’t tough enough, I’m being nickeled and dimed with demand for higher advertising contributions and fees on services (including software) that I thought would be provided”.

The valuations provided to the publicly held companies do not reflect the situation as described by the admittedly anonymous franchisees. The commentators quoted above don’t want to aggravate their franchisor, and we don’t want to be unfair or misleading to particular companies by relying on just a few conversations, though they do support one another. For the most part, franchisees are strongly discouraged from talking to the press or investment community. The companies will say that “competitive” issues require some secrecy, but there are few secrets in this industry.

The optimistic view, as represented by the valuations in the marketplace, is that the comments above are not typical or representative of the health of the subject franchise systems. Allow me to provide a short story which leads to a suggestion.


Twenty six years ago, in 1992, IHOP had just come public. I was a sell side analyst, thought the numbers were interesting and the stock was reasonably priced. The company, led by the now deceased CEO Kim Herzer, invited me to attend their franchisee convention, which I did. I obviously had the opportunity to interface with many franchisees and it was clear that, while all was not perfect, the franchisor was providing a great deal of support that was embraced by an enthusiastic franchise community. IHOP stock tripled over several years for me and my clients who owned millions of shares. I attended several more of their annual conventions and maintain some of those relationships to this day. Obviously, the conviction I gained from their open attitude was critical to the success of the investment. I should add, that many of those buyers in 1992 owned the stock for many years, not living and dying on quarterly reports.


As you are no doubt by now anticipating, my suggestion to publicly held franchising companies: open up your franchisee conventions to the investment community. The companies may quickly respond that lenders are already invited to franchise conventions, but franchisees are unlikely to express their system oriented concerns when they are making a pitch to a potential lender. Companies may also respond that their lawyers think it would be a bad idea, not consistent with full disclosure and analysts would be getting “inside information”. Let’s not allow the lawyers to provide “cover”. A good lawyer will provide a solution to the problem, not just provide the pitfalls. Analysts attending a franchise convention are not being told what sales or profits are going to be. Attending a franchise convention is  a “channel check”, no more than talking to a supplier or customer of a manufacturing company, which any decent analyst will do.

The anecdotal critical comments, as described above, have likely been heard by others, but may be atypical of most restaurant franchising companies. There are no secrets in this business. One of the investment appeals of this industry is its transparency. Notable news is going to leak out anyway. The objective of any publicly held company is to build stock ownership by well informed investors. Investment analysts pride themselves on their ability to “build a mosaic”, enhance the information provided in quarterly reports, SEC filings, and conference calls, with “channel checks”. What channel check would be more pertinent than meeting the franchisees of a company that is dependent on franchisee success? Putting it another way, and taking the highest valuation relative to EBITDA as an example: Wingstop (WING) is a company I have the highest regard for. However, you could call it irresponsible to pay almost fifty times trailing EBITDA for Wingstop stock (and I haven’t) if I couldn’t talk to franchisees of my own choosing?

There’s no particular need to invite this writer if I’m not considered influential enough. I have not spoken to these analysts on this subject, but qualified industry followers such as David Palmer, Nicole Reagan, Matt DiFrisco, David Tarantino, Jeff Bernstein, Andy Barish, Bob Derrington, Mark Kalinowski, Michal Halen, Gary Occhiogrosso, Howard Penney, Jonathan Maze, Nicholas Upton, John Hamburger and John Gordon provide the beginning of an invitation list.  I rest my case.

Roger Lipton


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