Denny's Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 10 speakers on the call.

Operator

Greetings and welcome to PennEast Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Curt Nichols, VP, Investor Relations, Finance.

Operator

Thank you, Mr. Nichols. You may begin.

Speaker 1

Good afternoon. Thank you for joining us for Denny's Q3 2023 earnings conference call. With me today from management are Kelly Vallee, Denny's President and Chief Executive Officer and Robert Virostek, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor. Denny's.com to find our Q3 earnings press release, along with a reconciliation of any non GAAP financial measures mentioned on the call today.

Speaker 1

This call is being webcast and an archive of the webcast will be available on our website later today. Kelly will begin today's call with a business update. Dan Robert will provide a development update and recap of our Q3 financial results before commenting on guidance. After that, we will open it up for questions. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call they constitute forward looking statements.

Speaker 1

Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set 4th in the company's most recent annual report on Form 10 ks for the year ended December 28, 2022 and in any subsequent Forms 8 ks and quarterly reports on Form 10 Q. With that, I will now turn the call over to Kelly Vilade, Denise, President and Chief Executive Officer.

Speaker 2

Thank you, Kurt, and good afternoon, everyone. Thank you for joining us. Today's discussion will focus on our Q3 results, the continued progress made towards our Crave strategies and the growth and expansion of Kiki's Breakfast Cafe. After that, we'll provide updates to our full year 2023 guidance. After the market closed, we reported Denny's system same restaurant sales growth of 1.8%.

Speaker 2

While we maintained positive same restaurant sales throughout quarter, same restaurant traffic levels softened as the quarter progressed. This was similar to the trend experienced across the industry. Consumer confidence declined in August September, driven by concerns around rising interest rates and the potential economic impacts of recent geopolitical events, we anticipate consumer uncertainty and discretionary spending pressure to persist at least in the near term. While the operating environment remains challenging, we are laser focused we are focused on

Speaker 3

making strategic choices in places we know

Speaker 2

we can win and where our guests count on us to deliver, such as best in class breakfast, an unbeatable value proposition and convenience in the form of off premise options. During the quarter, we wrapped up our Bacon Alia promotion, which delivered quality craveable menu options relevant to our guests. Our Bacon Alia platform outperformed our last Bacon Alia LTO and exceeded all of our projections. Following Bacon Alia, we leaned into seasonal flavors launching our relevant and craveable Pumpkin Pecan pancakes promotion, which just ended last week. Now as we head into the holiday season, we've introduced our turkey and dressing dinner and seasonal pies, and we're bringing back our salted caramel banana pancakes, which are seasonally relevant and a guest favorite.

Speaker 2

And next week, we'll be launching our new fall core menu, which will incorporate many of the learnings from our comprehensive research we will continue to execute on our business while not decreasing the overall number of menu items. For example, we 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 utilized to highlight breakfast items and craveable value, while also leveraging and reigniting our equity in such areas as our SLAM platform, including our new strawberry stuffed French Toast SLAM. This new core menu item has 4 slices of brioche French toast stuffed with sweet cream, cheese filling and topped with strawberries, strawberry sauce and powdered sugar. It can be enjoyed as a slam or a la carte.

Speaker 2

In addition, we're leaning into guest feedback and their desire for varied beverage options such as cold brew coffee. The fall core menu also incorporates a new pricing model that will help protect our value leadership while also better enabling franchisees to make smart pricing decisions they are aligned with regional factors and more localized competitive benchmarking. Lastly, in addition to the food and menu work happening within our 4 wells, our marketing team is continually optimizing our targeted messaging, delivering across effective channels to drive engagement and awareness. Now let's talk about value. We are pleased to see a steady increase in our total value mix.

Speaker 2

Total value mix in the 3rd quarter was approximately 17%, up from the 16% mix in the 2nd quarter and 15% mix in the 1st quarter. With growing concerns around consumer spending, delivering on our promise of everyday value for our guests is even more relevant than before. Understanding this need, we are choosing to double down on value to improve traffic trends. We've always been known for our strong value positioning and we're able to drive profitable sales and traffic through our value propositions. In addition to our signature Super Slam starting at $7.99 most recently we began testing our original Grand Slam at the unbeatable price of $5.99 in several markets with test results showing a profitable traffic lift and little impact to check compared to system trends.

Speaker 2

As a result, we will be extending the offer to several other markets in the coming weeks. Next, let's talk about the convenience of our off premise business. Off premise sales were approximately 19% of total sales for the 3rd quarter, flat with quarter 2. We feel good about this, especially considering that many in our industry are experiencing actual sales declines in this channel. Even better, most recently, we started to see an uptick in our off premise sales, hitting above 20% by the end of quarter 3, further showing that off premise channels are consistently strong for us and a way to leverage operating capacity at dinner and late night whether delivering convenience through our Denny's app or our Burger Den and the Meltdown virtual concepts, families rely on us for great off premise experiences with craveable food options.

