Orders up

By Dick Hughes  

NOVEMBER 14, 2010 2:37 p.m. (0)

After some tough years, Denny’s, the iconic Spartanburg restaurant chain,  is experiencing upward trends.

Guest traffic is up, new restaurants are opening in travel centers and on college campuses, a café-style Denny’s is being tested, new leadership is falling into place, profits are edging up and the stock price is rebounding.

A lingering dispute with Nelson Marchioli, who was dumped in June as chief executive officer and from the board, was settled, although at a price.

On Nov. 2, consistent with an arbitrator’s ruling, the company paid Marchioli a lump sum of $2.25 million “as if Mr. Marchioli’s termination of employment was under circumstances consisting of ‘termination without cause’ under his employment agreement.”

The company never has explained to shareholders why it terminated Marchioli, 60, of Greenville, who was CEO of Denny’s for 10 years and whose performance had been publicly praised by the company.

Last week, Denny’s reported its best financial performance of the year with net income of $9.9 million on revenue of $140 million in the third quarter.

Debra Smithart-Oglesby, interim chief executive officer and board chair, cited a fourth consecutive monthly increase in same-store guest traffic, “the strongest performance since the first quarter of 2005.” She noted that this past April Denny’s was losing guest traffic at the rate of 5.6 percent but, with its special value meal bargains, reversed that slide with a 2.3 percent increase.  “That’s an eight point improvement during this time period,” she told analysts in a presentation last week.

Revenues and net income for the quarter approximated that of the last quarter of 2009 but were slightly less than the same quarter a year ago. The company attributed the lower revenue levels to sale of company stores to franchisees.

Thus far this year, Denny’s has opened 91 restaurants in Flying J Travel Centers, 21 company-owned and 70 franchise-owned. It is ahead of schedule in conversion of a total of 141 Flying J locations by early next year, Mark Wolfinger, chief financial officer, told analysts.

Smithart-Oglesby said Denny’s plans to open a handful of company-operated café test locations in urban settings, the first two opening this year.  The company is investing $800,000 in each of the test cafes, according to Enrique Mayor-Mora, vice president for investor relations.

“In this limited-service concept,” Smithart-Oglesby said, “guests will be able to order at a counter and have runners bring out their food.”  Denny’s promises eight minutes from order to delivery.

The first Denny’s Café was to open this week in Orange County, Calif.

Smithart-Oglesby said the café model is premised on being able to “deliver attractive rates of return by leveraging lower capital and labor requirements.”

Once up and running and presumably profitable, Denny’s expects the vast majority of future cafes to be opened as franchises.

Smithart-Oglesby said Denny’s expanded college campus locations from one to five in the last quarter and is pursuing additional locations “on campuses across the country.

After several months of management turmoil, Denny’s filled important executive positions with the hiring of Frances Allen as chief marketing officer in July and Robert Rodriquez as chief operating officer in September.

Rodriguez was given a base salary of $425,000 annually, a signing bonus of $100,000, an annual incentive of 75 percent of base salary, 100,000 stock options and 250,000 restricted stocks dependent on stock price goals.

Rodriguez, 57, most recently had been president of Pick Up Stix, an Asian fast-food franchiser, and he was president of Dunkin’ Donuts from 2004-2008.

Allen got a base salary of $400,000 annually, a signing bonus of $100,000, incentive opportunity up to 75 percent of base salary, 100,000 in stock options and 200,000 in restricted stock awards linked to stock price goals.

Smithart-Oglesby, who was named interim CEO when Marchioli was abruptly terminated, said the board hired Spencer Stewart, an international executive search firm, to help find a CEO “and we expect that will occur by the end of this year.”

In September, Denny’s renegotiated $300 million in debt at lower interest rates and with less restrictive conditions.  Mayor-Mora told analysts that under prior restrictions “we had very little to no flexibility to form any stockholder-friendly activities such as share repurchases or dividend payments.”

Free of  loan restrictions, the board of directors Tuesday authorized repurchase of up to 3 million common shares “from time to time” through Dec. 31, 2011, in the open market or in privately negotiated transactions.  The company has 99.6 million shares outstanding.

Denny’s stock price, which was languishing in the mid-to-high $2 range for several months, has been on a gradual but steady rise to mid $3.

The stock traded close to $4 during the spring when there was a surge of consumer confidence during a proxy fight waged by dissident shareholders for three board seats, which they lost.