Denny’s Corporation (NASDAQ:DENN) Q1 2024 Earnings Call Transcript

Denny’s Corporation (NASDAQ:DENN) Q1 2024 Earnings Call Transcript April 30, 2024

Denny’s Corporation misses on earnings expectations. Reported EPS is $0.11 EPS, expectations were $0.14. DENN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to Denny’s Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kayla Money, Senior Director of Investor Relations. Thank you. You may begin.

Kayla Money: Good afternoon. Thank you for joining us for Denny’s first quarter 2024 earnings conference call. With me today from management are Kelli Valade, Denny’s President and Chief Executive Officer, and Robert Verostek, Denny’s Executive Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our first quarter earnings press release along with the reconciliation of any 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. Kelli will begin today’s call with a business update. Then Robert will provide a recap of our first quarter financial results and a development update before commenting on guidance.

After that, we will 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 during 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-K for the year ended December 27, 2023, and in any subsequent forms, 8-K and quarterly reports on form 10-Q.

With that, I will now turn the call over to Kelli Valade, Denny’s President and Chief Executive Officer.

Kelli Valade: Thank you, Kayla. Good afternoon, everyone, and thank you for joining us. I’m excited to share our first quarter results with you today and provide highlights for the quarter. I’ll do that in the context of our unique playbook, which includes our crave strategies and our specific areas of focus for both the Denny’s brand and Keke’s Breakfast Cafe. Denny’s Q1 domestic system wide same restaurant sales were negative 1.3 this quarter, with both sales and traffic outperforming both the family and casual dining segments. I’m incredibly proud of our teams and our franchise owners and operators who demonstrated incredible resilience and focus even in the midst of a tough operating environment. Denny’s dine in business showed progress this quarter with the breakfast daypart showing strength continuing to strengthen and grow dine in traffic throughout all dayparts is a primary focus and we believe we have a great approach in lineup to do this.

And for those guests seeking alternative dining experiences, our digital and off premise strategies are strong and deliver for many guests who want convenience. In fact, while off premise sales as a percentage of total sales had been at 19% or greater since Q1 2020, this first quarter we delivered 21%, stealing share from others that have scaled down in off premise channels. The proof points for us are clear. Denny’s off premise guests skew younger than dine in approximately 70% of our Gen Z and millennial guests utilize our off premise channels compared to the same groups utilizing dine in at approximately 40%. This simply means that this part of our business, though yes, lower margin, is highly incremental and delighting a different guest.

For that reason, off premise channels continue to be a strategic opportunity for us to grow new guests and transactions through our unique virtual brands and through Denny’s on demand. In addition to capturing share with our off premise business, our current areas of focus for Denny’s are clear. We will continue to innovate and dominate breakfast and do that with a focus on unparalleled value. This past quarter, we delivered on both. Our most recent spring menu, launched just a few short weeks ago, but is already delivering for us through both pricing and positive product mix changes. On this menu, we added to our signature slam platform with the introduction of our new Berry Waffle Slam featuring the new highly craveable Liege waffle. We are thrilled with the performance of these new waffles as they are outperforming sales expectations and getting fantastic feedback from operators and guests.

We also have several other new menu items beyond breakfast that are really resonating with our guests, including our new barbecue bacon chicken sandwich and the new Oreo Brownie Sundae. And our approach to simplify and minimize customizations on the menu is also making a difference with the create your own categories down as a percentage of mix on the menu and signature curated plates increasing. As we have mentioned, this helps us with order accuracy, makes server’s [ph] lives easier and speeds up ticket times without any impact to the guest as they are always welcome to customize any order. We’ve also continued to highlight our most popular and most profitable items on the menu, delivering improved margins. Delivering compelling value, leadership is also critical.

Our guests choose Denny’s because we offer an incredible experience at a great price for the foods they love, from familiar breakfast favorites to late night cravings. With approximately 70% of our guests at household income levels at or below $75,000, price and value remain front and center for many guests as they think about where they want to spend their dollars. This quarter, we responded to that by offering our original grand slam at the incredible starting out price of 599. Guests responded favorably with traffic and sales coming out strong into the New Year. Total value mix in the first quarter was approximately 19%, up from the 17% mix we saw last quarter. Additionally, our year-over-year share of wallet increased against family dining and casual dining from Q4 to Q1 across all income cohorts, proving our value messaging is resonating with all of our guests.

