The exterior of a Denny's restaurant.

The amount of 24/7 stores increased 10 percent in October, and now stands at slightly more than one-third of the footprint.

Denny’s Seeks a Return to its Late-Night Prowess

The brand is incentivizing franchisees to extend hours to 24/7. 

Denny’s understands that part of its brand identity is tied to 24/7 operations.

The late-night daypart unquestionably contributes to the chain’s success. Prior to COVID, the daypart accounted for 18 percent of sales. In Q3, same-store sales dropped 33.6 percent, but if it weren’t for restaurants closing during that late-night period, the figure would’ve been 8 to 10 percentage points higher.

Because of the significant financial impact, Denny’s is motivated to recapture its late-night success, and it’s sweetening the pot to do so.

The brand is offering a new program that provides a 3-percentage point decrease in royalties for franchises that switch to 24/7. The temporary relief is isolated strictly to sales during late night hours (10 p.m. to 5 a.m.), so while Denny’s is receiving lower royalties, they’re still funds that it wouldn’t have received otherwise from restaurants closed during those hours. The program is only for the fourth quarter.

Denny’s is also extending scheduled payments of deferred fees and rent to restaurants with closed dining rooms as well as locations operating at least 18 hours per day.

The amount of 24/7 stores increased 10 percent in October, and now stands at slightly more than one-third of the footprint. Those stores collected more than 80 percent of prior year’s sales in October.

“We really believe in getting them there,” said CFO Robert Verostek during the company’s Q3 earnings call. “… There are some costs to getting these units back open 24/7 and thus our willingness to put our money where our mouth is to help incentivize those units getting open more quickly.”

The average Denny’s restaurant must reach 70 percent of prior year’s sales levels to cover fixed and variable costs. In October, 60 percent of domestic franchised restaurants achieved this mark compared to 45 percent in Q3. The increase was aided by consistently strong off-premises business. AUV of off-premises sales has increased more than 95 percent, growing from $4,000 per store per week in February to $7,800 per store per week in September.

In October, 1,289 U.S. stores had open dining rooms, or 85 percent of the domestic footprint. Those locations saw same-store sales declines of 24 percent this month, compared to 36 percent in July. Of the open stores, 229 are restricted to 25 percent capacity, 667 are between 50 percent and 75 percent, 378 are following social distancing guidelines, and 15 have no restrictions. Nineteen stores are temporarily closed.

Here’s how U.S. same-store sales have trended at open dining rooms from Q2 to Q4

Second Quarter

  • April: –74 percent, two open dining rooms
  • May: –47 percent, 222 open dining rooms
  • June: –33 percent, 1,087 open dining rooms

Third Quarter

  • July: –36 percent, 1,244 open dining rooms
  • August: –29 percent, 1,044 open dining rooms
  • September: –24 percent, 1,127 open dining rooms

Fourth Quarter

  • October: –24 percent, 1,289 open dining rooms

There’s also 207 domestic stores operating off-premises only, and their comps decreased 33 percent in October compared to 55 percent in July. Denny’s includes outdoor dining—now offered by more than one-third of the U.S. system—in its off-premises only category, which contributed to the steep 22-point improvement.

Outdoor dining has been crucial in California, a state where 25 percent of nearly 400 stores have closed dining rooms. The closures in the Golden State impacted Q3 same-store sales by 4 percentage points.

“What you're pointing out there is really a testament to our operations team and our franchisees and their entrepreneurial spirit to maximize every guest opportunity to serve them,” Verostek said. “I've seen pictures of these set ups where there are full tents, where there is artificial turf, where there are misters and electricity and Muzak, and they're pretty impressive tight set-ups.”

The number of off-premises only stores is likely to rise as Illinois became the latest state to re-close dining rooms in certain regions, including Chicago.

To ensure an effective response to states reimposing restrictions, CEO John Miller said Denny’s has a daily feed that goes to franchisees, which gives them an update on what’s opening, what appears dangerous, and where COVID is spiking.

“We’re literally sort of communicating daily with our franchise system on sort of what to expect next, how to see around the next corner,” Miller said. “We’re communicating on a daily basis about late night hours and how to prepare to extend hours if they haven't yet and the results of those that have. …  We're literally by geography making regular daily coaching calls and trying to be as prepared as possible.”

Denny’s ended Q3 with 1,664 units systemwide—66 company-owned and 1,598 franchised and licensed. Operating revenue stood at $71.6 million, compared to $124.3 million last year, or a roughly 42 percent decrease.

Twenty-three franchises closed in the quarter, bringing the year-to-date total to 55 permanent shut downs. Ninety percent of those closed units had an AUV of under $1 million. Based on 2019 AUV, there are 50 to 75 more stores that fall in that range, so additional closures are expected in the near term.

“We do believe ultimately—again this is the dichotomy between near term and longer term—in nearer term we expect more closures, but longer term these are probably pull forwards of closures that would’ve happened otherwise in later 2021 or 2022 and beyond,” Verostek said. “… So when you're looking out a year from now and the pull forward of these closures, we are bullish, but near-term we still probably need to wait through some additional closures.”

The closures were offset by the opening of five franchises, including three internationally. Denny’s president Mark Wolfinger said the openings underscore the confidence that franchisees see within the brand, as seen by its more than 75 refranchised and development commitments along with existing domestic and international commitments. The chain believes opportunities for conversions will present themselves as the U.S. climbs out of the pandemic.

Based on Q3 results and current conditions, Denny’s is anticipating U.S. comps declines of 30 to 35 percent for all of fiscal 2020 and adjusted EBITDA of at least $28 million.