Advantica Restaurant Group, one of the largest restaurant companies in the US, yesterday [Monday] reported results for its Q4 and full year ended 26 December 2001.
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Nelson J. Marchioli, Advantica’s president and CEO, said: “Reflecting on my first year with Denny’s, we focused on returning to the basics of restaurant operations, including building the foundation for improved store-level profitability; fine tuning our restaurant portfolio by evaluating for closure unprofitable restaurants; and taking initiatives to reverse the long-term trend of declining customer counts. Although I am pleased we have made progress with these challenges, we still have a long way to go before I will consider our work a success.
“Customer counts benefited during the second half of the year from targeted value promotions, including a nationwide coupon drop that contributed to increased sales in the fourth quarter. We must continue to improve the customer’s overall experience to ensure customer count gains continue and are sustained. To help accomplish this goal, we implemented initiatives to improve customer service. For example, we realigned our incentive programs to better reward service improvements and invested more dollars into store-level labor. In addition, we reinvested significantly in our restaurant facilities in 2001, spending US$41m in capital expenditures and US$28m for repairs and maintenance.
“As part of our restaurant evaluation process, we make a determination as to which restaurants can achieve a level of profitability to warrant further capital expenditures. During the fourth quarter this process led us to identify 20 underperforming Denny’s restaurants for closure, in addition to the 63 units identified earlier in the year. Also during the fourth quarter, we implemented a previously announced restructuring plan to eliminate approximately 90 out-of-restaurant support staff positions to reduce future general and administrative expenses. All of these steps were taken to enhance Denny’s competitive position long term,” Marchioli concluded.
Fourth Quarter Results
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By GlobalDataRevenue at Denny’s company-owned restaurants for the fourth quarter of 2001 decreased to US$224.4m from US$251m in the prior year as a result of a 115-unit net reduction in company restaurants, partially offset by a 3.4% increase in same-store sales. The reduction in company restaurants since the end of last year included 59 refranchising transactions and the closing of 61 underperforming stores. Denny’s EBITDA (as defined below) decreased to US$27m from US$43.2m in the prior year quarter. The decrease in EBITDA was primarily attributable to US$11.7m less in refranchising gains and, to a lesser extent, the lower company restaurant base and reduced operating margins. Higher company restaurant operating costs as a percentage of sales were attributable to additional store-level labor and benefits as well as continued increases in repairs and maintenance expenditures. Higher occupancy costs as a percentage of sales were due to an adjustment that lowered general liability insurance expense by US$3.5m in the prior year quarter.
Franchise and licensing revenue increased approximately 7% to US$22.5m compared with US$21m in the prior year quarter, while franchise operating income increased to US$12.9m from US$7.7m in last year’s quarter. The increase in franchise revenue resulted from a net 42-unit increase in franchised and licensed units compared with the prior year quarter. In addition to the unit increase, the improvement in franchise operating income is attributable to US$2.4m of bad debt expense recorded in last year’s quarter. During the quarter, the Denny’s system opened 13 restaurants and closed 40, resulting in 1,749 restaurants at the end of the Q4.
The Company reported a loss from continuing operations for the quarter of US$39.5m, or US$0.98 per common share, compared with last year’s fourth quarter loss of US$26.6m, or US$0.66 per share. This year’s fourth quarter results include amortization of excess reorganization value of US$6.9m compared with US$10.5m last year. Also, this year’s Q4 results include a restructuring charge of US$8.4m compared with a similar charge of US$5.3m last year.
The charge this year reflects severance and other costs related to the Company’s elimination of out-of-restaurant support staff in the Q4 as well as the planned closure of underperforming stores. Also, this year’s Q4 results include an impairment charge of US$5.3m compared with a similar charge of US$6.4m last year. The charge this year reflects a writedown for underperforming restaurants, including the units identified for closure.
EBITDA is defined by the Company as operating loss before depreciation, amortization and charges from restructuring and impairment. The Company’s measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies.
Full Year Results
Revenue at Denny’s company-owned restaurants for fiscal 2001 decreased to US$949.2m from US$1,080.6m in the prior year. A 2.7% increase in same-store sales was offset by fewer company-owned units. Franchise and licensing revenue increased to US$90.5m in 2001 compared with US$74.6m in the prior year. The increase in franchise revenue resulted from additional franchised and licensed units compared with the prior year. Denny’s EBITDA decreased to US$135.1m from US$172.3m in the prior year. The lower EBITDA primarily resulted from reduced gains on fewer refranchising transactions.
For the year ended December 26, 2001, the Company reported a loss from continuing operations of US$96.3m, or US$2.4 per common share, compared with last year’s loss of US$82.5m, or US$2.06 per share. This year’s results reflect restructuring and impairment charges of US$30.5m, while the loss last year included similar charges of US$19m. This year’s results include amortization of excess reorganization value of approximately US$28.7m compared with US$42.1m last year.
On 26 December 2001, Advantica’s US$200m credit facility had outstanding revolver advances of US$58.7m compared with no outstanding balances at year end 2000. The revolver advances primarily result from Advantica’s satisfaction of the Coco’s/Carrows credit facility guarantee in January 2001. Outstanding letters of credit decreased to US$52.2m from US$65.3m at year end 2000, leaving a net availability of US$89.1m at the end of 2001.
Systemwide Sales
For the Q4 ended December 26, 2001, Denny’s systemwide sales, which include sales from company-owned, franchised and licensed restaurants, increased to US$553m compared with US$547m in the prior year quarter. This increase is attributable to a 2.4% gain in systemwide same-store sales, which reflects an increase of 3.4% at company units and 1.4% at franchised units. The same-store sales gain is partially offset by a 73-unit net reduction in total systemwide Denny’s restaurants since the end of the same period last year.
Denny’s systemwide sales for the year increased by approximately 3% to US$2.3bn compared with US$2.23bn in the prior year. This increase is primarily attributable to a full-year increase in systemwide same-store sales of 1.7%, which reflects an increase of 2.7% at company units and 0.8% at franchised units.
