Denny’s Corporation (NASDAQ:DENN) Q3 2020 Earnings Conference Call October 27, 2020 4:30 PM ET

Company Participants

Curt Nichols – Vice President, Investor Relations and Financial Planning and Analysis

John Miller – Chief Executive Officer

Mark Wolfinger – President

Robert Verostek – Senior Vice President and Chief Financial Officer

Conference Call Participants

Nick Setyan – Wedbush Securities

Todd Brooks – CL King & Associates

Jake Bartlett – Truist Securities

James Rutherford – Stephens

Michael Tamas – Oppenheimer

Brett Levy – MKM Partners

Operator

Good day, everyone. Welcome to the Denny’s Corporation Third Quarter 2020 Earnings Conference Call. Today’s call is being recorded.

At this time, I would like to turn things over to Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Curt Nichols

Thank you, Kelly, and good afternoon, everyone. Thank you for joining us for Denny’s third quarter 2020 earnings conference call.

With me today from management are John Miller, Denny’s Chief Executive Officer; Mark Wolfinger, Denny’s President; and Robert Verostek, Denny’s Senior Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our third quarter earnings press release along with any reconciliation of non-GAAP financial measures mentioned on the call today.

This call is being webcast and an archive of the webcast will be available on our website later today. John will begin today’s call with a business update. Mark will then provide some comments about our franchisees and development. And Robert will provide a recap of our third quarter results and current trends before briefly commenting on our annual guidance for 2020. After that, we’ll open it up for questions.

Before we begin, let me remind you that in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on the call today. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny’s to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company’s most recent annual report on Form 10-K for the year ended December 25, 2019, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q.

With that, I will now turn the call over to John Miller, Denny’s Chief Executive Officer.

John Miller

Thank you, Curt, and good afternoon, everyone. I hope each of you have remained safe and healthy since we last shared an update on Denny’s and we experienced sequential performance improvement throughout the third quarter, as we continue to evolve our business. We accomplished this despite the continued disproportionate impact of the COVID-19 pandemic on the full-service restaurant industry. In this dynamically changing environment, we have been focused on four key guest-centric themes: reassurance, value, comfort and convenience. I’ll now touch on each of these.

We understand and appreciate the concerns around general health and the ability to have a safe restaurant dining experience will persist for some time. Therefore, it is important that we reassure our guests of a safe dining experience by consistently upholding our commitment to enhance cleanliness and sanitation procedures at all customer touch points. The pace of communication to our restaurants has been unwavering as we have continually reminded operators of our enhanced protocols and shared best practices in the period of ever-changing state and local requirements.

Following a tightening of dine-in restrictions in July, our broadcast media message in August featured a timely brand spot, highlighting our enhanced safety procedures, while also communicating options for curbside pickup, contactless delivery, drive-up ordering and outdoor seating.

Our second area of focus is value and it is known for everyday value. And we believe value will remain important in this economic environment and guests seek to maximize the impact of their dollars on quality food options for the whole family. We understand that value comes in different forms.

And at the start of the third quarter, we focused on the price-driven value of our well-known $2 $4 $6 $8 Value Menu, as well as the convenience-based value of free delivery when ordering through our website or mobile app. We are currently featuring the abundant value of Super Slam. At the same time, we have expanded our abundant value platform of shareable family pack. These family packs offer a delicious, convenient, and cost-effective way to feed a family of four.

Our third area of focus is comfort. We strive to ensure that Denny’s is a place where our guests feel welcomed and valued, where they’re dining with a large family or as a party of one. We believe our guest is the image experience is a time to build connections within an environment that is both inviting and comfortable. Our established heritage restaurant image has received consistently positive guest feedback, largely due to its welcoming and relaxed feel.

Our operations team has also reinforced the critical need for comfort by reminding our entire system of the rules we live by, including the expectations that, number one, everyone is welcome to dine at Denny’s. Number two, everyone is treated like our favorite guest and number three, everyone has shown kindness and respect. After issuing multiple streamlined menus, we will begin using it full quarter and in next week providing more comfort food options, even though the menu is 24% smaller pre-pandemic core menu.

Our fourth area of focus is convenience. We believe guests will continue to expect technology to bring enhanced value to their dining experience, whether in our restaurants or through off-premise options, like our Denny’s On Demand platform. The start of the third quarter, we launched Apple Pay for our binge on demand iOS mobile app, and we continue to promote outdoor dining solutions in trade areas that currently preclude or significantly restrict indoor service.

Currently, over one third of the domestic system is offering outdoor dining. We’ve also been rolling out curbside pickup parking signs to help them made a better experience for our guests and team members while promoting guests controlled digital ordering from the parking lot. Average weekly sales for all off-premise transactions are up over 95% since the beginning of the pandemic, growing from approximately $4,000 per week per store in February to approximately $7,800 per week per store in September.