And for this quarter, we are again leaning into value, now featuring our reprised all day diner deals menu, which is a lineup of six entrees also with an impressive starting at price of $5.99, we are pleased with the results we are seeing in the first few days and optimistic about the potential impact for the quarter. And because we know that guests also crave our many premium items, we continue to elevate our barbell strategy by merchandising dishes like the berry stuffed french toast in restaurant. Even with a price conscious consumer, our check has remained whole with minimal to no check erosion. We consider this a success and will continue to leverage our effective Barbell strategy to offset costs and improve the model for our franchisees.

The third area of focus is convenience. I’ve mentioned a few of the stats related to our off premise business already, but I’ll dig in a bit more here sharing what you’ll see us do next. We’ve known that convenience is important to many of our guests, and since the onset of the pandemic, there’s been a growing preference for off premise dining. We continue to believe that our guests want convenience and that off premise channels will continue to see growth despite a shift by many companies to deleverage this part of the business. This belief was supported recently with data shared from Circana, formerly NPD, that showed that while off premise channels were slightly down in the first half of ’23, they spiked in the back half of ’23 and will continue to increase.

We believe, by leveraging our operating capacity at dinner and late night, we are positioned incredibly well to capture the share and leverage this strength as others focus only on their dining business. The growth is also meaningful both in terms of sales and the ability to attract new guests at different dayparts as our virtual brand sales and these later dayparts are nearly three times that of our breakfast and lunch dayparts, delivering a highly incremental 2% to 3% in sales transactions from those incremental guests. Because of these results, we are bullish in this area and plan to expand Banda Burrito, our third virtual brand concept, to an additional 200 plus locations over the next couple months. These will be in California because it has the unique potential of offsetting the impact of AB 1228.

When we offered this option, our California franchisees were quick to sign up, given the perfect timing and the fit of the band offerings. Once we expand fully into the California market, we’ll likely roll nationally, most likely starting in early Q4. Finally, and importantly, starting this quarter, we’re adding significant media to the market by reestablishing our brand co ops and providing a match for all dollars from our ad fund. This match was halted during the pandemic, but is critical to our go forward plans to get our message to more guests. The matching funds provide greater incentive for co ops to step up their media investment, which we leveraged locally to add an impressive $12 million on an annualized basis to the ad budget. Now I’ll switch gears and provide updates to a few of our priorities captured in our CRAVE strategic framework.

For reference, CRAVE stands for creating leading tech solutions, robust new restaurant growth, assembling best in class teams, validating and optimizing the business model, and elevating profitable traffic. I’ll first focus on creating leading tech solutions. We’ve made significant progress during the beta testing phase of our new cloud based POS platform. We can now say we will be partnering with Xenial Enterprise Solutions for this launch. We now have over 110 restaurants, complete with the installation, with plans to move in a general release for the system in Q3. Even more exciting are the recent results we’ve been seeing and what this platform will enable. The key components of the platform for us are enhanced kitchen video display systems or KVS, new beverage monitors, server handhelds and QRPay.

Our franchisees have been with us from the very beginning on this test, and they are now weighing in with their results, reporting average check increases given the ease of adding beverages and add ons, faster table turns, reduced waste and reductions in labor given less server hours needed in peak periods. We are encouraged by these results as they not only optimize the model, but they demonstrate a significant opportunity to show a strong return on the investment of this new system. In the kitchen, we’re also focusing on menu items that allow us to utilize existing equipment from our kitchen modernization rollout and extend the use of ingredients featured on the menu. In fact, our culinary team created the new liege style waffle after exploring additional items that could be prepared in our ovens.

This created efficiency for the restaurant while providing new menu options for our guests. The R&Crave [ph] stands for robust restaurant growth. That growth will come from new units and strategic investments in our physical assets through an ongoing accretive remodel program. This quarter was a big one in that we finalized our research and now know with certainty that we have a home run or even a grand slam with our latest remodel package. In this package, we leverage the learnings from our last remodel program called Heritage 2.0 and combine that with research and new design elements that lean into our unique diner position. We now have a winning solution, delivering mid single digit percentage traffic lift. These impressive results, along with our ability to incentivize and support our franchisees with financing through our loan pool, will help them finance these remodels and improve sales and traffic for the entire brand.

This will also get us back to a remodel pace consistent with what we had prior to the pandemic. Expect us to talk more soon about the way we’ll support our franchisees and work to improve our fleet with a strong focus to gear up in this area. In short, and to summarize what you’ll see from the Denny’s brand continued new menu innovation bringing craveable items to our guests, continued strength in providing unparalleled value offerings. Tech advancements with our Xenia rollout and a remodel program set to deliver fantastic traffic results and a great ROI for our franchisees. Finally, we’ll reinvest in our co ops, adding roughly $12 million to our overall marketing spend, capturing the attention of even more guests and driving traffic. Turning now to the momentum at Keke’s Breakfast Cafe, we noted on our last earnings call that we received a warm welcome in the Nashville market as we opened our first location outside of Florida.

