Labor Pressures Block Denny's Path Toward 24/7

The chain said it's struggling to even find candidates to interview.

May 7, 2021 Ben Coley

For the past several months, Denny’s has stressed the importance of returning to 24/7 operations.

The chain has brand equity in the late-night daypart, and the sales prove that. U.S. restaurants that were open 24 hours in Q1 had a same-store sales decline of approximately 10 percent versus 2019. Those with limited hours saw a drop of roughly 27 percent.

In April, an average of 565 stores operating 24/7—just one-third of the U.S. footprint—saw same-store sales jump 11 percent compared to 2019. In comparison, an average of 922 locations with limited hours dropped 11 percent year-over-year.

Here’s a better look at how significant the difference has been (compared to 2019):

January

24/7: –20 percent, 519 average units
Limited: –38 percent, 939 average units

February

24/7: –16 percent, 532 average units
Limited: –32 percent, 928 average units

March

24/7: 2 percent, 569 average units
Limited: –16 percent, 912 average units

April

24/7: 11 percent, 565 average units
Limited: –11 percent, 922 average units

The advantage of 24/7 stores is clear. But to operate all day and all night, you need the necessary labor, and that’s been a significant problem for Denny’s—and the rest of the industry for that matter. CEO John Miller described labor availability as the “primary headwind” for franchisees opening at late night. Operators need an estimated 20,000 employees, so Denny’s is talking to a vendor about enhancing online recruiting to provide more visibility to potential applicants. The chain will also host a national hiring event in June.

“We do think some have the view that it will mitigate earlier than September as people say 'back to school' is not normally a strong hiring period for full service if people won't want to wait till the last minute to grab one of those cook or server jobs,” Miller said during the chain’s Q1 earnings call. “Others say wait till a few weeks after it expires before you'll see people highly motivated. It's hard to know. Because we have a third of the system already there, yes, that's two-thirds missing, and because of their outperformance of the rest of the system, our franchisees are highly motivated to move in that direction as soon as they're able. So we do think this will pass in due time.”

Denny’s estimated that its overall same-store sales in Q1 were impacted 8 to 10 percentage points from restaurants operating with limited hours. The chain is optimistic about sales trends improving as more 24-hour units come online, however the brand cautioned that costs associated with recruiting, hiring, and training new employees may proceed additional sales growth, and potentially have a temporary impact on margins.

There’s also the question of, what are the long-term effects that may come out of the near-term labor pressure. Are higher wages a part of the discussion?

CFO Robert Verostek doesn’t think salary has been the main issue with staffing at this point. It’s just that Denny’s can’t find individuals to interview. So yes, higher wages is a topic Denny’s thinks about, but not because of the current labor pressures.

“The near-term [pressure] will be the staffing up the training and all that. We'll work through that,” Verostek said. “Candidly in the current periods across both the company and franchise, we're running less labor than what we would like. So the labor line is actually probably leveraging more than what we would even care for. But longer term, I think the question really is beyond what the pandemic will bring, but the general approach to how wages and minimum wages will evolve. And we do believe in a moderate increase in minimum wage in a tempered way. So we'll look at that and we'll continue to focus upon that and work through that to understand how that will impact us, but I think that's the bigger influence than what the longer term pandemic will throw at us.”

Denny's

More than 1,100 locations are live with The Burger Den, one of Denny's new virtual concepts.

Systemwide, same-store sales sequentially improved in the first quarter: January, –31 percent; February, –25 percent; March, –9 percent. Overall, comps slid 20 percent versus 2019. California, which holds 25 percent of Denny’s U.S. footprint, dragged comps by roughly 6 percentage points in Q1. However, the results were heavily weighted toward January and February prior to the easing of restrictions.

In April, comps were down just 2 percent. More than 80 percent of domestic franchise restaurants exceeded the 70 percent of 2019 sales threshold required to cover both fixed and variable costs. Also, more than 40 percent of the domestic system generated positive sales. An average of only 15 stores had closed dining rooms in April, compared to an average of 228 locations in March. As of April 30, nearly 40 percent of stores have capacity of 75 percent or utilizing social distancing, and 22 percent have no restrictions at all.

The sales should continue to trend nicely. California plans to reopen its economy in-mid June. Even now, many counties are boosting capacity, including Los Angeles County, which can now serve 50 percent.

Other than stimulus checks and the ease of dine-in restrictions, a big reason for the improvement has been the rollout of Denny’s two new virtual brands, The Burger Den and The Meltdown.

Denny’s substantially completed its rollout of The Burger Den in April. More than 1,100 locations are live with the virtual concept, with an average check that’s similar to Denny’s off-premises transactions. The Burger Den, considered highly incremental, is generating $900 in average weekly sales per restaurant. Its margins are in the range of mid 20 percent to low 30 percent.

Seventy percent of The Burger Den’s transactions occurred during the dinner and late-night dayparts, compared to 35 percent for Denny’s. Additionally, 75 percent of The Burger Den’s transactions happened during the weekday compared to 65 percent for Denny’s.

As for The Meltdown, more than half of domestic locations will launch the virtual concept in Q2. The brand is currently in more than 175 locations, and another 175 are expected to launch this week.

According to Miller, one of the primary objectives of the virtual brands is to unlock traffic potential across all dayparts.

“When and how fast we get there is just hard to guide from where we stand right here post-pandemic at the end of Q1. But I would like to be able to continue to provide more color on that very question,” Miller said. “ … Once we get our momentum toward these things, much like we did over the last several years on breakfast and lunch, I think we can really unlock some power in this brand.”

Denny’s ended Q1 with 1,649 stores systemwide—1,584 franchises and 65 company-run stores. Franchisees opened three stores, including two international locations. Operators also closed four units.

The chain’s total operating revenue was $80.6 million compared to $96.7 million in the prior year quarter. Net income was $23.2 million, or $0.35 per diluted share, compared to net income of $9.0 million, or $0.16 per diluted share, in the prior year.