Speaker 2

That's why we remain focused on capturing further off premise opportunities, including we have been in alpha testing of Vanda Burrito in 10 locations and based on positive results, we'll be expanding it to an additional 80 locations next month. We are primarily focusing this concept in California I believe it has potential to efficiently expand our off premise business with popular regional flavors, while leveraging many existing SKUs in our pantry. In addition, last week at our annual franchisee convention, we unveiled our 1st complete remodel and new prototype under Modern American Diner. Not only does the new prototype feature an improved overall look, it embraces off premise with a dedicated pickup area staffed by a dedicated to go specialist. So while we're focused on these three areas, food, value and convenience, we have not lost sight of our other strategic priorities captured in our Crave framework.

Speaker 2

At Denny's, Crave stands for creating leading edge solutions with technology and innovation, robust new restaurant growth as a franchisor of choice, assembling best in class people and teams through culture, tools and systems validating and optimizing the business model to maximize restaurant margins and elevating profitable traffic through the guest experience and uniquely craveable food. I'll touch on creating leading edge solutions with technology and innovation and assembling best in class people and teams. First, I'll start with technology and innovation. Technology touches everyone and everything in our business, currently about 50 plates on our menu are prepared at least in part using our new ovens, including our proteins and our oven baked entrees and desserts. The culinary and operation teams are continuing to learn and explore opportunities to leverage our kitchen equipment further, driving menu innovation and kitchen efficiencies.

Speaker 2

We believe the pursuit of additional efficiencies through our ongoing kitchen optimization programs will be critical as we anticipate further wage impacts, especially related to the FAST Act in California. We look forward to sharing more about these kitchen optimization strategies on future calls. In addition, we remain focused on implementing new solutions that not only solve points of friction, but also introduce relevant tools to streamline processes and deliver efficiencies such as QR pay. We are also still testing a new cloud based POS platform from which we are learning and enhancing ahead of a broader rollout. Going forward, this will be driven under the leadership of our new Chief Digital and Technology Officer, Pankaj Patra.

Speaker 2

We are excited to welcome Pankaj who can help us build on the solid foundation already in place, while leading us in identifying new, relevant and innovative solutions to serve our guests, employees and franchisees in the future. And of course, we have to talk about our people. We are a restaurant company, but also a people business, Which is why it's important that we put people first in everything we do. We officially launched our new Denny's Gain program in August, creating opportunities it may have been otherwise out of reach for our team members. GAIN includes 4 key areas: GED Accreditation, College Credits and Certifications, life skills and career pathways for high school students.

Speaker 2

We're really pleased with how the program has been received so far and are optimistic about the positive impact the program may have on attracting new talent and staffing and turnover rates. Since the launch of the program, 7 team members have already earned their GED, while 102 are currently enrolled in the program. Finally, I want to pivot and talk about growth and the expansion of Kiki's. Now that we have a playbook built on Kiki's that articulates what makes this brand so special, we're leaning into that Kiki special sauce to ensure that as we grow, we continue to demonstrate a differentiated offering to all of our guests through the new tagline, Mornings from Scratch. This quarter we rolled out a new menu design incorporating learnings from the brand Ethos work that was concluded earlier this year.

Speaker 2

The new menu has fewer items which reduces kitchen complexity while also providing a cleaner look that allows Kiki's to better showcase the high quality ingredients and made from scratch philosophy it's known for. The menu redesign has already led to check growth and we're still testing alcohol in several cafes also with promising results. We also continue making brand decisions and leveraging our learnings to support accelerated long term cafe growth within and outside of the state of Florida. We have opened 3 cafes already this year, including one that opened after quarter end. In addition, we have signed development agreements with current we have faced construction challenges and needed to adjust the timelines for several openings, we are extremely pleased with the progress we've made.

Speaker 2

We're also excited to bring the Kiki's concept to the Denny's franchise system. Interest in Kiki's remains high among Denny's franchisees and we're excited to announce securing several development agreements. Kiki's has also garnered interest from new franchisees, having held several meetings over the past couple of months with potential new operating partners. Lastly, we have a new cafe prototype ready to go as we look to bring the winning Kiki's experience to a new set of consumers soon. So as you can see, the foundational work we've been doing at Kiki's is starting to drive potential momentum and we're excited for what's to come.

