Revenue Recognition

Denny's Corporation earns its revenue between two sales channels in which it operates as one segment of the market; Company Restaurants and Franchised and Licensed Restaurants. As reviewed in the most recent 10k report, "the primary sources of revenues are the sales of foods and beverages at our company restaurants and the collection of royalties, advertising revenue, initial and other fees and occupancy revenue from restaurants operated by our franchisees under the Denny's name". All significant revenues and pre-tax earnings relate to retail sales of food and beverages to the general public through either company or franchised restaurants. Both company restaurants and franchised restaurants are affected by the same factors, including but not limited to marketing campaigns, new product introductions, menu pricing, competition, and economic conditions affecting consumer spending. Over the past 5 years Denny's has been incorporating vigorous growth initiatives through its opening of 139 new restaurants, an attribution to its 262% increase in Net Income to Company since 2018 (see Vertical Analysis 1-2).

Vertical Analysis 1-1

Operating income as a percent of revenue dropped in 2021 but recovered in 2022, as a result of expenses increasing in 2021, then both COGS and expenses decreasing in the following year. Gross profit in fiscal year 2022 was steady at 41.77% as compared to just under 35% the year before, and as expenses decreased by just under 5% from 2021-2022, Operating Income saw a jump of almost 12% in fiscal year 2022.

Vertical Analysis 1-2 Link to Excel

After operating income, noticeable features of the vertical analysis is the drastic changes of net income from fiscal years 2020 to 2022. Notice the "Gain (Loss) On Sale of Assets" section; Denny's lost a large amount of net income in 2021 due to a decrease in their sale of assets, only reaching 1.62% gain, while in 2022, methods were changed and there was a 12% gain on sale of assets, the biggest driving factor behind the 20% increase in Net Income to Company in fiscal year 2022.

Revenue Recognition

According to Denny's most recent 10-k report, published in February of 2022, "....Company restaurant revenue is recognized at the point in time when food and beverage products are sold at company restaurants". In simpler terms, Denny's recognizes company revenue (sales) when a customer's bill has been paid for their meal, and that has been input into the company system; this includes sales-related taxes collected from customers and remitted to governmental taxing authorities.

"Recognized" revenue from restaurants is coming from the sale of Denny's meals, including entrees, appetizers, beverages and bar sales. The franchise revenue consists primarily of royalties, advertising revenue, and occupancy revenue. These represent sales-based royalties that become recognized at the period during which sales occur, or at the time of payment. Furthermore, other fees generating revenue like advertising and equipment revenue are recognized at the time service is rendered or installed. Restaurant sales as a ratio of total operating revenue in fiscal year 2021 were 43.95%, and franchise and license revenues were 56.05% of operating revenue. As part of those franchise and license revenues, advertising was 31.3%, and occupancy revenue was 18.7%.

Quality of Earnings

Overall quality of earnings of a company refers to the ability of reported earnings to predict profitability in the future. Even just from observing changes in revenue and thus net income for Denny's Corporation in the past 5 years, including pre and post-pandemic earnings, the corporation has maintained a steady, healthy quality of earnings. Steadily increasing net income, which has now reached almost the same amount as before COVID, as well as gross profit as a percentage of revenue at its highest point of 41%, are good indicators of future financial success. Another more specific indicator of a company's quality of earnings is how cash flow adjusts with changes in net income. So when Net Income increased from $78.1 in fiscal year 2021 to $100.6 in fiscal year 2022, and Cash and Other Excess Assets (end of year) increased from $6.16 in fiscal year 2021 to $33.18 in fiscal year 2022 as well, this is a green flag for the company's future profitability. Currently Denny's is increasing sales as they open more franchises, but there is the danger of increasing indebtedness as they continue to expand. This could be the reason they sold a large amount of assets, but in the future there may be a need to incur additional debt or begin the sale of real estate to maintain the concurrent cash flow and operating needs.

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