The casual-dining chain invested $25 million in a new equipment package.
An updated equipment package is helping Denny’s enhance its menu with new sweet and savory options. The company, which has been working to install high-tech ovens and other kitchen upgrades across its U.S. footprint, launched a new menu this spring after completing the $25 million initiative.
Recent additions like Mac N' Brisket Sizzlin' Skillet, Oven-Baked Lasagna, and Caramel Apple Pie Crisp are resonating with guests and outperforming expectations, CEO Kelli Valade told investors during the company’s Q1 earnings call on Tuesday.
“This is the strongest new dinner product launch that we’ve had since the pandemic, since prior to the pandemic,” she said. “Our baked lasagna is actually double the forecast, way ahead of our test results. “The goal … is to leverage this for future LTOs. We’ve got a lot of those locked and loaded.”
The equipment is saving at least one hour per day of a cook’s time during peak periods, she added. It also is improving the quality of staple items like bacon and sausage, with the batch-cooking of breakfast proteins yielding greater product consistency versus cooking those items at the time of order.
“The consistency and quality of those core products is significantly improved, which only adds to the gains we’re seeing in our overall food quality scores,” Valade said. “In fact, Denny’s net sentiment scores related to our food are up over 800 basis points from a year ago, while the family-dining category saw a slight decline during that same period.”
The company also recently completed its conversion to a common network service provider, laying the foundation needed to ensure it has the speed, coverage, and reliability to fully enable restaurants to optimize wireless capabilities and improve restaurant application connectivity. With that foundation in place, Denny’s is moving faster toward the deployment of a new cloud-based POS system.
Valade said the system will bring about improvements in kitchen verification systems, server tablets, and QR pay.
“I personally witnessed the enthusiastic adoption of the server tablets recently during a restaurant visit to a test location,” she said. “I walked away more excited about our technology transformation and the opportunity on the horizon.”
Denny’s is working with retail tech companies Sparkfly and Olo, an open SaaS platform for restaurants, to launch a “next generation intelligent customer engagement ecosystem.” It plans to relaunch its rewards program in June.
“In the notoriously competitive industry, the forthcoming relaunch of the Denny's rewards program next month will position Denny's as a leader in customer-centric innovation, demonstrating the brand's commitment to using data and technology to drive growth and loyalty,” Valade said.
The company also is making progress on its “big three” near-term initiatives, which include staffing, 24/7 operations, and value. Valade said staffing improvements are helping more stores get back to around-the-clock service. Approximately 71 percent of the domestic system is back to full operating hours, compared to 63 percent in January.
The goal is to get 90 percent of the system back to around-the-clock operations by mid-2023. Progress was slower in Q1 than in previous quarters, but Valade is optimistic the company won’t need to extend that timeline.
“Every week, we are still adding new locations to that number,” she said. “We’ve basically gone from segmenting the entire population and having conversations with every franchisee to now showing them the profitability analysis. The late-night daypart is still going strong for us and growing, so that business case is there. It’s just a matter of being good stewards, being good partners to them, and continuing to have that conversation.”
On the value front, Dennys refreshed its All Day Diners Deal menu in March with the return of the Super Slam, which features two pancakes, two sausage links, two strips of bacon, a pair of eggs, and a hash brown for $6.99. Total value mix in Q1 was approximately 15 percent, up slightly from the 14 percent mix Denny’s saw in Q4 of 2022.
Systemwide same-store sales were up 8.4 percent in the quarter, including an 11.4 percent increase at company-operated restaurants and an 8.1 percent increase at franchised restaurants. Average weekly sales increased 10.7 percent to nearly $37,000. CFO Robert Verostek said the variance between the two metrics demonstrates that while the company’s system portfolio is smaller, it is healthier and generates higher average weekly sales as lower volume restaurants exit the system.
Total operating revenue in Q1 grew 13.9 percent to $117.5 million. Franchise and license revenue was $64 million, compared to $59.1 million in the same period a year ago. Company-operated sales increased from $44 million to $53.5 million.
Commodity inflation moderated from 13 percent in the previous quarter to 10 percent in Q1 of 2023. Labor inflation eased to 4 percent. Verostek expects commodity inflation will be in the 4-6 percent range for the full year, with roughly 60 percent of the company’s market basket currently locked. Labor inflation is expected to remain around 5 percent for 2023.
Denny’s franchisees opened five new restaurants, including four in international locations, and closed 13 units during the quarter. Eight restaurants completed Heritage 2.0 remodels, which include updated exterior elements and modernized booths. In February Valade said the company was reevaluating its remodel program to better cater to a customer base that is skewing younger and more diverse.
“We continue to take a close look at our restaurant image and remodel elements to ensure we are delivering an environment that meets guests' expectations for the modern American diner at a compelling ROI for our franchise partners,” she said. “We expect to have new remodel elements and tests later this year.”
One Keke’s Breakfast Café franchise location opened this spring. Denny’s is continuing to build a pipeline of both developers and site locations as it looks to accelerate growth for the recently-acquired brand in the back half of 2023 and into 2024. Valade said the company recently completed its brand ethos work to better understand Keke’s positioning in the segment. That work is informing decisions around interior decor elements, overall design for new builds, and opportunities to enhance product offerings and overall menu design.
“We’re currently testing alcohol and a new menu design as we speak, which will better highlight what Keke’s customers love – our made-from-scratch, fresh ingredients, and abundant portions,” Valade said. “We’ll leverage all these new offerings and test results to support accelerated long-term growth within and outside of the state of Florida, and we now have key training and operations leaders in place to ensure we’re set up for future openings.”
At the end of Q1, Denny’s had 1,594 restaurants, 1,574 of which were franchised and 74 of which were company operated. It also has 54 Keke’s restaurants, including 46 franchised units and eight company-operated units. The company anticipates opening 35-45 restaurants this year, including 8-12 Keke’s openings, with a consolidated net decline of 15-25 restaurants.