Keep an Eye on Denny's Cash Flow Growth
One of the most well-known American roadside diners, Denny's , reported a mixed bag of earnings this week. While the market remained unenthused with the company's results, there remain some strong points in both the business and the stock. During a period when many restaurants are struggling to maintain sales growth, Denny's is finding some success and deserves a tip of the hat. And while still relatively heavy in the debt department, the company again deserves credit for paying down nearly $100 million since the end of 2010. Valuation puts the American diner chain on the lower end of its peers, but this is not a blatant value case. For long-term-oriented, price-conscious investors, the question is whether the Denny's brand is growing.
For the recently ended quarter, Denny's managed to grow adjusted earnings by 5.1% to $0.08 per share. More important, same-store sales grew by 1.2% -- signaling the ninth out of the last 10 quarters that the company has driven comps higher. Whether you are a fan of the diner's food or not, this is an impressive feat in the current consumer spending environment -- just ask the company's competitors.
Revenue did shrink by roughly $3 million, but it was mainly related to the company's refranchising efforts -- the process of going from company-owned stores to franchised ones. The process was completed at the end of last year, and while it sacrifices some up-front revenue, it is a far preferable format in the long run as it generates lots and lots of cash.
Looking ahead to the full-year 2013, the company guided toward the lower end of the previously issued range on most counts -- earnings, new-store growth (zero to five net new stores), and adjusted EBITDA. Domestic store growth is set to grow between 0% and 1%, and the company is looking to hit between $43 million and $46 million in free cash flow.
The market wasn't impressed, but that doesn't necessarily mean the stock isn't appealing. Here's a few more things to consider.
Denny's shifting to an all-franchise model boosts margins and puts the focus on free cash generation. This year, the company expects the aforementioned $43 million to $46 million, and we can expect more in the following years. Denny's EV/EBITDA is around 9.5 times now, but on a forward basis is materially lower given the company's slow but steady paying down of debt levels and climbing adjusted EBITDA.
The company is also expanding abroad, and in the past quarter opened its first two stores in Chile and El Salvador. It may be hard to imagine going into a Denny's in Chile, given the apparent cultural differences, but seemingly die-hard American concepts have proved successful abroad and Denny's should not be much different.
Denny's may appear to be a rather negligible, aged brand in the full-service landscape, but don't count the business out as a potential long-term winner. The company's renewed focus on cash flow generation is encouraging, and top line should be aided with international expansion. Keep an eye on lowering debt levels and the (hopefully) continued same-store sales rise.
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