The local community continues to embrace Keke’s, as evidenced by sales volumes that are ahead of our expectations and on pace to deliver approximately $2 million in sales annualized. We believe this pace, which is also ahead of the average sales volumes we see in Florida cafes, validates our optimism for this brand and for the Keke’s team. It also shows that our discipline and determination, making sure we had the right recipe to begin expanding this concept into new markets was spot on. The refreshed interior, prominent mornings from scratch tagline and refreshed menu deliver on our core differentiators of an elevated culinary experience. Featuring delicious, abundant entrees prepared from scratch daily and using the highest quality ingredients.

At Keke’s, you’ll see this delivered in an energetic, fun atmosphere where the customer experience is best in class. We now measure Keke’s guest satisfaction through GuestXM [ph] and are blown away by the continued stellar results, specifically a Google rating of 4.7 and overall net sentiment and intent to return scores that far exceed other family dining or full service benchmarks. Following the opening in the Nashville market, two additional Keke’s opened in Jacksonville, Florida with a new design and another cafe is expected to open in the Nashville market in the next couple of weeks. The team is working feverishly to identify sites for future cafes, help secure property control, navigate permitting, and begin construction efforts against a strong development pipeline.

We simply can’t wait to introduce new guests and new markets to this fantastic brand. To close out, our thoughtful strategies are driving our actions and our areas of focus are well timed given the environment and the expectations of our guests and our franchisees. These solutions and the promise of new innovation on the menu with technology and the right investments give us reason to be optimistic about what’s ahead this quarter and beyond. I’ll now turn the call over to our CFO, Robert Verostek.

Robert Verostek: Thank you, Kelli and good afternoon everyone. Given the strong prior year numbers and the highly competitive value environment during the quarter, we viewed Denny’s Q1 domestic system wide same restaurant sales of negative 1.3%, favorably resulting in a two year comp of positive 7.1%. Denny’s domestic system wide same restaurant sales were comprised of approximately 5.5% in pricing, partially offset by approximately 0.5% of product mix related to higher value incidents. All pricing for the quarter was a carryover from fiscal 2023. However, in mid April, we took approximately 3% in pricing with the Denny Spring Core menu launch. April’s pricing included approximately 5% in California to offset the anticipated impact of AB 1228.

This was more heavily weighted towards franchise restaurants, with company restaurants averaging approximately 4%. Denny’s domestic average weekly sales for the first quarter were approximately $37,000, including off premises sales of approximately $8,000, or approximately 21% of total sales. Keke’s delivered system wide same cafe sales of -3.6% for the quarter. Approximately 40% of our Keke’s cafes are located in Orlando, which has consistently trailed both Florida and the national average. However, we have been very pleased with the progress made in this small but mighty brand. 2023 was a year of building out the right team to lead Keke’s and they are already making meaningful impacts. In fact, over the last year they have closed the traffic gap to family dining significantly and we still have more traffic and check driving initiatives in the works.

Keke’s plans to roll out a selection of alcoholic beverages system wide during Q2, which deliver incidents of approximately 4% in test, most of which was incremental. Additionally, we are encouraged by the early test results of our new interior design in our latest Florida openings and are optimistic about what a future remodel program could deliver to the brand, including the addition of Patios. Before I begin discussing the quarterly financial results, I want to take a moment and describe the changes to our non-GAAP financial measures that we believe will provide more clarity to investors and analysts and greater comparability to peers. Beginning this quarter, we adjusted our non-GAAP financial measures for items such as legal settlement expenses, pre opening expenses and other items we do not consider in the evaluation of our ongoing core operating performance.

In addition, cash payments for restructuring and exit cost and cash payments for shared based compensation will no longer be a component of our adjusted EBITDA definition. We have also sunset our adjusted free cash flow non-GAAP measure and we are now referencing the non-GAAP cash flow statement presented in our quarterly SEC filings. Please see the analyst center on our investor relations website or our current investor presentation for a recasting of historical non-GAAP financials. Turning to our first quarter financial details, total operating revenue was $110 million, compared to $117.5 million in the prior year quarter. Franchise and license revenue was $57.6 million, compared to $64 million in the prior year quarter. This change was driven by a $2.1 million decrease in initial and other fees associated with the sale of kitchen equipment in the prior year quarter and a $1.5 million decrease in advertising revenue, primarily related to temporarily lower local advertising co op contributions in the current quarter.

