DENN DENNY'S CORPORATION

Sector financial performance:

This company, who is primarily a franchiser and licencor and an operator (70% revenue, 10% restaurants) of family dining restaurants, has been grouped into family – casual dining restaurants sector in foodservice industry.

It seems that significantly slowing down traffic is the major reason contributing to downturn in comparable sales of casual dining restaurants between 2015 and 2017. Data indicates the average increase in comparable sales all across this sector went down from around 1.7% of 2015 to around -0.6% of 2017: the average growth in comparable sales for bar& grill-sub sector went down from -0.9% to -2.4%, from 5% to -0.2% for American family sub sector, from 1.6% to 0.5% for Italian sub-sector, from 3% to -0.7% for Mexican sub-sector, from 1.7% to -0.7% for pizza sub-sector.  Correspondingly, what accompanied with declining sales is the decreasing traffic all across the sector during this period. For example, our data of casual dining sector indicates that the average growth in traffic for 2015, 2016 and 2017 was -1.1, -2.3, and -2.4% respectively including: 2%, -1.3%, and -1.3% for family dining restaurants; -1.6%, -3%, and -3.1% for bar& grill restaurants; -1.3%, -1.7% and -1.6% for Italian restaurants; -0.7%, -1%, and -2.3% for Mexican restaurants, -1.4%, -2.6%, and -2.7% for pizza restaurants.

Since 2017, it seems the downward trend in comparable sales (up by average 1.3% in first half of 2018 as compared with -0.6% of 2017) has been halted driven by slower decrease in traffic with rising price among almost all of sectors. In fat, for sectors experiencing continuing decrease in traffic, it has been increasingly difficult by rising price to offset the faster decreasing traffic/transaction. For example, in family dining sector, the average growth in comparable sales down to -0.4% in 2018 from -0.2% of 2017 as traffic went down further; For sectors experiencing recovery of traffic, we see increase in sales with slower rise in price. For example,  in Italian & steak sector, the average growth in comparable sales up to 1.3% in 2018 from 0.5% of 2017; in Mexican food sector, the average growth in comparable sales up to 0.3% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in bar& grill sector, the average growth in comparable sales up to 0.7% in 2018 from -2.4% of 2017;

It seems, unlike in fast-casual restaurants, the difference in performance in terms of comparable sales and thus the traffic in this sector presents much smaller variations.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to casual dining than to fast-casual restaurants but bigger than QSR as indicated by changes in their growth in traffic. However, probably because there are more powers for casual restaurants than another two restaurants to raise menu price since their menu prices a higher, their sales have been better offset by increased menu price or product mix.

For companies in this industry, franchising seems not to be popularly accepted as compared with QSRs. Except for some bar& grill and family restaurants chains, most of companies are operating their own restaurants and their gross margins vary in similar range as those fast-casual restaurants.

However, due to less spending in G&A of casual restaurants ( average 5.5% compared with 10%)  the average operating margins are higher (above 7.5%) than fast-casual restaurants (3%): bar& grill casual dining sector - 5.5% with a G&A as percentage of sales of 7.5%; family sector - 11% with a G&A as percentage of sales of 5%; Italian sector -  8% with a G&A as percentage of sales of 6%; pizza - 5% with a G&A as percentage of sales of 5%; Mexican - 6.5% with a G&A as percentage of sales of 5%.

Unlike in QSR where companies use franchise as buffer, companies’ margins in this sector declined as traffic and thus sales slowing down. However, with higher menu price the typical average gross margin of restaurants in this sector decreased by smaller percentage than those in fast-casual sector, which is about 100 basis points less since 2015.

The average cash flow/share of companies in this sector presents decrease of 8% and 4% for 2017 and 2018.

                                                                                                    click for more about this industry

Company performance:

It seems that the demand for service/products of this company has been strong but the growth had slowed down between 2015 and 2017as indicated by its positive but getting smaller traffic growth. The growth in royalty has been positive but slowed down as well. After entering 2018, franchise restaurant comparable sales started to decline and caused royalty revenue decreased as well.

For the first two quarter of The Fiscal 2018 compared with 2017(ended 201806

Company-owned comparable sales increase by 1.5% (down 0.1% for 2Q).

Franchise comparable sales increased by 0.2% (down 0.8% for 2Q).

Royalty revenue decreased by 0.6% by decrease in sales and less restaurants franchised.

The Fiscal 2017 compared with 2016

Company-owned comparable sales increase by 1%.

Franchise comparable sales increased by 1.1%.

Royalty revenue increased by 2.3% by increase in sales and rate.

 The first three quarters in Fiscal 2017 compared with the same period of 2016

Company-owned comparable sales increase by 0.6%.

Franchise comparable sales increased by 0.7%.

Royalty revenue increased by 1.8%.

Fiscal 2016 compared with 2015

Company-owned comparable sales increase by 1.1%.

Franchise comparable sales increased by 0.8%.

Royalty revenue increased by 3.9%.

Fiscal 2015 compared with 2014

Company-owned comparable sales increase by 6.5%.

Franchise comparable sales increased by 5.7%.

Royalties’ revenue increased by 4.3%.

Its gross margin (including company-operated expenses and franchise rental costs) went up from about 25% of 2014 to about 27% of 2017 primarily due to favourable shifting of products mix, lower commodity costs, lower labor costs and leveraging as a result of increased franchises revenue. Its SG&A as percentage of sales has been around 13% during the same time and its operating margin thus went up to about 14% in 2017. However, gross margin decreased to about 24% in first half of 2018 due to increased spending on franchise ad and increased labor costs. While SG&A% was improved (11%), its operating margin went down to 13% from 14% of 2017.

Cash flow increased slightly in the first half of 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 23. We think that its stock is being relatively fairly valued compared with its peers.

For customized trading strategy of this stock

Bitnami