Denny's Rises from the Dead

 | Jan 11, 2012 | 11:00 AM EST  | Comments
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It's not easy being a forgotten restaurant chain, a joke of sorts, a one-time well-known brand that all but fades into oblivion.

The restaurant business is tough at best. Consumer tastes change and when you are working on fairly thin margins it's a fine line between making a go of it and bankruptcy. Few publicly-traded restaurant names have stood the test of time. 

McDonald's (MCD) is one that has, of course. It's the granddaddy of them all, but even this great success story has stumbled from time to time. It may not appear that way if you look at a price chart going back 40 years, but if you hone in on the period between 2000 and 2005, you'll notice a fairly large dip in late 2002. At the time, some thought McDonald's best days were behind it and that fast food as we knew it was over. It wasn't. The company recovered and has been a 7-bagger since bottoming in early 2003.

Denny's (DENN) is no McDonald's. It never has been and never will be.  In fact, the company's parent, Flagstar, filed for bankruptcy in 1997. After Denny's emerged from bankruptcy it struggled, crushed by the weight of its debt. Ultimately, what was once a fairly well-known, albeit second-tier, brand all but disappeared.

I'd forgotten that the chain was still public until the infamous 2009 Super Bowl breakfast giveaway ad campaign in which Denny's gave away 2 million free breakfasts on the Tuesday following the game. This was repeated the following year. While it was ultimately used as ammunition against the company as a poor use of the advertising budget in a subsequent proxy fight by activists, it did put Denny's back on the radar.  

Three years later, Denny's is alive and kicking. The company navigated the recession very well and profitably. Debt was reduced from more than $550 million at the beginning of 2005 to $231 million as of the latest quarter end, primarily through the sale of company-owned restaurants. The company has been pursuing a refranchising strategy, moving away from company-owned restaurants, which is a much less risky strategy. As part of the fallout from the 2010 activist campaign, which failed to put any new members on the Board, the company hired John Miller as CEO in early 2011. Denny's has also tinkered with the menu quite a bit. But the jury's still out on that.

On Tuesday, the company announced that fourth-quarter same-store sales were up 1.5%. That's a decent, but certainly not a remarkable, number. What is remarkable is that the company is growing units, having opened 62 (27 net) in 2011. This is no small chain, with nearly 1700 locations.

Denny's still does not get a whole lot of respect from the Street, but that may change if the company can show further progress. It would not hurt to get the stock price above $5, which would be a 20% run from here.

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