The family-dining giant improved comps in July despite 25 percent of U.S. stores closing dining rooms.
Like many other full-service brands, Denny’s was rocked by COVID when the pandemic began in March.
Domestic same-store sales dropped nearly 80 percent as dining rooms shut down. However, in subsequent weeks, Denny’s doubled off-premises business, offered curbside service, trimmed its menu, rolled out family meal deals, and eventually reopened dining rooms. As a result, the 24/7 chain clawed its way back to a decline of 29 percent in the final week of June. More than 1,400 units had reopened dining rooms.
Momentum was somewhat halted in July due to rising COVID cases nationwide. At the beginning of July, California Gov. Gavin Newsom closed in-restaurant dining across 19 counties, including Los Angeles. A couple of weeks later, in-restaurant dining was shut down for the whole state. This wasn’t ideal for Denny’s since 25 percent of its U.S. units are in the Golden State. Other states like Texas also reduced their maximum capacity limits from 75 percent to 50 percent.
The number of open dining rooms decreased to 1,032 by mid-July. Comps slid to a decline of 42 percent during the second week of the month, but have held steady since then. Even with closures in California, Denny’s finished 39 percent down in July compared to a slide of 41 percent in June. It’s a vast improvement from a decrease of 76 percent in April and a drop of 65 percent in May.
Denny’s pointed to a couple of reasons why sales have stuck relatively well despite the reversal of reopening plans.
CFO Robert P. Verostek said California was performing well prior to the new mandate. And even with the closures, he noted that operators “became even more scrappy” and the weather allowed them to move more sales to the parking lot, curbside, tents, and other outside seating arrangements.
CEO John Miller said growth of to-go sales has been maintained and driven by the younger consumer. Ages 18 to 24 were up 40 percent versus Q1 in terms of takeout, while 25 to 34 increased 9 percent and 35 to 44 grew 8 percent.
Currently, 63 percent of sales are dine-in and 22 percent are pickup/curbside. About 13 percent is through third-party delivery and 2 percent comes from the website.
“So as things lift, these are promising in that, one, these things are retained and then dine-in will give us that capacity back,” said Miller during the brand’s Q2 earnings call. “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 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 apparatus of some sort.”
In Q2, U.S. same-store sales dropped 57 percent. Company-owned units saw a decrease of 65 percent, while U.S. franchised stores slid 56.1 percent. Through Q1 and Q2, domestic comps were down 29.1 percent, company-run stores were down 36 percent, and U.S. franchises dipped 28.4 percent. Denny’s total operating revenue was $40.2 million compared to $151.9 million in the prior year quarter, or a 73.5 percent plummet. Net loss was $23 million compared to a net income of $34.2 million in the prior year quarter.
The loss of the late-night daypart continues to be a challenge. Roughly 30 percent of domestic units are operating 24/7. The remaining stores are without a daypart that mixes 18 to 20 percent, which translates to a comps difference of about 12 to 14 percentage points.
Miller said Denny’s isn’t giving franchisees a timetable of when they need to return to 24/7 operations.
“Our sensitivity is around the ability to staff,” Miller said. “We have weekly calls with our steering body that runs our franchise system—franchise volunteers—and basically they are recommending to themselves without the assistance of corporate leaders to get extended hours back as quickly as they can staff. So all 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 employment 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 as soon as we can.”
Here’s how sales have trended through Q3 for Denny’s:
- Week ending July 1: –33 percent; 1,430 dining rooms open
- Week ending July 8: –42 percent; 1,124 dining rooms open
- Week ending July 15: –41 percent; 1,032 dining rooms open
- Week ending July 22: –41 percent; 1,035 dining rooms open
Denny’s ended Q2 with 1,616 franchises and 67 company units. Fifty-five restaurants are temporarily closed, including 47 domestic franchise restaurants and eight international franchise restaurants.
Despite deferral and abatement of fees, rent relief, and access to the Paycheck Protection Program, 15 franchises in New York—operated by franchisee Feast American Diners—closed their doors during the quarter. Year-to-date, 30 franchises have closed across the system.
Miller said the AUVs of those restaurants were well below the franchise average prior to COVID. The pandemic just accelerated their inevitable closures. He anticipates there will be more in the near term.
“There's not this running to the franchisor saying we're shutting down—we require notice and conversations about that,” Miller said. “The conversations have been, what do we do to fight for transactions, breakfast, lunch, dinner, and late night, how can we get staff to 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. They're 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.”
Denny’s has worked to market the restaurants to franchisees eager to expand their ownership with Denny’s. Eleven restaurants, including 9 in New York, have either been purchased or agreed to be purchased since the pandemic began. The nine restaurants in New York are part of the 15 restaurants that were closed by Feast American Diners.
“These last few months have been challenging for our guests, restaurant teams, franchisees and employees—both financially and personally,” Miller said. “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 dining experience that is safe and clean for our guests.”