Prior to the pandemic, these co op contributions represented approximately 0.4% of system sales however, they have averaged about half of that over the past several years. Beginning in Q2, the Denny system has fully reestablished local advertising co op contributions and we look forward to these investments driving incremental guests into our restaurants. Adjusted franchise operating margin was $30.1 million, or 52.2% of franchise and license revenue, compared to $31.6 million, or 49.4%, in the prior year quarter. This margin change was primarily due to lower sales and lease terminations. Company restaurant sales were $52.3 million compared to $53.5 million in the prior year quarter. This was primarily driven by a decrease of 3% in Denny’s same restaurant sales, partially offset by one additional Keke’s equivalent unit.

Adjusted company restaurant operating margin was $6 million, or 11.5% of company restaurant sales compared to $7.1 million, or 13.2% in the prior year quarter. This margin change was primarily due to higher workers compensation and general liability expenses in the current quarter of approximately $1 million, or 1.9 percentage points of company restaurant sales. Commodity inflation was approximately 2% for the quarter, similar to what we experienced in Q4 20 23. Additionally, team labor inflation remained unchanged in Q1 at approximately 3% I want to take a moment to provide insights on the impact of AB 1228 on our ’22 California company restaurants. Since AB 1228 was signed in September 2023, while there were industry fears of full service employees rushing to secure fast food jobs, we have been very pleased to actually see improvements in both management and crew turnover in our company restaurants.

We believe this is a true testament to investments made in our teams, such as our gain program, allowing team members to obtain their GED, college credits, life skills, and career pathways. Additionally, we have not experienced a material increase in team wages thus far in April, which is in part due to our servers earning well above the AB 1228 minimum wage when factoring in tip income. General and administrative expenses for Q1 totaled $21.2 million compared to $20.1 million in the prior year quarter. These results collectively contributed to adjusted EBITDA of $18.4 million. The effective income tax rate was 24.6% compared to 61.5% in the prior year quarter. This change was primarily due to discrete items relating to share based compensation in the prior year quarter.

Adjusted net income per share was $0.11 in the current year quarter compared to $0.13 in the prior year. This change was primarily due to higher workers compensation and general liability expenses, which weighed on adjusted EPS by approximately $0.02. Our quarter end total debt leverage ratio was 3.5 times. We had approximately $271 million of total debt outstanding, including $261 million borrowed under our credit facility. During the quarter, we allocated $4.8 million to share repurchases, continuing our commitment of returning capital to our shareholders while also balancing investing in Keke’s growth. At the end of the quarter, we had approximately $96 million remaining under our existing repurchase authorization. Next, to recap our first quarter development highlights, our brands opened eight combined restaurants during the quarter.

Denny’s franchisees opened five new restaurants, including three international locations. These openings were offset by 24 franchise closures and one company restaurant closure. These franchise closures averaged less than $1 million in their average unit volumes and were open on average for 32 years. Over that timeframe, trade areas have shifted and as was the trend prior to the pandemic, franchisees stayed open through the holidays to enjoy one last season with their long time loyal guests. Despite these closures, we remain encouraged by the overall health of the broader franchise portfolio. In fact, despite domestic franchise same restaurant sales decreasing 1.2% during the quarter, the average unit volumes have actually increased by approximately 1.1% compared to the prior year.

Moving to Keke’s, we opened three company cafes during the quarter, two in Jacksonville, Florida, in addition to the first cafe outside of Florida in Hendersonville, Tennessee. We are very encouraged that our first cafe outside of Florida is currently on track to deliver sales of approximately $2 million and as Kelli noted, our second company location in Tennessee will open in the next couple of weeks in Gallatin, just in time for Mother’s Day. In addition, there are currently four cafes under construction with several others in permitting and site approval phases. Lastly, let me now take a few minutes to expand on the business outlook section of our earnings release. With many sales driving initiatives such as the expansion of Banda Burrito which has consistently rivaled the meltdown performance, as well as the testing with Franklin Junction and reigniting our remodel program in local co op advertising funds, we remain optimistic on our domestic system wide same restaurant sales guidance of between zero and 3% compared to 2023.

We anticipate opening 40 to 50 restaurants on a consolidated basis, inclusive of 12 to Keke’s openings and a consolidated net decline of 10 to 20 restaurants. We are projecting 2024 commodity inflation to be between zero and 2% and for labor inflation to be between 4% and 5%. The labor inflation guidance takes into account the anticipated impact from AB 1228 in California. Our expectations for consolidated total general and administrative expenses are between $83 million and $86 million, including $12 million related to share based compensation expense, which does not impact adjusted EBITDA. And lastly, as a result of evolving our non-GAAP financial measure definitions and factoring in Q1 results, we now anticipate consolidated adjusted EBITDA of between $87 million and $91 million compared to the previous guidance of between $85 million and $89 million.

