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July 31, 2020, 9:12 a.m. EDT

10-Q: DENNY'S CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. The Company urges caution in considering its current trends and any outlook on its operations and financial results disclosed in this report. In addition, certain matters discussed in this report may constitute forward-looking statements. These forward-looking statements, which reflect management's best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny's Corporation, its subsidiaries, and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as "expect", "anticipate", "believe", "intend", "plan", "hope", "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the rapidly evolving COVID-19 pandemic and related containment measures, including the potential for further operational disruption from government mandates affecting restaurants; economic, public health and political conditions that impact consumer confidence and spending, including COVID-19; competitive pressures from within the restaurant industry; the level of success of our operating initiatives and advertising and promotional efforts; adverse publicity; health concerns arising from food-related pandemics, outbreaks of flu viruses, or other diseases; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy (including with regard to energy costs), particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company's SEC reports and other filings, including but not limited to the discussion in Management's Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company's Annual Report on Form 10-K for the year ended December 25, 2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 2020, this report on Form 10-Q and in the Company's subsequent quarterly reports on Form 10-Q. Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. Following the pandemic declaration, federal, state and local governments responded by implementing restrictions on travel, "stay at home" directives, "social distancing" guidance, limitations of dine-in food service, and mandated dining room closures, which collectively had a significant adverse impact on the Company's business performance, results of operations and cash flows for the quarter and two quarters ended June 24, 2020.

Operational Update

In response to various government orders restricting dine-in restaurant food service, the Company implemented a number of initiatives to support Denny's restaurants including: free delivery when guests place orders through the Company's website or mobile app, a contactless delivery option, streamlined menus to facilitate greater operational efficiency, a platform of shareable family meal packs, a curb-side ordering and pick up option, selling grocery items where permitted, highlighting value products, and evolving our dining service to include outdoor seating options.

The Company remains focused on the safety and wellbeing of its guests, restaurant teams, franchisees, employees, and suppliers. Retraining materials and communications have been distributed to the entire system of restaurants, reinforcing strict food safety procedures, handwashing and personal hygiene standards, and enhanced daily deep cleaning protocols. Restaurant teams are subject to daily temperature checks, are required to wear face masks and gloves, and must wash their hands with alcohol-based sanitizer at regular intervals throughout their shift. The Company has remained in close contact with public health officials and government agencies to ensure all public health concerns are appropriately addressed. While these enhanced health and safety measures were developed in anticipation of dine-in service restrictions beginning to be lifted and as Denny's restaurants prepared for new social-distancing standards in their dining rooms, the current restrictions are expected largely to continue and have an adverse impact on our operating costs.

The Company has also worked closely with its suppliers to address contingency plans and has not experienced any significant supply chain issues thus far.

Current Trends

Domestic system-wide same-store sales1 sequentially improved on a weekly basis during the second quarter ended June 24, 2020, as compared to the equivalent weeks of 2019. During the second quarter, dine-in restrictions continued to ease with most restaurants operating with streamlined menus and reduced operating hours. Due to the recent significant increase in COVID-19 cases, various states reinstated dining room closures and the Company experienced a slight decline in domestic system-wide same-store sales1 in fiscal July.

In an effort to provide greater transparency due to COVID-19, Denny's is providing the following tables that present second and third quarter weekly results compared to the equivalent fiscal weeks in 2019:







                  Domestic System-Wide Same-Store Sales1 for the Weeks Ended:
                      Fiscal April: (76%)                                                               Fiscal May: (65%)                                                Fiscal June: (41%)
           4/01        4/08        4/15         4/22        4/29       5/06       5/13       5/20        5/27        6/03        6/10       6/17       6/24
           (79%)       (78%)       (76%)       (72%)       (72%)      (68%)      (63%)       (60%)       (55%)       (47%)      (39%)      (37%)      (29%)
               Fiscal July: (39%)*
          7/01     7/08     7/15    7/22*
         (33%)    (42%)    (41%)    (41%)
        


*Preliminary results

Number of Domestic Restaurants Operating with Open Dining Rooms for the Weeks Ended:

Fiscal April Fiscal May Fiscal June 4/01 4/08 4/15 4/22 4/29 5/6 5/13 5/20 5/27 6/03 6/10 6/17 6/24

Fiscal July

Average unit volumes of off-premise sales have almost doubled from February 2020 to July 2020, supported by temporarily waived delivery fees, new "Dine-Thru" curbside service programs, and recently launched shareable family meal packs.

