Denny's - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day and welcome to the Venice Corporation Second Quarter twenty twenty Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Speaker 1

Thank you, Jenny, and good afternoon, everyone. Thank you for joining us for Denny's second quarter twenty twenty earnings conference call. With me today from management are John Miller, Denny's Chief Executive Officer Mark Wolfinger, Denny's President and Robert Verostek, Denny's Senior Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our second quarter earnings press release along with any reconciliation of non GAAP financial measures mentioned on the call today. This call is being webcast, and an archive of the webcast will be available on our website later today.

John will begin today's call with a business update. Mark will then provide some comments about our franchisees and development, and Robert will provide a recap of our second quarter results and current trends before commenting on our liquidity position. After that, we'll open it up for questions. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The company knows that certain matters to be discussed by members of management during this call may constitute forward looking statements.

Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10 ks for the year ended December 2539, and in any subsequent Forms eight ks and quarterly reports on Form 10 Q. With that, I will now turn the call over to John Miller, Chief Executive Officer.

Speaker 2

Thank you, Kurt. Good afternoon, everyone. This quarter has proven to be one of the most difficult quarters this country and especially the full service restaurant industry has ever seen. However, I'm so proud of what Denny's has been able to accomplish during this unprecedented time. When states and local jurisdictions began to impose restrictions at the onset of the COVID-nineteen pandemic, guests and franchisees were entering unchartered waters.

Am impressed with how our devoted team and resilient network of franchisees worked so well together to quickly implement changes so we can continue doing what we love to do most, feeding people. In addition to implementing enhanced cleanliness and sanitation standards to ensure the safety and well-being of our restaurant staff and guests, our team worked diligently to provide all possible options for guests to continue enjoying Denny's craveable products. These options included our well established Denny's on Demand platform, dine through curbside ordering and even converting portions of our parking lots and sidewalks into outdoor dining rooms. Average weekly sales for all of off premise have almost doubled since the beginning of the pandemic, going from approximately $4,000 per week in February to approximately $7,900 in July. As the dining experience shifted for guests, it was important for us to develop a streamlined menu that was optimized to feature some of our more popular products and allow for greater kitchen speed and efficiency.

We also introduced a new platform of shareable family meal packs, offering a delicious and convenient way to feed the whole family. We have continued to evolve this platform and now offer desserts and milkshakes, along with our popular Grand Slam, burgers and chicken tender meals for feeding a family of four. As states and local jurisdictions began to lift restrictions during the quarter, restaurant teams were trained in our enhanced health and safety measures, measures and became well prepared to reopen dining rooms and welcome back our guests in a safe environment. Our guests were ready to dine in with us as domestic system wide same store sales sequentially improved from a decline of 76 in April to a decline of 41% in June. While a few states have recently reverted to more restrictive dine in service limitations, our guests have adjusted and are utilizing our off premise and outdoor dining options.

Though reduced operating hours continue to impact same store sales, with approximately 30% of our domestic units currently operating a full twenty four hours, preliminary July system wide same store sales were similar to June at down approximately 39%. This is despite including a partial month of the dine in shutdown across California, a key state for Denny's that encompasses approximately 25% of our domestic restaurants. Furthermore, we are very encouraged by the preliminary system wide same store sales results of down approximately 41% for the last July, which included the full impact of the California dine in shutdown. These sales results are a significant improvement from the low point of negative 80% in the March and leads us to believe that we have already seen the lowest sales levels of this pandemic. In closing, these last few months have been challenging for our guests, restaurant teams, franchisees and employees, both financially and personally.

However, one thing has always remained constant, our passion for feeding people. Our teams and franchise community have worked tirelessly to ensure that no matter what the circumstances are, we will continue to do what we love most by providing a welcoming come as you are dining experience that is safe and clean for our guests. And I want to thank our leadership teams and franchise partners for their unwavering commitment and dedication to this brand, to our guests and to our Denny's family. With that, I will turn the call over to Mark Wolfinger, Denny's President, to discuss more about our franchisees and development. Thank you, John.

