After the close Thursday, Denny's (DENN) reported fourth-quarter revenue, and shares were recently down 7% at $5.07. We are not taking any action on this Alert.
The restaurant chain posted revenue of $244 million and earnings of 2 cents a share vs. consensus analyst estimates calling for revenue of $246 million and earnings of 1 cent a share. Denny's also said that it expects 2007 operating profit of between $968 million to $987 million, which is lower than the $995 million the company had previously forecast.
Looking at the quarter, we believe the stock's 6% decline this morning is overdone. The slight revenue miss should not be that surprising given that Denny's is now operating fewer restaurants because of its restructuring strategy. Management did say that the outlook for 2007 is uncertain, but this is the norm for casual dining chains, and we believe that Denny's is being conservative in its estimates.
Also, Denny's restructuring efforts led to a $100 million reduction in outstanding debt, or 18% of total debt for 2006. We expect further debt reduction in 2007 as Denny's continues to sell of some of its franchisee restaurants.
Investment firm Merriman Curhan Ford downgraded shares to neutral today from buy following the near-term misstep, but remained optimistic long term. We agree with that positive outlook and believe the current restructuring plan -- which includes revamping existing stores and additional sales of restaurants to franchisees -- will continue to benefit the company.
We continue to rate shares a One and will look to add to our position if shares fall below the $5 level.
Frank Curzio is a research associate at TheStreet.com.
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