8-K: Denny's Corporation Reports Mixed Q3 Results, Outlines Growth Strategy at Investor Day

Denny's Corporation announced its third-quarter 2024 financial results, which included a slight decrease in revenue but highlighted strategic initiatives for future growth, during its Investor Day.

Summary

• Denny's Corporation reported a total operating revenue of $111.8 million for the third quarter of 2024, compared to $114.2 million in the same period last year.
• The company's domestic system-wide same-restaurant sales decreased by 0.1%, with a 0.1% decrease at franchised locations and a 0.4% decrease at company-owned restaurants.
• Operating income was $11.7 million, down from $14.0 million in the prior year quarter.
• Adjusted franchise operating margin was $30.1 million, or 51.0% of franchise and license revenue, while adjusted company restaurant operating margin was $6.2 million, or 11.8% of company restaurant sales.
• Net income was $6.5 million, or $0.12 per diluted share, and adjusted net income was $7.2 million, or $0.14 per diluted share.
• Adjusted EBITDA was $20.0 million.
• The company invested $7.8 million in capital expenditures and allocated $1.8 million to share repurchases.
• Full-year 2024 guidance includes same-restaurant sales between -1% and 0%, 30 to 40 restaurant openings, and a net decline of 45 to 55 restaurants.
• The company expects commodity inflation of approximately 2% and labor inflation between 3% and 4%.
• Adjusted EBITDA for the full year is projected to be between $81 million and $84 million.

Sentiment

Score: 6

Explanation: The document presents a mixed picture with some positive strategic initiatives and brand performance, but also some negative financial results and challenges. The company is taking steps to improve, but the overall sentiment is cautiously optimistic.

Positives

• Denny's outperformed the BBI Family Dining index for the third consecutive quarter, indicating strong brand performance.
• Keke's showed significant sequential improvement in same-restaurant sales and outperformed benchmarks in Florida.
• The alcohol program rollout at Keke's and the Banda Burrito rollout at Denny's positively impacted sales.
• Denny's is seeing positive results from its remodel program, with a 6.4% sales lift and 6.5% traffic lift.
• The company is focused on improving guest experience, with a 0.6 increase in average Google rating.
• Denny's is leveraging its brand strength to reclaim traffic through increased frequency and an expanding guest base.
• Keke's is positioned for growth with a strong brand, solid margins, and a growing pipeline of over 140 development commitments.
• The company is implementing a seed and feed strategy for Keke's, which involves building new company cafes and then refranchising them.
• Denny's is focused on optimizing its portfolio by closing lower volume restaurants and opening higher volume locations.
• The company is aiming for a 5%-6% reduction in G&A expenses over the next 12 months.

Negatives

• Total operating revenue decreased to $111.8 million from $114.2 million in the prior year quarter.
• Denny's domestic system-wide same-restaurant sales decreased by 0.1%.
• Operating income decreased to $11.7 million from $14.0 million in the prior year quarter.
• Adjusted company restaurant operating margin decreased to 11.8% from 14.3% in the prior year quarter.
• Keke's system-wide same-restaurant sales decreased by 1.0%.
• The company is expecting a net decline of 45 to 55 restaurants for the full year 2024.
• The company is facing commodity and labor inflation, which is impacting margins.
• Denny's is experiencing variability between restaurants, with a 17 percentage point difference in net sentiment scores between the top and bottom 20%.

Risks

• The company faces risks related to economic conditions, public health, and political conditions that impact consumer confidence and spending.
• Commodity and labor inflation could negatively impact profitability.
• The company's ability to effectively staff restaurants and support personnel is a risk.
• Competitive pressures from within the restaurant industry could impact market share.
• The company's ability to integrate and derive the expected benefits from its acquisition of Keke's Breakfast Cafe is a risk.
• Adverse publicity and health concerns arising from food-related pandemics or outbreaks could negatively impact sales.
• Changes in business strategy or development plans could impact future performance.
• The company's ability to maintain adequate levels of liquidity for its cash needs is a risk.
• The company is facing a strategic initiative to accelerate the closure of lower volume Denny's restaurants, which could impact revenue.