I want to echo John and express how extremely proud I am of our franchise community for the resiliency and determination during this pandemic. Their commitment to the success of this brand is truly remarkable and invigorating. While new restrictions and paused reopening plans are not what we had hoped for, our franchisees are much more prepared than they were in March and are utilizing every option possible to serve Denny's guests. Virtually all of our domestic franchisees took advantage of the Paycheck Protection Program and have received funding that has assisted them with navigating through these tough times. In addition to these funds, we have provided relief to franchisees in the form of deferrals or abatements of royalty and advertising fees as well as rents where we either own the property or have been able to secure relief from the landlord where we sublease to franchisees.

We have also deferred all remodels until the end of Q1 twenty twenty one and extended most of our domestic development commitments for one year from their original due to allow greater sorry, the original due date to allow greater balance sheet flexibility for our franchisees. We will continue to monitor these dates and adjust as necessary. Franchisees were prudent with these funds and relief efforts and made sure the restaurants were prepared to reopen in a safe and clean environment with appropriate staffing levels. Despite tremendous efforts, the unfortunate reality is some of our franchisees had to make tough decisions during the quarter. This led to the closure of 15 franchise restaurants, bringing the June year to date total to 31 closures.

The AUVs or average unit volumes of these restaurants were well below the franchise average prior to COVID-nineteen. And with increasing top line pressure, these restaurants unfortunately could not sustain in the current environment. The pandemic's impact accelerated these closings as we had anticipated them closing in the next several years anyway due to lower sales volumes and continued inflationary pressures. As a reminder, the average restaurant requires approximately 70% of its 2019 sales in order to cover both fixed and variable cost items. With recent restrictions and postponement of reopening plans, we expect to have additional closures in the near term.

However, we anticipate most of these situations will prove to be an acceleration of future period closures and remain confident in the sustainability and longevity of our portfolio. Our confidence is further supported by an increasing number of franchisee to franchisee transactions. As some franchisees have ultimately decided to discontinue operations of the restaurants for a variety of reasons, our development team has been working diligently to market these restaurants to well capitalized development focused franchisees that wish to expand their ownership within Denny's. There have been 11 restaurants, including nine in New York, either purchased or agreed to be purchased since the beginning of the pandemic, which has provided additional growth opportunities for some of our existing franchisees. These nine restaurants in New York were part of the 15 restaurants that were previously reported by local media as having closed, but will be reopening under another franchisee's ownership.

These transactions along with three franchise restaurants that opened during the quarter brought our total number of restaurants to sixteen eighty three and speak to the confidence and future opportunities our franchisees see within the brand. As of last week, we had 55 restaurants temporarily closed, including 47 domestic franchise restaurants and eight international franchise restaurants. Additionally, ten thirty five domestic restaurants were operating with open dining rooms with capacity limitations across 28 states. We also completed three remodels during the quarter, including one company restaurant. These remodels began prior to the COVID-nineteen pandemic, and we do not expect any more remodels to be completed this year.

We look forward to returning to net restaurant growth in the future and are confident we will do so back by over 75 restaurant refranchising development commitments along with our existing domestic and international commitments. We also believe opportunities will exist to expand through conversions as we emerge from the pandemic. I'll now turn the call over to Robert Barostik, Denny's Chief Financial Officer, to discuss the quarterly performance.

Speaker 3

Robert? Thank you, Mark, and good afternoon, everyone. I will start with a brief review of our second quarter results, then share an update on our strong liquidity position. Franchise and license revenue decreased 55.6% to $25,000,000 primarily due to the impact of COVID-nineteen on sales at fresh franchise restaurants and a related onetime $3,000,000 royalty abatement during the second quarter. Franchise operating margin was $9,800,000 or 39.1% of franchise and license revenue compared to $26,000,000 or 48.8% in the prior year quarter.

This margin decrease was primarily driven by the impact of COVID-nineteen on sales and the related onetime $3,000,000 royalty abatement, partially offset by an increase in occupancy margin from additional leases and subleases to franchisees as a result of our refranchising and development strategy in 2019. As a reminder, franchisees paying rent on properties we own received a twelve week lease payment deferral. However, the income and expense are still recorded in the current period with cash expected to be received over Q4 of this year and Q1 of next year. Company restaurant sales of $15,100,000 were down 84.2% due to the impact of COVID-nineteen as well as a ninety four equivalent unit decline in our portfolio as a result of our 2019 refranchising and development strategy. Company restaurant operating margin was negative $4,500,000 or negative 29.6% compared to a positive $15,600,000 or 16.4% in the prior year quarter.

