As we report on the past year and look ahead, the Denny’s brand, our Company and our balance sheet continue to grow stronger. Management is focused on the strategic objectives of delivering an exceptional dining experience and driving sustainable long-term sales and system growth, while continuing to reduce debt. Beyond that, we are seeking to become an innovator and best-in-class franchisor—ideas that are not far-reaching when you consider Denny’s heritage as a leader in 24-hour service and an early adopter of the franchise business model.
In 2007, we were able to drive positive sales growth as we overcame a difficult economic environment and competitive pressures, particularly at weekday breakfast and late night, to increase same-store sales across the Denny’s system by 1.2%.
Net income for the year was $34.7 million, or $0.35 per diluted common share, an increase of $4.4 million over the prior year. The improvement was due primarily to the success of the Company’s Franchise Growth Initiative program that produced gains on the sale of restaurant operations and real estate assets during the year. Through asset sale proceeds and increasing cash flow from operations, we meaningfully reduced Denny’s debt balance by more than $100 million for the second consecutive year. This represents a 36% reduction in our outstanding indebtedness since 2005.
We returned to positive net unit growth in 2007 and have built a robust development pipeline through our Franchise Growth Initiative. Our new development programs resulted in the sale of 130 company restaurants—36% were sold to operators new to the Denny’s system—and commitments for 120 new franchise restaurants scheduled to open over the next several years. This achievement speaks to the lasting appeal of the Denny’s brand. Our franchisees opened 18 new restaurants during 2007 and that number is expected to nearly double in 2008.
We were particularly pleased to launch a new joint development program with Pilot Travel Centers, building on our history of highway development and 24/7 operations. The first Denny’s/Pilot location opened late last year, one of six new company restaurants opened during 2007.
In order to drive profitable sales growth, we have taken an aggressive stance against our fast-food competitors, asserting Denny’s as the dominant place for “Real Breakfast 24/7” and promoting profitable breakfast programs that appeal to our guests. Research confirmed that we own “real” breakfast in the minds of consumers. We are focused on maintaining this leadership position and leveraging our breakfast strength across all four of our dayparts.
We are also pursuing new opportunities that address changing consumer trends in order to more effectively compete against the growing fast-food and fast-casual segments. We have developed a dynamic innovation process that will provide critical insights on new products, new facilities and new operating platforms to propel future sales growth.
Founder Harold Butler started this business 55 years ago with a solid commitment: “We’re going to serve the best cup of coffee, make the best doughnuts, give the best service, keep everything spotless, offer the best value, and stay open 24 hours a day.” While the menu has certainly evolved with popular additions like the Grand Slam® breakfast—celebrating its 30th year—that same commitment stands today.
We aim to optimize the mix of company and franchise restaurants and provide customers with the food and experience they’re seeking. In the coming years, we look to build on our successful portfolio growth and generate the highest returns for our shareholders.
We thank our employees and our franchisees for all they do every day to make Denny’s a better place for our guests. And, we thank our shareholders for the opportunity you give us to earn your confidence and grow a great American icon.
Nelson J. Marchioli
Chief Executive Officer and President
April 2008