We’ve been pleased with our ability to sustain this higher level of off-premise sales, even as easing restrictions across many parts of the country have yielded simultaneous growth in dine-in transactions. Domestic system-wide same-store sales declined approximately 34% for the third quarter, driven by an improving monthly trend due to easing dine-in restrictions in new parts of the country, in addition to the initiatives that I’ve noted.

In closing, I want to thank our leadership teams and franchise partners for their continued engagement, steadfast resolve, and unwavering commitment to this brand. Their collective efforts to reassure our guests provide compelling value options and deliver the comfort of our guests seek across technology-enabled and convenient platforms has contributed to the progress we made in the third quarter. These guest-centric themes will also remain in focus as we move forward.

With that, I’ll turn the call over to Mark Wolfinger, Denny’s President to discuss more about our franchisees and development.

Mark Wolfinger

Thank you, John. The continued progress you mentioned in October is encouraging and not only driven by easing dine-in restrictions, but also the resilient and the tenacious spirit of our franchisees. Currently, 99% of our domestic systems have opened with nearly 1,300 restaurants operating with open dining rooms. However, less than one-third of our domestic franchise restaurants are operating 24 hours a day, seven days a week. While we cannot control state and local restrictions and the related impact on our sales trends, we have incentivized our franchisees to maximize their sales and profitability potential by expanding their operating hours.

For the fourth quarter, we have initiated two new programs. The first program provides an extension on the scheduled payment of deferred fees and rent to those restaurants with closed dining rooms due to state or local restrictions, as well as those restaurants that are operating at least 18 hours a day. The second program provides temporary royalty relief on late night sales to restaurants opened 24 hours during the fourth quarter.

As we’ve mentioned before, the late night daypart represented approximately 18% of our sales prior to the pandemic. We estimate that our overall same-store sales results in Q3 are impacted by approximately eight to 10 percentage points from restaurants closed during this daypart. As a reminder, the average restaurant requires approximately 70% of its 2019 sales in order to cover both fixed and variable cost items. We are pleased to say that during October, approximately 60% of our domestic franchise restaurants are achieving the 70% of 2019 sales level. This is an improvement from approximately 45% during the third quarter.

On a related note, as would be expected, the pandemic has prompted higher closures than our historical run rate. During the third quarter, 23 franchise restaurants closed along with one company restaurant bringing the September year-to-date total to 55 closures. Six of these closures were due to lease expirations. The remaining 49 closures related to franchise restaurants with AUVs, average unit volumes of less than $1 million, well below the franchise average, prior to COVID-19. The pandemic accelerated these closings that we had otherwise anticipated in the next several years.

We do expect to have additional store closures in the near-term. However, we anticipate most of these situations will prove to be an acceleration of future period closures, and we remain confident in the sustainability and longevity of our portfolio. These closures were offset by five franchise restaurants that opened during the quarter, including three international restaurants, which brought our total number of restaurants to 1,664. These recent openings underscore the competence and future opportunities our franchise see within the brand.

We look forward to returning net restaurant growth in the future and are confident we will do so backed by over 75 refranchising development commitments along with our existing domestic and international commitments. We also believe opportunities will exist to expand through conversions as we emerge from the pandemic.

I’ll now turn the call over to Robert Verostek, Denny’s Chief Financial Officer to discuss the quarterly performance. Robert?

Robert Verostek

Thank you Mark, and good afternoon, everyone. I will start with a brief review of our third quarter results, then share an update on our business outlook for fiscal year 2020. As John mentioned, we saw a sequential improvement in our same-store sales results during the quarter. More specifically, domestic system-wide same-store sales declined 39% in July, 35% in August and 28% in September, leading to a decline of 34% for the full quarter.

These sales results were influenced by capacity restrictions and reduced operating hours. For example, with mostly closed dining rooms since mid-July California restaurants weighed on the total third quarter same-store sales results by approximately 4 percentage points. On the other hand restaurants in Texas, which were operating under a 50% capacity limits throughout the quarters provided nearly a point of benefit to our overall quarterly same-store sales results.

Domestic restaurant operating with open dining rooms delivered a same-store sales decline of approximately 29% for the quarter, compared to a decline of approximately 46% as those domestic restaurants operating with closed dining rooms. We have been pleased to see the improving top line trends continue into October, during which domestic system-wide same-store sales declined approximately 26%.

In addition to the weight of government imposed dining room restrictions on our business, we have also discussed the impact of less than one-third of our system operating 24 hours during the pandemic. We’re encouraged to see some franchisees extend their operating hours in October to take advantage of the incentives Mark described. Domestic restaurants, which were open 24 hours in October, had a same-store sales decline of less than 20%. The number of domestic locations operating 24 hours have increased by approximately 10% during the month of October, and currently represents slightly more than one-third of our store base.

Franchise and license revenue decreased 27.8% to $43.8 million, primarily due to the impact of COVID-19 on sales at franchise restaurants. Franchise operating margin was $19.7 million or 45% of franchise and licensed revenue, compared to $29.5 million or 48.7% in the prior year quarter. This margin decrease was primarily due to the impact of COVID-19 on sales at franchised restaurants.