This was due to the sales and related deleveraging impact of COVID-nineteen as well as the reduced company restaurant portfolio achieved through our 2019 refranchising and development strategy. Total general and administrative expenses were $13,200,000 compared to $18,500,000 in the prior year quarter. The decrease was due to revised achievement expectations in both our short term incentive plan and long term share based compensation as well as both temporary and permanent reductions in personnel costs due to COVID-nineteen and our 2019 refranchising and development strategy. This was partially offset by market valuation changes in the company's deferred compensation plan liabilities. The results collectively contributed to adjusted EBITDA of negative $5,100,000 Depreciation and amortization expense was approximately $1,000,000 lower at $4,100,000 primarily resulting from a lower number of equivalent company restaurants due to our 2019 refranchising and development strategy.

Interest expense was approximately $4,900,000 compared to $5,400,000 in the prior year quarter, primarily due to a reduction in financing leases. During the quarter, we recorded 11,500,000 of other noncash, nonoperating expenses related to the discontinuance of hedge accounting for a portion of our interest rate hedges. This was due to several factors and circumstances that were identified during the quarter and had significant impacts on the forecasted transactions, which ultimately resulted in this accounting treatment. The other noncash nonoperating expenses include a $7,400,000 reclassification of amounts previously recorded in accumulated other comprehensive loss to expense, $3,800,000 related to changes in fair value associated with the portion of interest rate hedges for which hedge accounting was discontinued and a $300,000 of expense recognized related to amounts remaining in accumulated other comprehensive loss, which will be recognized as other nonoperating expense over the remaining term of the interest rate hedges for which hedge accounting was discontinued. This resulted in reclassification from accumulated other comprehensive loss to the statement of operations but with no impact to cash, adjusted EBITDA or adjusted loss per share adjusted net loss per share.

Had hedge accounting treatment remained effective, all accounting transactions related to our interest rate swap would remain in accumulated other comprehensive loss and flow through equity rather than through the statement of operations as previously described. The benefit from income taxes was $5,100,000 yielding an effective income tax rate of 18.1%. Adjusted net loss per share was $0.25 compared to adjusted net income per share of $0.23 in the prior year quarter. Adjusted free cash flow after cash interest, cash taxes and cash capital expenditures was a negative $11,500,000 compared to a positive $6,800,000 in the prior year quarter, primarily due to a reduction in adjusted EBITDA. Cash capital expenditures, which included maintenance capital and remodels, was $1,700,000 compared to $3,700,000 in the prior year quarter.

As previously announced during our first quarter earnings, we entered into a second amendment to our existing credit facility, which waives certain financial covenants, including the consolidated fixed charge coverage ratio. However, even though the leverage covenant is waived, it is important to mention our leverage ratio as of 06/24/2020, was 5.4x, and we had approximately $323,000,000 of total debt outstanding, including three zero seven million dollars under our credit facility. During these uncertain times, we set forth to further fortify one of the strongest balance sheets in the industry. Most recently, we raised $69,600,000 in net proceeds from a public offering of common stock, which we subsequently used to pay down the credit facility. Immediately following these events, we had approximately $12,000,000 cash on hand and $237,000,000 outstanding on the credit facility, yielding approximately $100,000,000 of total available liquidity after considering the current liquidity covenant.

We also granted the underwriters a thirty day option to purchase up to an additional 1,200,000.0 shares of common stock, which we currently expect will expire unexercised. It is important to note that as same store sales improved sequentially throughout the quarter, so did free cash flow. Our cash burn in fiscal June was in the $1,000,000 to $3,000,000 range, which is an improvement from our cash burn of $5,000,000 to $7,000,000 in fiscal April. Absent the $3,000,000 royalty abatement recorded in fiscal June, we wouldn't have been cash flow positive for the month. Given the dynamic and evolving impact of the COVID-nineteen pandemic on our operations and substantial uncertainty about future performance, we cannot reasonably provide an updated business outlook.