Finally, I would like to thank our supportive franchisees and result driven brand teams who have remained focused on serving our guests while continuing to drive our strategic priorities. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A and a portion of our call.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Michael Tamas with Oppenheimer. Please proceed with your question.

Michael Tamas.: Hi, thank you. Your guidance for flat plus 3% same store sales for the year implies a pretty material acceleration after this first quarter. I understand you face easier comparisons and you do have a bunch of catalysts rolling out, but the macro environment does also appear to be a little bit more challenging than it was even just a few months ago. So you willing to talk about near term trends that all build on your confidence to achieve that four year guidance? And can you maybe talk about which of those sales initiatives you’re most excited about that can drive real change in the near term? Thanks.

Robert Verostek: Hey, Michael, good to hear your voice. This is Robert. With regard to the sales, specifically, Q 1, particularly about mid March, to about mid April, saw some pretty significant volatility related to spring break. But as we exited April, the trends really started to improve, particularly just within our own results and the comparisons, again, against casual and family dining. So what we experienced on the quarter, we changed that trend. Now, as we head out of April. I do also would like to say that our value initiatives have really been performing quite well. We just launched into our latest version of that. Again, our all day diner deals, they have a 599 price point inclusive in that. So despite the general macro economic environment, and I agree with you, there is an overhang there. We are, I think, very well positioned with that value messaging to drive same store sales. And I’ll pass it to Kelli for the initiatives.

Kelli Valade: Yes, absolutely. And thank you, Michael, for the question. Yeah, the only thing we’ve noticed, and we’ve continued to watch not only throughout the quarter, but gives us a bit of confidence in April and for the quarter, is the fact that the trade that we really do see, or what appears to be trade down, given our beats to casual dining. And that has been, you know, pretty consistent. Right. So while, yes, cautious consumers looking for value. We feel like, again, those work for us and have been working for us. We also launched a new menu. That’s really early, but from what we can tell, you know, there was some pricing in that menu but also a positive mix. And the Barbell strategy continues to work for us with people really adding, you know, our new dessert is doing well, things adding to the check.

So that gives us some confidence. And then the things we’re most excited about, I think, look, the dollars and cents would say the increase in marketing spend and with the simple matches, the match, that’s going to happen again gives us a lot of confidence $12 million as mentioned in the script. So, you know, that’s along with the things that we see in potentially a remodel program that will gear up as strong as it was pre pandemic. Those results are in and could have the potential to really show some effect. The back half of the year, I mentioned another virtual brand that’s not insignificant in terms of the sales that we see in that virtual brand and in the test that we already have in close to 100 restaurants. So go California first and then nationally, the back half of the year.

Those are probably the ones I put at the top of the list, starting with the co op match adding median to the, the mix.

Michael Tamas.: Thanks. And then just as a follow up on value, we’ve heard a lot of restaurants talking about stepping up their value offerings going forward, particularly across the fast food category. Obviously, Denny’s is known for value and you pointed out that the value mix was actually up to 19% this quarter. How does that shape the way you’re thinking about your value strategies going forward? And is there a value mix level that you or your franchisees would like to stay below or sort of stabilize that? Thanks.

Kelli Valade: Yeah, I think, you know, especially what you see happening in fast food. I would just say, you know, again, we’re watching the price increases there. We’re knowing what we know, what our guests count on us for, and know that that value leadership is something we can offer. I think at 19, we’re not surprised by that at all. It’s been 17 for quite some time and we’ve been at those levels before. So for us, you know, I don’t think we worry unless it gets above probably 25% in mid twenties, not to probably go higher than that. Our 2468 platform that launched years ago, but was one of our most successful platforms got as high as 24%. And so that’s probably an area we feel safe in, in the way we’ve orchestrated and architected that, not that menu in the past and what we would, you know, we’d be okay with going forward.

Michael Tamas.: Thank you.

Operator: Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question.

Jake Bartlett:

Jake Bartlett: Great. Thanks for taking the question. My first one was a follow up on the value discussion in the all day diner meals launched that about a year and a half ago. I’m wondering how that has performed versus just doing the Grand Slam. Trying to understand how, you know, whether the relaunch here, you know, will, you know, how impactful it could be versus launching the 599 Grand Slam.