Company restaurant sales of $27.8 million were down to 56.2% due to the impact of the pandemic, as well as a 33 equivalent unit decline in our portfolio, as a result of our 2019 refranchising and development strategy. Company restaurant operating margin was $500,000 or 1.7% compared to $9.3 million or 14.6% in the prior year quarter. This was due to the sales decline and related deleveraging impact of COVID-19, as well as the reduced company restaurants portfolio achieved through our 2019’s refranchising and development strategy, partially offset by approximately $1.5 million of favorable reserve adjustments and tax credits related to the CARES act.

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Total general and administrative expenses were $13.7 million, compared to $16.4 million in the prior year quarter. The improvement was primarily driven by a reduction in core G&A of approximately 20% due to proactive cost savings initiatives and previously announced reductions in personnel due to COVID-19. Additionally, we recorded approximately $800,000 in tax credits related to the CARES act.

These results collectively contributed to adjusted EBITDA of $8.0 million. Depreciation and amortization expense was approximately $300,000 lower at $4.0 million, primarily resulting from a lower number of equivalent company restaurants. Interest expense was approximately $4.4 million, compared to $4.2 million in the prior year quarter, with the increase primarily due to the amortization of dedesignated interest rate swap losses from accumulated other comprehensive loss, net.

The provision for income taxes was $0.8 million yielding an effective income tax rate of 11.2%. Adjusted net income per share was $0.01 compared to adjusted net income per share of $0.18 in the prior year quarter. Adjusted free cash flow after cash interest, cash taxes and cash capital expenditures was $2.1 million compared to $3.7 million in the prior year quarter, primarily due to a reduction in adjusted EBITDA offset by lower capital expenditures.

Cash capital expenditure which included maintenance capital or $1 million compared to $10.6 million in the prior year quarter, primarily due to prior year real estate acquisitions and facilities maintenance related to our 2019 refranchising and development strategy. During the quarter, we raised $69.6 million in net proceeds from a public offering of common stock, which we subsequently utilized to pay down our credit facility. We ended the quarter with approximately $246 million in total debt outstanding, including $230 million under our credit facility.

Additionally, after considering cash on hand and remaining capacity under our credit facility, we had approximately $104 million of total available liquidity after considering the liquidity covenant. As a reminder in May of this year, we entered into the second amendment to our existing credit facility, which temporarily waives certain financial covenants, including the leverage ratio which was 5.7 times at the end of the quarter. As same-store sales improved sequentially throughout the quarter, so did adjusted free cash flow. In September, we generated cash of between $1 million and $3 million. This compares to what would have been a slightly positive adjusted free cash flow in fiscal June after excluding the impact of $3 million of royalty abatements extended to our franchise partners during that month.

Let me now take a few minutes to expand on the business outlook section. Based on third quarter results and our expectation that the current business conditions will not materially decline, we anticipate the following annual guidance ranges. It is important to note that fiscal year 2020 includes 53 weeks of activity. We expect domestic system-wide same-store sales of between 70% and 75% of prior year. We anticipate total general and administrative expenses of between $51 million and $54 million, including $7 million of share-based compensation expense. As a reminder, share-based compensation expense does not impact adjusted EBITDA. We expect an adjusted EBITDA of at least $28 million. And additionally, we anticipate cash tax refunds of between $5 million and $7 million related to prior year overpayments of estimated taxes.

Cash capital expenditures are anticipated to be between $6 million and $8 million. Adjusted free cash flow inclusive of the anticipated tax refund is expected to be at least $10 million. Finally, I want to mention how proud I am of how our management team remains focused on managing business cost, while supporting Denny’s recovery through the challenges of the COVID-19 pandemic. In doing so, we have and will continue to leverage the strength of our asset-light business model and fortify balance sheet to ensure the success of our dedicated franchisees and this brand.

That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A portion of our call.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll hear first today from Nick Setyan with Wedbush Securities.

Nick Setyan

Thank you, and thank you for all the detail around dining rooms and trends through Q4. Any chance you could help us a little bit more by maybe just focusing on the company-owned units, just because the EBITDA from the company looking such a big part of profitability, maybe just percentage of company-owned units that are still closed in terms of dining rooms capacity at the units that are open maybe the trends with the company-owned units in the quarter date period. All of that would help.

Robert Verostek

Hey, Nick. Appreciate that, and appreciate the question. Again I – we didn’t really break out that data in that way. I can tell you as we noted in previous calls and previous investor calls that we’ve done, that the company portfolio still trails and it was trailing and still trails the balance of the franchise system with regard to results, particularly in those areas that would be considered tourist areas are high drive locations, our Disney locations, Nevada location. So that they do trail with regard to that they had and they still do. With regard to all of those various specific breakouts, I don’t actually have that information sitting in front of me. Maybe we can figure out how to get that to you, looking at Curt over here, how to get that to you in a – without a specific information going to one person. So…

Nick Setyan

I appreciate that.