However, in these challenging times, our management team remains focused on managing business costs while supporting Denny's recovery. In doing so, we will leverage the strength of our asset light business model and fortified balance sheet to ensure the success of our franchisees and this brand. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q and A portion of our call.

Speaker 0

Thank And at this time we will go to Nick Setyan of Wedbush Securities.

Speaker 4

Thanks for the cash flow commentary around June. Any way to parse out what margins you know what margins might look like might have looked like in June just so we can have an idea of how to think about going forward trends and what margins may look like even with the recent downtick in comps?

Speaker 3

Nick. This is Robert. Was looking over at Curt with regard to that. We really haven't parsed out June in any public way. I can tell you that the reality is that margin is not going to improve dramatically until we can get closer have those same store sales improve.

If you notice in the release, in the earnings release, we quoted, I think, 41% in fiscal June and then again down 39% in fiscal July. So I will point out to you that the one benefit is while the trending has gone June was improving and July saw somewhat of a hiccup with some of the states closing, particularly California. We did mention that absent the royalty abatement, we would have been cash flow positive in June. My suspicion, although we haven't mentioned it, is that, that trend will continue into July. But the reality is those margins are going to be under pressure until that top line gets back in shape.

Speaker 4

Fair enough. The downtick in July, have you seen any kind of a downtick in states where we haven't seen closures of dining rooms?

Speaker 2

Nick, this is John. That's a great question. It's really the region it really follows the capacity. If you have good weather and can feed people on the parking lot, that helps. But basically, if you're takeout only, are performing on the averages worse than somebody at 75%.

So 25%, 50%, 75% in takeout only. We have, as we said in the script here, done quite a few scrappy things to set up tents, flags, curbside, dine through, hostess on the parking lot. Those things have really helped. Some brightness in this is that sort of Texas outperformed the average of the brand. There was a reversal from 50% to 25% lift.

And so you sort of took it on the chin for a few days, but it seems to have behaved as if it's sort 50%. Part of that is we're heavy on weekends. Part of it is some of those are well parked stores. People may be willing to sit in the parking lot waiting for a table to be available. There's any number the weather has been milder in the mornings.

It's been hot there, but in the 90s instead of the 100s. So any number of those things could be a little bit of a break for us. But what we the optimism really the regular conversations we have with our franchisees is around the fact that so much momentum was being built before the reversal and the restrictions. And we do believe that those will reverse again in due time. It won't be forever that these lifts are in place.

Speaker 3

The other thing to add, Nick,

Speaker 2

with regard to the same store sales,

Speaker 3

I think it was in the earnings release also is that right now, approximately 30% of the units are open 20 fourseven. So these comps that we're quoting are being impacted by the fact that still nearly two thirds to three quarters of the brand are not open 20 fourseven. In large part, what we're hearing with regard to that is that, that is staffing related, just gearing back up and getting employees to come back to work to be able to staff those dayparts. But those are weighing on those comps that I just quoted, that 41% from June and that 39% in fiscal July, those are being weighed down by the fact that we only have about onethree or so of the units open 20 fourseven.

Speaker 4

Understood. Okay. And then just last question. The unit closures kind of stayed steady at 15% with Q1. I'm wondering how you're thinking about the closure rate going forward.

Is sort of the 15 ish number each quarter kind of the right way to think about it? Or should that pick up in the near term?

Speaker 2

Yes. Nick, it's John again. The 30 franchised one company year to date, these AUVs of these stores are really below the average prior to COVID. And so they are likely not going to make it through the next remodel cycle or the next lease renewal, and this just accelerated. So what do we expect next is sort of the modeling question.

And I would say we anticipate there will be additional closures in the near term, but they're really most likely to be also accelerations of what would have come anyway. So at this point, there's not this running to the franchise or saying, we're shutting down, we require notice and conversations about that. And the conversations have been what do we do to fight for transactions, breakfast, lunch, dinner, late night, how can we get staffed open to more extended hours. But conversations have really been on the other side of this. And we have franchisees that are pretty astute to cash management that are capable of coming to their own conclusions, and they've concluded they're better off fighting for the business than rolling over or playing defense.

