Denny’s took a stock market hit Wednesday (May 2) following a first quarter that came up short in same-store sales, although the performance was split significantly between its company and franchised units. Corporate stores saw a 3.2 percent lift, while domestic franchised restaurants reported 1.2 percent gains, year-over-year. Given that Denny’s is a heavy franchise system (only 182 of 1,724 are company owned) these results dragged the overall figure to a paltry 1.5 percent mark.
In response, Longbow Research lowered Denny’s to a neutral rating after having it lined up as a buy. Shares traded down nearly 13 percent early Wednesday afternoon, but are still up 29 percent over the last 52 weeks, ranking Denny’s ninth out of 47 restaurants stocks with a market cap north of $50 million, according to Seeking Alpha.
CEO John Miller took an optimistic approach to the results, crediting Denny’s gap between corporate and franchised stores as a tailwind capable of sustaining the chain long-term. The key, as it has been for several quarters, is Denny’s off-premise growth and what that means for the whole company. In March, off-premise sales represented 9.8 percent of total sales, an increase of 110 basis points from 8.7 percent in December. Since launching Denny’s on Demand in June of last year, off-premise sales have grown about 300 basis points as a percentage of total sales.
And this growth isn’t running parallel. About 52 percent of Denny’s company portfolio is actively engaged with multiple delivery options compared to just 22 percent of franchised units.
“They can move as fast as we move on many rollouts and strategies, but when it comes to sort of new implementations, it tends to trail a little bit,” Miller said of the franchise system. “I think, the good news here or the best we can guide, is that we think this will continue to grow … We think this is a tailwind for the brand that we will continue to see expand. We think that more of these [third-party delivery] companies will be available in a higher percentage of the country and more franchisees will add in due time.”
Denny’s first quarter earnings per share of 15 cents beat Wall Street expectations by 2 cents. Revenue came in at $155.27 million—a 21.4 percent boost, year-over-year. This also missed predictions by $660,000.
Miller said he believes Denny’s has plenty of momentum “despite a persistently choppy full-service dining environment.”
On the development front, Denny’s has opened more than 500 restaurants since 2009, representing more than 29 percent of its current system. Three international units opened in Q1, including two in Canada, and the company’s sixth in the Philippines, bringing the international footprint to 130 restaurants.
Domestically, Denny’s closed more restaurants than it opened in the quarter. Franchisees debuted 10 units while 20 more closed. A company store shuttered as well, and Denny’s acquired five franchise restaurants.
“The ongoing revitalization of our brand and our expanding global footprint continue to attract new interest for international expansion, and we look forward to gaining further momentum,” Miller said.
As for the revitalization, Denny’s made progress on several of its ongoing initiatives. One is the Heritage remodel program. Miller said these refreshed units continue to receive favorable guest feedback and generate a mid-single-digit range sales lift. These updates give outlets a more old-fashioned-diner feel, and create a warmer, more welcoming atmosphere. It has helped open up the dinner daypart as well, Denny's said.
During Q1, franchisees completed 52 remodels and Denny’s finished one company store. About 71 percent of the system is currently updated, but Miller said the chain is “just entering the middle stages of our revitalization with many brand-enhancing strategies remaining and an expectation that approximately 80 percent of the system will have the new image by the end of 2018.”
“These remodels will continue to be a significant tailwind toward our brand revitalization over the next few years,” Miller added.
Additionally, Denny’s recently launched a new core menu that includes a Mediterranean Grilled Chicken dinner, Homestyle Meatloaf dinner, Double Berry Banana Pancake, and a Signature Diner Blend of coffee made with sustainable 100 percent Arabica beans.
The company’s latest LTO, part of a partnership with the upcoming Solo: A Star Wars Story, featured several new items, including Co-Reactor Pancakes, made with strawberries, strawberry sauce and whipped cream, and a side of Crystal Crunch Rocks, finished with a pitcher of warm citrus sauce to pour over the pancakes; the Blaster Fire Burger—chipotle Gouda cheese, bacon, and spicy ghost pepper sauce; the new Two Moons Skillet; and Denny’s Lightspeed Slam. Crystal Crunch Rocks can also be added to milk shakes.
The brand introduced exclusive trading cards to raise money for No Kid Hungry and collector cups as well. This launch was accompanied by an ad campaign in collaboration with the Lucasfilm team.
Returning to off-premise, Miller said the to-go transactions are highly incremental and over-indexed to the late-night dinner daypart, as well as younger guests ages 18–34. There is a cost involved, however. Company restaurant operating margin was $14.3 million, or 14.2 percent of company restaurant sales in Q1, compared to $15.9 million, or 17 percent, in the prior-year quarter. This was primarily due to an increase in third-party delivery costs, a prior year benefit in general liability expense, and an expected rise in product costs and minimum wages, partially offset by higher sales, Denny's said. Regardless, the cost burden is well worth the result.
“Despite the additional delivery fee, the total margin rate of these third-party delivery transactions ranges from the low teens to upper 20 percent,” he said. “We anticipate continued long-term growth in off-premise sales from the Denny's on Demand platform as more restaurants expand their delivery channels.