Robert Verostek

Yes. Other than that, Nick, I apologize that we dealt to you, again not trying to be clandestine. We – again, to your point, we really tried to break out as much detail as we possibly could. So all I can tell you that all of our company units are open, they remain open none of them are in a temporarily closed status. So they are all open and they would be – and to the extent that they are allowed to have on-premise dining all of them would be taking advantage of that, if a County or State allows for harms from the signings, we would certainly – a company unit would certainly be open.

Nick Setyan

Perfect. Understood. In terms of – I guess some of the peers out there have still cautioned around the potential for a reversal of capacities, given a potential of the second wave and the trends we’re seeing out there? I guess what steps are you taking in case, we do have to go back instead of forward.

John Miller

Yes. Nick, it’s John. So well, that’s true, day-by-day there are cautions and two steps forward, one step back. There are parts of the country that are taking a more conservative view for instance in Illinois right now with some curfews has been put in place in the city and throughout the CDC has put out some new definitions about distance and exposure. On the other hand, places that have been conservative and were opened are starting to open up more, a few in the counties had some updates as of just a couple of hours ago, even moments ago, where additional stores that have been take out on and will be added to dining room.

So I think that the heart of the question though, is our communication, our – how do we handle these things? So we have a daily feed that goes to our franchisee is what we’ll call an ox update that sort of give announcements on what’s opening, what looks dangerous, where COVID is spiking. We’re literally sort of communicating daily with our franchise system on sort of what to expect next, how to see around the next corner. We’re communicating on a daily basis about late night hours and how to prepare to extend hours if they haven’t yet and the results of those that have.

We’re getting real-time weekly updates to our steering body which is the head of our franchisee association board that looks after all of the advisory councils plus it’s sort of an extended steering body of a very engaged franchisee to help sort of guide best practices in their local communities and assist which bring strategies, and also frankly, the challenges, that we think we’ve been aggressive and not aggressive enough. Improve that daily communication and weekly counsel we’re able to say, hey, let’s make sure that dining room set up with investigate either, so if you look at plexiglass between tables looks like that can only – that won’t be allowed, don’t bother here just yet.

So we’re literally by geography making regular daily coaching calls and trying to be as prepared as possible. Headwind exist with that – one of those things for late night hours while franchisees have the deal and desire or sometimes they’re going, working away in a few more weeks, there’s a little bit of an investment hurdle to get over, to retrain late night crew, and I get them on board. I got to train them during the day shift to cut them loose at night. So there is some of those headwinds we have 24 hour concepts may not that we’re working through it. And as Mark pointed out in his talking points, our franchisees are adding as extended hours each week, more being added,

Robert Verostek

Hey, Nick, going back, Curt – let me give you a little bit of additional information on top of what John just shared about the 24 hours. This is as of today, right, so not as specific, this is not as of the balance sheet date, but as of today with regard to company units, again, this is a breakout of company units – 66 company units of 11 are opened at 25% capacity, 13 are open at 50% capacity, 12 are opened with 75% capacity 18 are within that social distancing status, which is a – I think that’s six foot radius definition and then 12 are off-premise. So that’s kind of the breakout of the various status of on-prem and off-prem only, so hopefully that adds a little bit more for you.

Nick Setyan

Thank you very much. That’s very helpful.

Operator

We’ll hear from Todd Brooks with CL King & Associates.

Todd Brooks

Good afternoon, everybody. Just a few quick questions. One, can we walk through the mechanics of the royalty belief that you’ve talked about in Q4 for those franchisees that do reopen in the 24/7 operating model, just like what would be either anticipated drag is or if you look at a per unit the reopens type of royalty relief hit that you would expect, that would be helpful.

Robert Verostek

Yes, Todd, this is Robert. So with regard to that the mechanics are pretty straightforward with regard to that relief. If a unit moves to 24/7, is opened 24/7 or late night – in during our late night dayparts, they receive a 3 percentage point decrease in royalty rates isolated to those hours for the fourth quarter. So again, it’s not the – it’s just isolated from that 10:00 AM – or 10:00 PM to 5:00 AM, dayparts for units that are open during that timeframe.

So with regard to drag the way we visualize it, it actually is not too – it’s the converse of a drag, while we have – we will be giving up some royalties, we wouldn’t have been receiving otherwise. So it actually is a way to build that and build back to our 24/7 daypart more quickly. As you noticed in my comments, even in the month of October, those 24/7 units were led their same-store sales performance declined with less than 20%. So we really believe in getting them there as John noted in the previous follow-up question, there are some costs to getting these units back open 24/7, and thus the – our willingness to put our money where our mouth is to help incentivize those units getting open more quickly, but it’s isolated to Q4, it’s isolated to the 10:00 PM to 5:00 AM daypart, and it’s isolated to units that get up in 24/7.