Speaker 4

That's great color. Thank you very much.

Speaker 2

Thanks, Nick.

Speaker 0

And we will go next to Michael Thomas of Oppenheimer and Company.

Speaker 5

Great. Thanks. Hope everybody is doing well. You just mentioned that there's a big chunk of units still not doing twenty fourseven hours. So can you talk about maybe what is that missed sales opportunity if those units were to turn that on?

How much were sort of foregoing by not having those open?

Speaker 3

Yes. Michael, this is Robert again. So just roughly speaking, I imagine we can pull it up specifically, but that daypart is somewhere around 18% to 20%. And the simple math would suggest that if you take 70% of that, that 18% to 20%, that's probably weighing on the comp 12 to 14 percentage points, just rough math.

Speaker 5

Got you. That's great. And then in the units that you've had to sort of reclose or restrictions have tightened again, can you talk about maybe what the off premise sales trend looked like before you had the dining rooms open there? Then once you've opened them again, what did that look like? And then now as they've reclosed, have you seen those customers that I assume sort of went to dine in, have they reverted back to off premise?

Speaker 3

Yes. So Michael, this is Robert again. The reality is that off premise business has been really kind of the silver lining in a very traumatic pandemic situation. I'd say we doubled I think it was in one of the scripts here that we've doubled I think it was John's that we went from $4,000 to nearly $8,000 and 95% of that held Even as we pointed out in that last week of July when California went back to off prem only, we held those sales results. So that's been somewhat of a stalwart throughout the entire time.

Once we hit April through the last number, that last week of July that we reported, it about doubled, and that's probably held most of that. So that's a good thing for us.

Speaker 5

Perfect. And one last quick one. I know you guys obviously went pretty hard in the value with the T468 sort of reintroduction. Just wondering what other sales levers do you have in your back pocket that you're thinking about over the next couple of quarters? And I know you probably don't want to be too specific, but just anything that we can sort of point to about things that you guys are looking at that we should be thinking

Speaker 3

about? Sure.

Speaker 2

Well, what we did near term, of course, was to sort of pull the menu down in size. There's it's practically impossible to determine what impact that has on transactions if a guest isn't looking for their favorite. But clearly, the top selling items we focused on with fewer cooks on the line and limited service capabilities, we want to make sure the experience was a reasonable ticket time and hospitality experience. And so like so many brands that you've seen, we did pull the venue back to some degree. So one of the things that we've been talking about is how that will continue to expand throughout the balance of the year, not getting into specific promotion ideas.

And then of course, to reiterate what we have made public so far is we did focus on to go with free delivery and some other support programs along those lines. We did have a ten year anniversary launch of the 2068 menu. We did not see that all the way through the promotion based on some of these pullbacks, but it did sort of kick that up as we sort of pulled SuperSlam out. So SuperSlam in the quarter accounted for about 10% of sales, but that's a little bit of a mixed bag as that fell off toward the end of the quarter and 2,068 ramped. And then all of those ramped back down as we pulled those promotions to focus more on delivery in the final closeout of the

Speaker 5

Great. Thanks so

Speaker 3

much. Thanks, Michael.

Speaker 2

The short answer is an expanded the menu expanding again in the balance of the year, and there will be some new news too.

Speaker 0

We'll go next to Todd Brooks of CL King and Associates.

Speaker 6

Hey, good afternoon, everyone. Hope you're all doing well. Todd. Guys. A couple of follow-up questions.

One on the late night daypart, the 70% of stores that are not offering it yet. Are we have we established a trigger where franchisees will be required to be open 20 fourseven again once staffing is available? Or is it still something that's optional for them for the foreseeable future?

Speaker 3

What we have established with our

Speaker 2

franchise community and our franchisee association leaders and our brand advisory councils is that there's no change in brand requirement or the brand offering to consumers. And all are in agreement that this is not a negotiation. What we've done then per franchisee per region is left it a little bit loose as to when that requirement will come back. Our sensitivity is around the ability to staff. We have weekly calls with our steering body that runs our franchise system, the franchise volunteers.

