Denny's platter of food.

Same-store sales grew 1.7 percent at franchised restaurants in Q4. 

Denny's Rethinks Remodel Program

Changing consumer demographics and soaring costs spark a pullback in restaurant upgrades.

Denny’s core guests are skewing younger, with millennials and Gen Z now representing about half of the brand’s customer base. 

“Over half of our total guests base is also ethnically diverse, and our breakfast and late-night daypart skew younger and more diverse all the time,” CEO Kelli Valade said during the company’s Q4 and full-year earnings call. 

The changing customer demographics, combined with soaring costs of remodels, are spurring the diner-style restaurant chain to pull the brakes on its remodel program. Seven restaurants were updated in Q4, bringing the total to 49 in 2022. Stores that received the upgrades, which include flashy exterior elements and modernized booths, are seeing a mid-single-digit sales lift. 

“We want to ensure our remodels deliver the same compelling returns we have come to expect, while also meeting the expectations for a modern diner among a growing base of younger multicultural guests,” CFO Robert Verostek said. “With this consideration in mind, we plan to execute lower scope restaurant upgrades at targeted restaurants in 2023, before returning to a full remodel cycle in 2024.”

Efforts to boost staffing and a financial incentive to motivate franchisees to offer 24-hour service appear to be paying off. Roughly 67 percent of the company’s domestic system is open around the clock, up 14 percentage points from mid-year 2022. That includes 4 percent, or 12 to 15 restaurants per week, in the final month of the year.

The fact more stores are nearing pre-pandemic staffing levels is one element bolstering Denny’s customer sentiment scores, which charted an upward trajectory throughout fiscal 2022. Another driving customer sentiment is the brand’s renewed focus on value. The company last fall launched an All Day Diner Deal platform with meals starting at $5.99. 

READ MORE: Denny's Unveils Roadmap to 24/7 Operations

The brand’s current barbell strategy aims to balance those lower-priced items with premium, profit-driving menu products. 

“Our barbell strategy is working, as guest check average has remained strong,” Valade said. “We believe those looking for a deal at Denny’s can find it on our All Day Diner Deals menu, but most choose our more premium LTO and core menu products.”

Same-store sales grew 6 percent at company-operated restaurants and 1.7 percent at franchised restaurants in Q4. The growth was driven by an 8.5 percent increase in average check size. Domestic average weekly sales were up 7 percent on a two-year stack.

Q4 operating revenue increased 12.3 percent from $107.6 million to $120.8 million. Net income was $12.8 million, compared to $43.5 million in the same period a year ago. The change was primarily related to the sale of two parcels of real estate in the prior-year quarter. Full-year comps grew 10.4 percent at company-operated restaurants and 6 percent at domestic franchised restaurants. Total operating revenue grew 14.6 percent to $456.4 million. Net income declined from $78.1 million to $75.7 million. 

Denny’s ended the year with 1,602 global restaurants, including 1,536 franchised units and 66 company-operated units. Franchisees opened 12 new restaurants in Q4, including five international locations, resulting in 28 gross new openings for the full year. It ended the year with 66 franchised restaurant closures and an overall net loss of 38 units. 

“The persistent inflationary environment has continued to weigh on lower-volume restaurants, and we experienced a higher than average number of Denny's franchise closures in the back half of the year,” Verostek said. “While our system portfolio is smaller than it was three years ago, it is healthier and generating higher average weekly sales as lower-volume restaurants exit the business.”

As inflationary headwinds moderate, the brand should return to its long-term trend of opening 2 percent or more of its system annually while closing 2 percent or less through normal attrition, he added. 

Denny’s also ended the year as a portfolio company operating two complementary concepts, following its $82.5 million acquisition of Keke’s last summer. The breakfast cafe has 54 total restaurants, all of which are in Florida, including 46 franchised units.

Keke’s first step out of Florida will be with a small number of company-operated restaurants to demonstrate the brand’s potential. With an updated disclosure document in the spring, Denny’s will have the ability to begin signing development agreements in other states for openings that are likely to occur in 2024. 

Denny’s is working to uncover opportunities to optimize Keke’s in areas like supply chain, facility management, and site selection for development opportunities. It currently is conducting brand ethos work to “ensure we appropriately capture the secret sauce that has made Keke so special,” Valade said. 

“We remain impressed by the sophistication of the existing 18 Keke’s franchisees and their desire to grow, particularly given the opportunities to expand within Florida,” she said. “We’re also thrilled with the cult-like following this brand enjoys in that state, where Keke’s was just voted Florida’s Best Pancake House.”

For fiscal 2023, Denny’s expects consolidated restaurant openings of 35 to 45, including eight to 12 new Keke’s restaurants, with a consolidated net decline of 15 to 25.