Todd Brooks

Okay. Very helpful. Thanks. And then if you look at franchisees that do reopen for the late night and assuming they can get back to kind of that down 20% type of same-store sales level, what’s the furlough margin looking like for that franchisee that gets back to that level?

Robert Verostek

That’s a really good question, Todd. So let me try to get to it this way. So when we talked about companies which were the – and we originally guided earlier this year, we guided to 18% to 19% for company operating margin. And those are on for vendor company units, right, the units that are approaching $3 million in sales, so it would be less than that. So you have that, so at 100% sales, you kind of have that target reference for the company units.

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We’ve also said, and I think we reiterated again today that the breakeven level of margin, our average for a unit is approximately 70% of system-wide sales. So again, if you take the haircut from a company volume of $3 million to a franchise average unit volume of 170, and look in the FTV then audience [Technical Difficulty] hypothesis for illustrative purposes, let’s say that that’s 15%, I think it would be somewhat linear between the 70% and 100% level.

So if they were to achieve 85%, that would be like somewhere in mid to upper single digits range. Again, that is really big some in the air type of analysis with regard to that, but we need to get these units open 24/7, we need to get California open to on-premise dining, we need to get back to 85% and then 90% plus of sales to drive back to that double-digit to mid-teens type of margins, but it’s still going to be a single digit number. So…

Todd Brooks

Okay. Very helpful. And then the final question I have is within the guidance and kind of assuming could we get back to 70% to 75% of last year’s sales volumes for the full year? What are the assumptions around the two moving parts that they gave you to that level? What are you assuming as far as further openings of the closed California stores? And then how much of the base are you assuming reopens for the 24/7 model over the course of the fourth quarter? Thanks.

Robert Verostek

Yes, Todd. So I think probably the best way to look at that is if you look at the October results you’d – we quoted, I think it was in my script that we were down off 26%. So we were conversely that would suggest that we have 74% in the month of October of the prior year sales. So we are somewhat in that range at least for Q4, if the – as my statement said, as long as things don’t materially decline the caveat to the forecast, as long as things don’t materially decline, we’re already kind of in that range.

So and that is I think if we do the counts, if you look at California right now, we’re probably about 50-50, more than 50% of California has on-premise dining currently county-by-county for our public information. So I think the more units that they get open 24/7, the better off we are, the more units that have California on-prem dining, the better we are. But the reality is where October was with the one-third of the North of – slightly North of one-third of the units open 24/7, and maybe slightly North of half the California units opened to on-prem, we were in that kind of that 70% – right at that 75% of sales already. So…

Todd Brooks

Okay, great. Thanks Robert.

Robert Verostek

Yes, sir.

Operator

[Technical Difficulty] Truist Securities, we’ll hear next from Jake Bartlett.

Jake Bartlett

Great. Thanks for taking the questions. My question is just actually building, I just want to make sure I understand that the comments about the guidance and – if I put 26% same-store sales in the fourth quarter, I get roughly down 30%, 31% for same-store sales. And so if there is some sort of weighting different that we should be aware of? I mean, I guess maybe if you’d be more explicit about what it implied for the fourth quarter as a whole?

Robert Verostek

So yes, there are – thank you for the question. So you got a sixth week period in December and that would be influencing these numbers. So again, you have that type of impact within there. So it’s weighted heavier, those numbers will likely be weighted heavier just because you have more units opened during that timeframe. Earlier in the year we candidly – we were, when this thing first hit at one point in time, I think we were down to seven units that were open and operating.

So there is a probably an outside impact to that 14-week period and the number of units that are open. I don’t think we specifically implied, that’s why we gave the range candidly as 70% to 75% and not necessarily gets pinned down to a very specific number. Again, we hope California opens up, we hope that 24 hour incentive helps to move franchisees to get to 24/7. But the reality is that some of this is out of our control, Illinois is an example of that to the other side, thus, the range and not really wanting to get tied down to a – to kind of a specific range for Q4.

Jake Bartlett

Got it. I appreciate that. Maybe, just to make sure if we think about kind of where we are in October, would – as you think – would that be in the middle of the range for the annual guidance or I don’t know, just we can – I can do the weighting I guess separately, but is that in the ballpark that where you are currently would keep you kind of in the middle of the guidance?

Robert Verostek

Yes, it’s an interesting question, Jake. I don’t know if I’ve done that math myself. I know that the 26% for October, the down 26% for down October, again, we don’t expect to materially decline from that, but again we hope to build from that – from that point. But I don’t know if – I haven’t – candidly haven’t done the math myself to understand what that midpoint would suggest for that 70% to 75%, I apologize for that.

Jake Bartlett

No, don’t worry…

Robert Verostek

Maybe it’s something you can take forward with Curt and Kayla in the follow-up.

Jake Bartlett

Yes, sounds great. But my other question was on – well, I appreciate the detail about same-store sales that the stores would open dining rules and then those with off-premise only. I had a question, looking at – in October, off-premise only stores were down 33%, a really significant increase from July of down 55%, is that including stores where you have off-premise or – sorry, outdoor dining or – what accounts for just such a huge improvement for off-premise only? And I guess, in the context of the $7,800 a week for off-premise. I’m just trying to materially reconcile that $7,800 with the down 33% same-store sales?