And basically, they are recommending to themselves without the assistance of corporate leaders to get expanded hours back as quickly as they can staff. So I'll appreciate the benefits of those hours and are working toward it. Part of the challenge, of course, coming from COVID is people's fears about being exposed or exposing a loved one at home and or a stimulus in the form of a check or unemployment benefits have perhaps made the job market more challenging than it would with higher unemployment. Those things are all temporary and evaporate soon. So the idea is to get open later, faster or as soon

Speaker 3

as we can.

Speaker 6

Yes. Perfect. And then secondly, can we just review what the Californian operators are doing? Because I think with returning to that mandated closure posture again, I would have expected same store sales to maybe falling off a little more over the course of June. So on top of off premise efforts that were in place during the first mandatory closures as far as the rollout of curbside and third party delivery and etcetera.

Can you talk about maybe outdoor dining, if that's been a driver that's made Sure. The sales a little stickier

Speaker 2

There's a number of things that made it stickier, and I would never have never thought that I would be excited about down 41. But there's a couple of things going on. If you look at the breakdown in the tale of the sort of the latest results, we're about 63% dine in across the country, 22% is dine through. So these people come into the parking lot to pick up food or have curbside delivery or sit in under a tent in a table that's out on the parking lot. So we're calling it to go.

And then call it 1513% through third party delivery and 2% at denny's.com are third party. Of all of that takeout, the Q1 to Q2 change has been driven by younger people using the brand more through to go. So eighteen to twenty four year olds were up 14% versus Q1 and just overall use of all of our takeout. Twenty five to thirty four year olds were up nine and 35 to 44 up eight. The oldest customers we have are slightly down.

They're the most concerned about getting out. So as things lift, these are promising in that, one, these things are retained and then dine in will give us that capacity back and two, that it's a younger audience that might have been otherwise hard to reach through typical forms of broadcast or media, but the fact that there's trial through online ordering and pickup or they prefer to sit on a parking lot that's colorful with seating where the competitor down the block doesn't have that. Not all stores have deployed these methods, but more and more are adopting it every week. But because of the great weather in California, it's been quite easy for them to sort of lead the way with parking lot apparatuses of some sort.

Speaker 6

Okay, great. That's very helpful. And then my final question. I know you pointed the $3,000,000 in franchisee abatements in Q2. I know it's hard to predict the future, but as far as visibility on further franchisee support, would it be more along the lines of further deferrals from this point out at these sort of sales trends?

Or would you expect that there could be another round of abatements?

Speaker 2

Yes. That's a great question. I think we all have skin in the game is the point from deferrals to abatements over the course of the onset of the pandemic through today. I think when you look at the math, with a highly franchised system, it's not like we're 10% franchised and can sort of cover for some franchisees that are on their way. I think our franchisees understand as well as we do that these things in the grand scheme of things are nominal overall.

And so we're proud of the fact that near 100% of our system participated in PPP program. We have our franchisees fast adopting plexiglass shields between tables where permitted to increase capacity, dining on the parking lot, dine through, drive through curbside, text me when I'm here, all touchless payment on the parking lot, all the kinds of things to create confidence to our consumers and to show that we're a brand that's trying to pay very close attention to what our consumers are looking for. I don't believe that there's an expectation, but I think it's I just can't guide. I mean we don't know what the circumstances might hold as we unfold. But I think right now, we're of the view, we've done what we should.

Speaker 3

Yes. Tom, so this is Robert. So if you think about the last $3,000,000 abatement, was a fairly blanket approach. It went evenly, pretty spread evenly to each of the franchise units on approximately $2,000 a unit, a little bit more in some circumstances, but in general, 2,000. I never say never.

And to John's point, you don't have this crystal ball of what's happening. But internally, I think the conversation has pivoted more to just bolstering liquidity to potentially utilizing if we were to do the next step of this to do it in a way that may incent behavior that would drive sales. So to use those resources again, if you participate and do X, which will likely drive sales, we may offer you this benefit. Now again, nothing concrete that we're announcing today, but I think that would be more of the tone that it might take going forward.

Speaker 6

Okay. Thanks. Very helpful, guys. Appreciate it.

