Denny’s is leaning into virtual brands and off-premises channels to combat stagnating traffic. The company already has two delivery-only concepts, Burger Den and The Meltdown, and is testing a third called Banda Burrito in 10 locations. It plans to bring the new brand to an additional 80 restaurants in November.
“We are primarily focusing this concept in California and believe it has potential to efficiently expand our off-premises business with popular regional flavors while leveraging many existing SKUs in our pantry,” CEO Kelli Valade said during the company’s Q3 earnings call on Monday.
A franchisee also is working on a 20-unit test with Franklin Junction, a host kitchen platform that pairs brick-and-mortar restaurants with virtual brands. Denny’s is finalizing an agreement to grow the test over the next few months with an eye toward expanding the partnership systemwide. CFO Robert Verostek said Franklin Junction’s virtual brands, along with Burger Den, The Meltdown, and Banda Burrito, offer a way to leverage operating capacity at dinner and late-night to a new consumer.
Denny’s also unveiled a new prototype under its “Modern American Diner” banner at its annual franchisee convention last week. The store features an improved overall look and embraces the off-premises channel with a pickup area staffed by a dedicated to-go specialist.
Off-premises orders through the brand’s app and delivery-only concepts held steady at 19 percent of sales in Q3 and were tracking above 20 percent by the end of the quarter.
“We feel good about this, especially considering that many in our industry are experiencing actual sales declines in this channel,” Valade said.
Systemwide same-store sales were up 1.8 percent but decelerated throughout the quarter amid softening traffic levels. The comps growth was driven primarily by 8.4 percent of pricing, including 5.8 percent current-year pricing and 2.8 percent carryover pricing.
Versotek said same-store sales began sliding around the back-to-school timeframe in late August and perpetuated into September but noted there was little change to the average check during that period.
“When you look at the same-store sales trends, it really is that overall traffic shift across the industry that we’re talking about,” he said. “July was better than August, which was better than September. The cadence really devolved over the course of the quarter … and then October sequentially declined from September.”
Concerns around rising interest rates and the potential economic impacts of recent geopolitical events are impacting consumer confidence, Valade added. She expects those headwinds will persist “at least in the near-term.”
The company’s value mix was 17 percent in Q3, up from 16 percent in Q2 and 15 percent in Q1.
“With growing concerns around consumer spending, delivering on our promise of everyday value for our guests is even more relevant than before,” Valade said. “Understanding this need, we are choosing to double down on value to improve traffic trends.”
In addition to its signature Super Slam starting at $7.99, the company is testing its original Grand Slam starting at $5.99 in several markets. With test results showing a profitable traffic lift and little impact to check compared to system trends, the offer will be extended to several other markets in the coming weeks.
Denny’s also is incorporating many of the learnings from its recent guest research work into a new fall core menu launching in November.
“The menu architecture and design amplify what we’ve learned is most important to our guests and business, while not decreasing the overall number of menu items,” Valade said. “For example, we’ve simplified the menu layout by decreasing the number of customizations and build-your-own categories that currently occupy large areas of the menu.”
Those areas will now be used to highlight breakfast items and value propositions, including its slam platform. The company also is leaning into guest feedback for greater beverage variety with new cold brew coffee options.
The fall core menu incorporates a new pricing model that Valade said will help protect the brand’s value leadership while enabling franchisees to make smart pricing decisions that are aligned with regional factors and more localized competitive benchmarking.
“It’s definitely a more strategic approach,” Valade said. “We really doubled down on sensitivity by category, by item, as well as being really myopic around all of the cost infrastructure across the country. That’s really helping us to stay aligned with our franchisees as we take pricing going forward.”
Denny’s isn’t directly impacted by California’s FAST Act, which requires quick-service chains with 60 or more units to pay a minimum wage of $20, but it anticipates the law will have repercussions for full-service chains when it goes into effect in April. Versotek said servers earn more than $20 an hour with tips and cooks earn just under $20 an hour. That could help the company retain employees without significant wage increases, though some level of pricing will likely be needed to cover the law’s impact on the labor market.
“If it was only coming through pricing and nothing else, you’d probably be somewhere in the 3 percent range just to cover the FAST Act,” he said. “Beyond that … we’re looking at automation to ensure the labor that we deploy in California is the most efficient.”
Denny’s domestic average weekly sales for Q3 were approximately $37,000, which translates to an AUV of $1.9 million. Company restaurant operating margin was $7.3 million or 13.7 percent, compared to $3.8 million or 7.2 percent in the same period a year ago. Commodities moderated sequentially from 1 percent inflation in Q2 to 1 percent deflation in Q3. Labor inflation also improved slightly from 4 percent in Q2 to 3 percent in Q3.
Denny’s revised its full-year outlook to reflect the impact of consumer uncertainty and discretionary spending pressures. It now expects domestic systemwide same-store sales growth between 2.75 and 3.5 percent, down from the previous guidance of 3 to 6 percent. It anticipates opening 35 to 45 restaurants on a consolidated basis, including four to six Keke’s openings, which amounts to a consolidated net decline of 10 to 20 restaurants.