Robert Verostek

Yes. So Jake, you’re spot on that. Off-premise only in our definition would include units that had patios in the such. So off-premise means that they cannot seat inside our restaurants, although, they may be under a tent in the parking lot. So the – I think that really what you’re pointing out there is really a testament to our operations team and our franchisees and their entrepreneurial spirit to maximize every guest opportunity to serve them.

I’ve seen pictures, Jake, of these set ups where there are full tents, where there is artificial turf, where there are misters and electricity and Muzak, and they’re pretty impressive tight set ups and it really, to your point, I think you caught on to one of the areas that was really, really a good thing. I think we have about 300 units or so that are taking advantage of those type of opportunities.

So again, you’re spot on that, that is really the reason why you can go from early on with the off-premise being really a dire number to where we are today. With again, really on the back of our ops team educating and helping our franchisees and our franchisees really maximizing the guest experience.

Jake Bartlett

Got it, that’s really – that’s impressive. I guess, as we think about that is there any seasonality to that? I know in California it remains beautiful all year round and you can see outside, but is there any – could that change as such you go to the winter – winter months, that capacity?

Robert Verostek

I think it really points to our small states, Jake. I do think that we will continue in large part to be able to execute against the strategy and again if you think California, Arizona, Texas, Florida, we will likely have this opportunity and frankly where this opportunity really never existed in the Mid-west, it wasn’t as prolific as where we thought we’d be able to take advantage of it and on an extended time frame.

John Miller

Yes, I think the positive momentum of by the way and real quick is while you have people willing to dine in real pretty weather or a mild weather or light jacket weather, there are days that are really hot, it creates burden in California and there’s been a lot of smoke in the air and there’s – so again, scrappy franchise system and we’re not the only brand that’s done some of these things obviously so credit to sort of the nature of our industry, but also there have been headwinds to our success for those to be – some of those things are updating.

So with positive news and negative news, one offsets the other, right, I think Robert suggested, this should continue, particularly in this market. The other things is that our operators learn how to do curbside and dine-through where people pull up an order or pull up an order they’ve already ordered to go to pick up on their way somewhere. It was fitting neatly into the habit after the longer exterior signage and the like. So while that’s not the same as dine-in, make no mistake about it, extended hours and extended capacity are the best thing that can happen to full-service diners, including these things do mitigate it to some degree.

Robert Verostek

Just tagging on to that really quick, Jake. I’ve been reminded in the room that that is probably the off-prem or tent in, in type dining, patio dining probably becomes more available on states such as Arizona, as the weather becomes more temperate, as opposed to summer, the summertime when those temperatures are well above 100. So there’s gives and takes across that as John just alluded.

Jake Bartlett

Great. Well, sitting here in Massachusetts, I’m jealous. Thanks a lot. Thanks for taking the questions.

Robert Verostek

Thanks Jake.

Operator

We’ll hear now from James Rutherford with Stephens.

James Rutherford

Hey, thanks for taking the questions and really appreciate all the detail you gave on the operating Denny’s for units and the comps here. It’s really helpful on our side. I had a question about, the comment about heightened near-term closures. I think this has been a little bit of a theme for a couple of quarters. Now I just was hoping you could help us think about the potential magnitude of that. I mean, it seems that with improving comps, the unit closures would maybe slow sequentially, but given that some of these are based on lease expiration, I just wanted to clarify that comment, please.

Robert Verostek

Yes, James, thanks for the comment about the detail. We tried to be really helpful here, pretty unique – and sometimes. With regard to closures, I think one of the interesting things that really kind of teased out of the data here as we were preparing for this call, and we pointed it out in the script is that 90% of the closures that we’ve experienced today have been below $1 million in AUV. So that kind of represents a pull forward of potential closures. Now the other piece of information I’ll share this, this was not in a script but it’s a relevant piece of information to have for this discussion is that based on 2019 average unit volumes, there still are 50 to 75 units that fall in that sub-million dollar category.

So there’s – we’ve talked throughout time about having that sub less than probably 200 units that were $1 million or less. We really have been on road shows and stuff. And this is probably a more concrete example from us or a specific detail from us. That’s been nearly 50 of the ones we’ve closed already this year had that volume of $1 million or less than we still have 50 to 75 that fall into that category.

Thus, the idea, while comps are still improving. And we pointed out that 60% of our franchisees, franchise units that are open are above that kind of that breakeven 70% threshold level. That doesn’t mean that there won’t still be near-term pressure on closures and likely probably into that step that I just described. Now we do believe ultimately, again, this is the dichotomy between near-term and longer term. That near-term that we will expect more closures, but longer term, these are probably pulled forward of closures that would have happened otherwise in later 2021 or 2022 and beyond.