Speaker 7

And

Speaker 0

moving on, will go to a question from James Rutherford of Stephens Inc.

Speaker 8

Hey, thank you all for taking the questions. Actually, just one for me and it's taking another crack at the July trend.

Speaker 2

What I

Speaker 8

was curious was if you all can give additional color on the kind of weekly sales levels in the California stores before and after indoor dining was closed, even if it's directionally? And I asked because I'm trying to reconcile the commentary in the earnings release about sales levels not declining in July, even when those closures happened or the closure of the dining happened with the statement that off premise sales are still around $8,000 per week, which would obviously be meaningfully below the kind of pre pandemic levels. Just trying to clarify what the comps you're seeing for the stores that reopened dining rooms versus the ones that are kind of closed again today.

Speaker 3

James, this is Robert. Yes, trying to kind of get the question in my head. I'm looking at the charts that we put into the earnings release, and you can see the markdown as units reopened. If you look at the June at the 55%, and we were marching through down in the last week of fiscal June down to that 29% as more and more units opened, and we got more socially distance and California came online. And then you saw Texas back up, I think it was from 75 to 50.

And then you saw California then probably in that week of July 8, I think it was a week or so ago, went to at first it was 19 counties and then they went to the entire state. So it kind of phased through there and we got to that 41%. So likely backed up 10%, but California was performing really quite well for us as the units were opened up. And we were sad to see that they had to revert back to that point, but really actually quite pleased to see that they as John just described in his previous answer, that they became even more scrappy and the weather out there allowed them to move more of those sales to the parking lot in dine throughs and tents and various seating apparatus. So not sure I'm answering your exact question.

Again, clearly, had more sales in California when they had on premise sales. But the fact that July looked the month of July and the last week of July looked very similar is very reassuring to us at this point.

Speaker 8

Okay. Thank you.

Speaker 0

And we'll go next to a question from Jake Bartlett of SunTrust.

Speaker 7

Great. Thanks for taking the question. I wanted to start with that last question, maybe asked a little more explicitly, which is a number of other concepts have given same store sales at stores that have dine in being offered or dine in being offered and stores with only off premise. So can you share what the same store sales have been at stores that are offering dine in versus the same store sales at stores that

Speaker 2

are not offering dine in? Yes. I think it's the same answer. The on the averages, if you're 70 again, if you blend all the twenty four hour restaurants fully open together, they're going to have many of those are ahead of last year or a few of them anyway. And then the 75% a little less and the 50% a little less.

But the trouble with the question is there are so many classes of units that are highly varied. There's stores three miles apart in California that are ahead of last year and all the way to down half of last year. So but the average is the story holds true along the more dine in drive thru combined that you have, the more sale and the extended hours, the better you're doing. So the story is as lifts improve, sales will improve as restrictions go away.

Speaker 7

Got it. Well, one part one kind of reason for that question is, I believe the statement earlier was that franchisees would cover fixed and variable costs with sales down about 30%. And I think it was framed as recovering 70% of prior year sales. So I mean, is it fair to say that stores that have been able to open their dining rooms are free cash flow positive? Or have are achieving that level and driving positive margins?

Are they still kind of underwater?

Speaker 3

Jake, this is Robert. So I get the question. I see where exactly where you're going. And we were working we're trying to better understand that. And we do have a insight to our franchisees with regard to their P and Ls.

Have a new tool. I've talked about this a lot, maybe even talked on the last tool. It's a Lumen tool where we get information. It's monthly, but we receive it only quarterly. So the insight into that as we've moved through this is, again, we capture it, but it's not necessarily real time like we would have a company P and L.

So to make statements specifically about what percentage may be cash flow positive, again, we believe in the averages. We can work with the averages, but to quote a specific number that might be cash flow positive is difficult. Again, I do hold to the 70% average being accurate. And again, to what John just said, that the higher the on prem business and for us, that social distancing is the most amount of on prem that you would get, the more likely that you would be surpassing that down 30% or 70 plus percent of the sales. So again, I'm really not trying to be evasive in the question.

I'm just not sure we have the data point that would tell that I could relate to you about how many units are exactly how many franchise units are exactly cash flow positive right now.