Future Outlook

The company expects full-year 2024 same-restaurant sales between -1% and 0%, 30 to 40 restaurant openings, and a net decline of 45 to 55 restaurants. They also anticipate commodity inflation of approximately 2% and labor inflation between 3% and 4%. Adjusted EBITDA is projected to be between $81 million and $84 million for the full year. The long-range outlook includes a 3% net unit growth CAGR and a 5%-7% Adjusted EBITDA growth CAGR.

Management Comments

• Kelli Valade, Chief Executive Officer, stated, 'Our third quarter sales results directly reflect ongoing brand investments and dedicated focus on value that resulted in outpacing the category.'
• Kelli Valade also mentioned, 'We are also very excited to be hosting an Investor Day today.'
• Management highlighted the company's plan to grow average unit volume sales, margins, and the portfolio, while balancing capital allocations to maximize shareholder returns.

Industry Context

The restaurant industry is facing choppy economic conditions, with personal savings rates trailing pre-pandemic averages and food away from home inflation outpacing food at home inflation. Guests are managing their spending by seeking deals and ordering takeout more often. Family dining has lost the most traffic, but Denny's has shown resilience by outperforming peer BBI indices and improving guest net sentiment scores. The daytime eatery category is growing, and Keke's is well-positioned to capitalize on this trend.

Comparison to Industry Standards

• Denny's outperformed the BBI Family Dining index for the third consecutive quarter, indicating a stronger performance than some of its direct competitors in the family dining segment.
• Keke's outperformed the BBI Family Dining sales benchmark in Florida by over 120bps, suggesting a competitive advantage in that region.
• While Denny's domestic system-wide same-restaurant sales decreased by 0.1%, this was a sequential improvement of 50bps, showing a positive trend compared to previous quarters.
• Keke's system-wide same-restaurant sales decreased by 1.0%, but this represented a sequential improvement of 360bps, indicating a positive trajectory.
• Compared to other full-service restaurants, Denny's has a lower average unit volume (AUV) at $1.9M, while some competitors like Olive Garden and Texas Roadhouse have AUVs above $4M. However, Denny's is focused on growing AUVs to $2.2M.
• In the daytime eatery category, Keke's has an AUV of $1.8M+, which is competitive with other brands like First Watch ($2.2M) and Snooze ($3.1M).
• Denny's is aiming for a 3% net unit growth CAGR, which is a moderate growth target compared to some rapidly expanding chains in the daytime eatery segment.
• The company's long-range outlook includes a 5%-7% Adjusted EBITDA growth CAGR, which is a reasonable target given the current economic environment and the company's strategic initiatives.

Management Changes

Stakeholder Impact

• Shareholders may be concerned about the decrease in revenue and operating income, but may be encouraged by the company's strategic initiatives and long-term growth plans.
• Employees may be impacted by the company's strategic initiative to accelerate the closure of lower volume Denny's restaurants.
• Franchisees may benefit from the company's focus on improving restaurant performance and providing financial support for remodels.
• Customers may benefit from the company's focus on improving guest experience and offering compelling value.

Next Steps

• The company will continue to focus on its strategic initiatives to grow average unit volume sales, margins, and the portfolio.
• Denny's will focus on increasing guest frequency and expanding the guest base.
• The company will accelerate the closure of lower volume Denny's restaurants.
• Keke's will continue to expand its footprint and implement its remodel program.
• The company will continue to invest in technology and equipment to improve efficiency and product quality.
• Denny's will redesign and relaunch its loyalty program.
• The company will focus on optimizing its portfolio by closing lower volume restaurants and opening higher volume locations.
• The company will continue to balance capital allocation between remodels, new openings, and share repurchases.

Key Dates

Keywords

restaurant, franchise, same-restaurant sales, EBITDA, operating margin, remodel, off-premises, Keke's, Denny's, growth, value menu, virtual brand, capital allocation, investor day