So while you get the idea that net unit growth is probably bolstered by getting back to the development commitments from 2019 refranchising strategy. And when that comes back about, we did extend those commitments by a year when the pandemic hit. So when you’re looking out a year from now and the pull forward of these closures, we are bullish, but near-term we still probably need to wait through some additional closures.

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James Rutherford

Got it. That’s helpful. Circling back on the outdoor dining discussion from a minute ago, maybe I missed it. But could you help quantify the level of outdoor dining sales you’re seeing in those 300 or so units that are offering that today?

John Miller

Yes, if it’s a mixed bag. I mean, you’ll have stores with outdoor dining, blowing away another store with outdoor dining. You have another one, so each trade area has very different after five dynamics, lunch dynamics and breakfast and late night dynamics. I would say on the whole outdoor dining versus non-outdoor dining in markets that are takeout only, we outperform on the averages. But it’s a fairly random array of results.

James Rutherford

Fair enough. Fair enough on that. I just wanted to check it off my list here. One last question from me is on the G&A guidance. It implies a pretty big step up of G&A in the fourth quarter. Is that all stock-based compensation or is it the underlying cash G&A movements in the fourth quarter?

Robert Verostek

Now, James, that’s another excellent question. That is largely focused right into that stock-based compensation area, you saw the 8-K that we issued within the last month that was focused around the incentive, the 2018 and 2019 incentive plans and the accounting that was required coming from that a lot of that had been reversed off in previous periods. And with that modification that was detailed in that 8-K, the accounting required that we book additional expense. So much of that increased that you noted will be focused into the stock-based comp.

The benefits from the cost rationalization both in our tightened approach to travel, which is virtually nil at this point in time to the impact, to the personnel. We – back in May, we impacted approximately 50 people permanently dislocating family – 50 or so of our family and friends from here. Those benefits in that core G&A, as you recall, we break out our G&A in detail between core short-term incentive, long-term incentive, and this deferred comp accounting machination that we have to work through. That core will continue to benefit from the actions that we’ve taken.

James Rutherford

Excellent. Thanks for the detail.

John Miller

Thanks James.

Operator

And from Oppenheimer, we’ll hear from Michael Tamas.

Michael Tamas

Hi, thanks. I hope everyone is well. You mentioned about a third of the units are up for 24 hours in October, so I was just wondering, can you kind of talk about what percentage of units could actually be open for late night given the various restrictions? And I think there’s some curfews going in around the country. So that’s the first part, thanks.

Robert Verostek

Yes, Michael. I will lay a couple of data points. So we are about – we are north of a third, slightly north of a third. We picked up about 10% in the month of October when we initiated that incentive. So we continue – literally, I’ve been on calls personally with some of our larger franchisees walking through the data with them to talk about that. At my fingertips right now is piece of information we may be able to get to, but at my fingertips, I don’t know the local or state restrictions with regard to hours. But it is far beyond the third that we have now. I wouldn’t – I don’t know the specific number, but it’s far beyond the third that we talk about.

John Miller

Yes, 1,287 stores have opened dine-ins. Those are likely to go first because of the staffing that comes with dine-ins, being open becomes easier to make the hurdle in the late night hours, but that’s not necessarily true of every location. There’ll be some stores that are already 24 hours that have no in-store in – indoor dining. So there’s not a hard and fast rule, but I think that’s a pretty good guide, but that 287 is sort of the step change will happen there first.

Michael Tamas

Got it. Thanks for that. What do you think was the trigger to get that 10% of extra stores that opened in October? And what do you think pushes franchisees over the edge, over the next coming weeks and months to reopen late night? And is there any commitment beyond the fourth quarter to stay open, to get that loyalty relief as well, or did it just for the fourth quarter and whatever happens after that did not impact that? Thanks.

John Miller

I think that it was the fourth quarter only, but I think sequential sales improvement comes, confidence improvements, come staffing improvements, comes cash flow solutions and late night hour extension. So I think part of it is the incentive from the franchise or a part of it is daily communications. The business case for late night hours, the bias for younger audiences from Denny’s On Demand, high trial after five and late night. All those things point toward, adding back the brand equity we have is 24 hour brand.

Michael Tamas

Got you. And then on the units that are open for in-store dining, is there an opportunity through partition, we’re taking advantage of slower dayparts to sort of increase the level of sales. It sort of seems like between September and October, you’re in indoor dining open restaurants sort of leveled off there. So just trying to think about what the opportunity is going forward? Thanks.

John Miller

Sure. Part of our weekly calls and data communications, we’ll be exploring all these kinds of options that may extend capacity or give consumers more confidence. It’s been a long time now since I read my script several minutes ago. This area of comfort and sort of security, safety has been a big topic of our conversation, assuring the consumer. And so there are areas where people really have taken to this plexiglass between boots and tables. And for separators, foot pedals on backing doors, sanitation stations around the dining room. And there are others that have not responded as much to it, or there’s been sort of bias in the news against it.