Speaker 7

Okay. And just to as you think about your the company owned stores that you have, it should we think of restaurant level margins as being flat at negative 30% comp? Is that the right math?

Speaker 3

Probably yes, probably rightly. Yes. I think that's probably a rough fair assumption, Jake, that if you were about down 30%, you would probably your operating margin would probably be about zero. I think that's the converse of way of saying it. Okay.

Speaker 7

And then last question. Just to try to get a handle, there's always a bunch of moving parts in G and A in terms including this deferred comp valuation impact. But how should we think about G and A for the rest of the year? It was higher ultimately in the second quarter even before stock comp than the first quarter. How should we think about it going forward?

Just really in rough should we is this second quarter the right run rate or potentially lower or higher? Just to give us a rough guidepost.

Speaker 3

Yes, Jake, that's an excellent question. And we'll get the 10 Q out here soon. I'm not sure if it's in the press release. I'll quote the press release. When you look at the various pieces here, the corporate administrative expenses is the $9,700,000 So you can do the quick math there.

That's a $2,700,000 improvement versus prior year. The share based compensation at $1,500,000 is also another improvement. And then the incentive comp is you can see that we booked that the short term incentive compensation that I spoke to in virtually nothing. And then this deferred compensation valuation adjustment, that's just a market change of the of that liability. It comes out as other non op.

That's really an in and out number. So when you look at the real cash components of G and A, you really have to look at the other three. And the reality is in the share based compensation, the two components, both the long term and the short term are a function of performance. The top one is really what we kind of internally call the core G and A. And that's down year over year.

We spoke to it. We spoke to it in, I think, the Q1 earnings call that we had at one point in time 100 people furloughed, ultimately, sadly to say that 50 of those 100 became permanent displacements for us, which is a sad day. We don't have a ton of people here in the home office. It's less than two fifty. So that's a significant number for us.

But I think that you will see that, that core number will continue to trend in this fashion, down from prior year, but there will likely be some volatility in particular that deferred comp is really just market driven, again, noncash and then some volatility against performance in the other two pieces. But with that core number, you will that number will trend lower than prior year.

Speaker 7

Great. I appreciate it. Thank you.

Speaker 0

And we'll hear next from Brett Levy of MKM Partners.

Speaker 2

Great, thank you. I apologize if these questions are a little redundant. But aside from what you're seeing on the macro level from capacity that's being restricted from openings and closings, what else do you think you can and need to do to reengage with the consumers?

Speaker 7

And also, what more do you

Speaker 2

think you're hearing from the franchisees that they want and need you to do at this point? Well, of course, there's a lot of conversation about new normals. And we're in this the typical spot of conjecture versus guidance versus what's been disclosed, right? But sort of the big industry questions are there will be some purge, there will be some consolidation of large balance sheet franchisees, there will be conversion opportunities down the road, there will be different kinds of footprints being entertained, there's different uses of technology and pace at which they might be adopted. There is the discussion of a number of people downsizing their headquarters and making more positions, permanently at home positions or elective.

You have your office where you work at home a good portion of the time. So if you're working at home and opting out of certain meals, make a peanut butter sandwich for lunch. You have to step up your to go appeal? Do you alter your packaging? Do you find ways to do more beverage sales to go?

Do you exploit late night even more? There's all kinds of conversations about the opportunities that are presented and the challenges that are presented. It does call attention to the advantages some brands that are well positioned for to go and delivery have at this present time and the disadvantaged brands that have built all their equities for dining in. But I think it's a unique time to explore those and good brands will. We won't be the only one that talks about these things in the coming quarters and months.

But there's a lot of excitement around the possibilities. It's too early to talk about anything specific. But I do think as consumers and marketplaces evolve, brands must too, and you'd expect it needs to be in the middle of all that.

Speaker 0

And with no further questions in the queue, I'll at this time turn the call back to Curt Nichols for any additional or concluding comments.

Speaker 1

Thank you, Jenny. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in late October to discuss our third quarter twenty twenty results. Thank you all,

Speaker 3

and have a great evening.

Speaker 0

Again, does conclude this call. We would like to thank everyone for your participation. You may now disconnect.