As of July 22, 2020, 97% of domestic Denny's restaurants were operating, most with take-out and delivery options, streamlined menus, and reduced operating hours, which impacted same-store sales1 results. Also as of July 22, 2020, 55 Denny's restaurants remain temporarily closed, including 47 domestic franchise restaurants and 8 international franchise restaurants. Additionally, 1,035 domestic restaurants were operating with open dining rooms with capacity limitations across 28 states.

Franchisee Support

Direct financial relief to Denny's franchise partners has included: deferral of remodels until March 31, 2021, and most of our domestic development commitments for one year from their original due date, both of which will be reviewed to determine if an additional extension is appropriate; deferral of royalty and advertising fees for week 11 of the 2020 fiscal year; abatement of such fees for weeks 12 and 13 of the 2020 fiscal year; a $3 million royalty abatement in the second fiscal quarter of 2020; and a 12-week lease deferral for franchisees operating in properties owned by the Company. Fiscal weeks 11, 12 and 13 were all within the Company's first quarter ended March 25, 2020.

Additionally, the Company has secured rent relief in the form of abatements or deferrals for over 77% of the leases in which the Company is a lessee, including those instances in which the Company subleases to franchisees and will be extending the same relief to the franchisees as a pass through.

Furthermore, the Company has worked closely with key vendors and primary third-party franchise lenders to help secure additional relief on behalf of franchisees. Substantially all of Denny's franchisees pursued available forms of relief under recent

federal stimulus programs, and franchisees representing approximately 99% of total domestic franchise restaurants have received funding under the Paycheck Protection Program.

Cost Savings Initiatives and Capital Allocation

In response to the COVID-19 pandemic, the Company began implementing cost savings measures in the first quarter, including suspended travel, canceled in-person field meetings, placed holds on all open corporate and field positions, significantly reduced restaurant level staffing across the Company portfolio, meaningfully reduced compensation for the Company's board of directors and multiple levels of management, and furloughed over 25% of the employees at its corporate office, approximately half of which were subsequently separated from the Company. The Company has begun to ease certain of these cost savings measures. For example, the Company has resumed recruiting for certain corporate and field positions. In addition, the compensation reductions expired on June 25, 2020.

The Company is also analyzing whether federal tax credits available in connection with the COVID-19 pandemic apply to wages paid to retained employees during the crisis. In addition, the Company suspended share repurchases as of February 27, 2020, and terminated its Rule 10b5-1 Plan effective March 16, 2020, in light of uncertain market conditions arising from the COVID-19 pandemic.

For the quarter ended March 25, 2020, the Company was in compliance with its financial covenants related to its credit facility, but projected that it would not be in compliance with certain financial covenants beginning for the quarter ended June 24, 2020 due to the impact of the COVID-19 pandemic. Subsequent to the quarter ended March 25, 2020, effective May 13, 2020, the Company and certain of its subsidiaries entered into a second amendment to the current credit facility which amends the current credit agreement dated as of October 26, 2017. See Liquidity and Capital Resources - Credit Facility. As of June 24, 2020, the Company was in compliance with its financial covenants related to the amended credit facility.

On July 6, 2020, subsequent to the end of the second quarter 2020, the Company closed on the issuance and sale of 8,000,000 shares of common stock. Net proceeds of $69.6 million were received after deducting the underwriters' discounts and commissions and offering expenses payable by the Company and partially disbursed to pay down the outstanding balance on the credit facility. Immediately following these two events, the Company had approximately $12 million of cash on hand and $237 million outstanding on the credit facility, yielding approximately $98 million of total available liquidity after considering the current liquidity covenant under the amended credit facility.

(1) Domestic system-wide same-store sales include sales at company restaurants and non-consolidated franchised and licensed restaurants that were open the same period in the prior year. Total operating revenue is limited to company restaurant sales and royalties, advertising revenue, fees and occupancy revenue from non-consolidated franchised and licensed restaurants. Accordingly, domestic system-wide same-store sales should be considered as a supplement to, not a substitute for, the Company's results as reported under GAAP.

Jul 31, 2020

COMTEX_368694137/2041/2020-07-31T09:12:23

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