And so it just sort of varies by area across the country. We had a very high adoption rate in the dine system with a lot of stores, put those systems in pretty quickly. And then it’s slowed, it does take some investments. I think it’s – I don’t have a number, Curt, do you have the number? I think it’s over 400 have plexiglass, but I don’t want to – we’ll probably let us verify the accuracy of that comment.

Michael Tamas

Got you. Fair enough. All right. Thank you.

John Miller

Thanks, Michael.

Operator

[Operator Instructions] We’ll hear now from Brett Levy with MKM Partners.

Brett Levy

Thanks and appreciate you taking the question and appreciate the detail that you provided us. I guess, we could call it through, I’ll start with a top line question, then move down to P&L a little. Appreciate the color on California, Texas, but would you be able to give us any sense of what the top quartile or top 10% of your system are doing? And if or how many are generating positive comps?

Robert Verostek

Hey, Brett, this is Robert. With regard to that, we’ve really tried to break it out, but to give you that it comes with guardrails with regard to kind of Texas and California, again, being the – we have nearly 400 units in California and 200 units in Texas that represents nearly what is that. 40% of the system right there, we have roughly 35% to 40%. So again, we thought that that was pretty good guardrails.

The challenge with what we’re dealing with right now is the data just moves so quickly, depending upon today, depending on which units are allowed to open and allowed to close. So I can cut it for you one way today and a move tomorrow. So it really kind of looked to provide kind of the best overlay that that’ll give you a sense of the direction.

And we want to keep pointing back. And because this is true, the more that we can get as the restrictions ease, and we can get to more on-premise dining, there is a absolute linear correlation to the improvement in same-store sales. And that holds also for 24/7. It’s a very linear correlation between that. So we are highly focused on those two pieces. And again, it goes to California is just north of half the units being open. The more those get opened, the better off we are. And it really is that linear, the fewer the restrictions, the more 24/7 the better the results are.

Brett Levy

Along those lines, can you give any color on how the Southeast is doing given that, that was obviously among the earliest and they are among the least stringent in terms of restraints?

John Miller

Yes. Texas is doing a little better than Florida is about the best I can do at the moment. And California worse than both, California, Washington represents the bigger challenges and Florida, Arizona, Texas represents the better news.

Brett Levy

That’s fair enough. Now when we think about G&A, how should we think about both the levels of what you’ll layer on as you start to see sales recover into 2021? And just the pace at which, I mean, your spending should materialize, whether it’s anything from the travelers training to just additional spending on that corporate?

Robert Verostek

Yes, hey, Brett, this Robert again. With regard to that, we have always been quite good at controlling our G&A, as you would expect, as you enter into a pandemic, you become hyper-focused on the things that you can actually control, clearly the G&A is one of those areas. So I think that you will see us continue to focus on that area as restrictions ease. And we move through 2020 and into 2021, it’s just a part of our DNA. It’s always would – part of our DNA to control this line.

And I think you will see a continued focus on controlling that. You have more abundance out there, you can pick a base and I can’t tell you what that is, but I’m fairly certain that that is extended at some point into 2021, which will require us to continue to be diligent with our G&A spending.

Brett Levy

And then just my final question, similar on the CapEx side, when do you foresee returning to more of a project-oriented pursuits whether it’s talking to your franchise about upgrading the existing office or really accelerating the build out?

Robert Verostek

Yes, Brett. So with regard to that, the biggest expenditures that we were going through, other than some of these real estate acquisitions that were getting caught up in a 10.31 that made the free cash flow will look a little funny, but we’ve tried to talk through that in detail to get there. There’s other biggest expenditure was really into the remodels. And we were right on the cusp of launching in to what we call the Heritage 2.0, we had tested that. And we are getting ready to launch into that.

With regard to our franchisees, we did – and we have already communicated to them and offered relief that they would not need to complete remodels prior to 2022. So with regard to that, now to the extent that we need to get back to producing cash flow and can pay out of that, we are very bullish on the results from our Heritage 2.0.

But again, I think that would be predicated upon getting back to some level of sales normality at some point in time. But again, we are very bullish on our remodel theme and want to get back there. The franchisees have been given a more funding through the end of 2022 or through the beginning – sorry, the beginning of 2022. And we will have the flex from a company perspective, the time to be at a new normal is. We’ll update with some reconnaissance here 575 units have plexiglass installed currently.

Brett Levy

Thank you very much.

John Miller

And just one other cleanup note for everyone on the phone with regard to the 50 to 75 units that are sub-$1 million. Again, just be clear that that was a nearer term comment that was not necessarily isolated into Q4, a relative near-term versus a longer term.

Operator

And with no other questions, I’d like to turn things back to Curt for any closing remarks.

Curt Nichols

Thank you, Kelly. I’d like to thank everyone for joining us on today’s call. We look forward to our next earnings conference call in February, during which we’ll discuss our fourth quarter 2020 results. Thank you all and have a great evening.

Operator

Again, that does conclude today’s conference. Thank you all for joining us.



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