Speaker 2

In conclusion, we just wrapped up our annual Denny's Franchise Association Convention and Trade Show, which is an incredible opportunity for us to gather with our franchisees, talk about our business today and rally together for our future. We used our time together to share our plans to continue to strengthen we revitalize the brand through new and relevant strategies all under the Crave umbrella and we showcase new leadership and bold thinking. While not avoiding the realities and challenges of the current operating environment, our franchisees walked away with a clear and alignment of the strategies and initiatives that will strengthen both top and bottom line results and continue to grow our brand and they were pleased with our bold thinking. Next time, we'll share further progress against those strategies for both Denny's and Kiki's. With that, I'll now turn the call over to Robert.

Speaker 4

Thank you, Kelly, and good afternoon, everyone. Today, I will provide a development update and a review of our Q3 results before discussing our annual guidance, starting with development highlights. Franchisees opened 8 new restaurants during the quarter, including 2 international locations, while Kiki's opened 1 franchise cafe during the quarter. We also opened an additional Kiki's franchise CAFE in October. While several Kiki's openings expected this year will likely push out to earlier 2024 due to permitting and construction delays outside of our control, the development pipeline for this growth concept continues to take shape.

Speaker 4

Property control has already been secured for 10 future franchised and company operated KIKI's locations, in addition to signed development agreements from current KIKI's we will be conducting a few key questions from Denny's franchisees and continued discussions with Denny's franchisees. Moving forward to our Q3 results. Denny's domestic system wide same restaurant sales grew 1.8% in the 3rd quarter compared to 2022, consisting of a 2.1% increase at domestic franchised restaurants. Denny's domestic system wide same restaurant sales growth was primarily driven by pricing of approximately 8.4%, net of changes in discounts and product mix. Denny's domestic average weekly sales for Q3 were approximately $37,000 including off premises sales of approximately $7,000 or 19 percent of total sales.

Speaker 4

This translates to average unit volumes of approximately $1,900,000 Franchise and license revenue was $61,000,000 compared to $65,200,000 in the prior year quarter. This change was primarily driven by a $4,400,000 decrease in initial and other fees associated with the sale of kitchen equipment in the prior year quarter. Franchise operating margin was $31,200,000 or 51.2 percent of franchise and license revenue compared to $30,700,000 were 47.0% in the prior year quarter. Approximately 330 basis points of this favorable change in margin rate resulted from a lower kitchen modernization rollout impact in the current year quarter. Company restaurant sales of $53,200,000 were up 1.8%.

Speaker 4

This growth was primarily due to an increase of $800,000 at Kiki's Breakfast Cafe company restaurant sales in the current quarter. Company restaurant operating margin was $7,300,000 or 13.7 percent compared to $3,800,000 or 7.2% in the prior year quarter. This margin change was primarily due to lower legal settlement expense, improvements in product cost and more equivalent units compared to the prior year quarter. Commodities continued to improve, moderating sequentially from 1% inflation in Q2 2023 to 1% deflation in Q3 2023. Additionally, we saw a slight improvement in labor during the quarter, moderating sequentially from 4% in Q2 2023 to 3% in Q3 2023.

Speaker 4

G and A expenses for Q3 totaled $18,200,000 compared to $16,600,000 in the prior year quarter. This change was primarily due to increases in share based compensation expense in corporate administration expenses partially offset by a reduction in performance based incentive compensation. These results collectively contributed to adjusted EBITDA of $22,200,000 the provision for income taxes was $1,700,000 reflecting an effective income tax rate of 17.6% for the quarter compared to 24.3% in the prior year quarter. Adjusted net income per share was $0.17 we generated adjusted free cash flow of $12,000,000 which represents 54% of our adjusted EBITDA. Our quarter end total debt to adjusted EBITDA leverage ratio was 2.99 times.

Speaker 4

We had approximately $259,000,000 of total debt outstanding, including $248,000,000 borrowed under our credit facility. During the quarter, we allocated $16,500,000 to share repurchases, continuing our commitment of returning capital to shareholders. At the end of the quarter, we had approximately $117,000,000 remaining under our existing repurchase authorization. Since beginning our share repurchase program in late 2010, we have allocated over $685,000,000 to repurchase approximately 66,000,000 shares at an average share price of $10.43 let me now take a few minutes to expand on the business outlook section of our earnings release. We anticipate Denny's domestic system wide same restaurant sales will be between 2.75% and 3.5% compared to 2022.

Speaker 4

We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of 4 to 6 Kiki's openings, which amounts to a consolidated net decline of 10 to 20 restaurants. We are projecting commodity inflation for 2023 to be between 1% 2%. We expect labor inflation of approximately 4% for the year. Our expectation for consolidated total general and administrative expenses are between $75,000,000 $77,000,000 including approximately $11,000,000 related to share based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplates a full year of Kiki's G and A.

Speaker 4

As a result, we anticipate consolidated adjusted EBITDA of between $85,000,000 $87,000,000 Finally, I want to mention how proud I am of our franchisees and the entire Denny's and Kiki's teams who have remained focused on serving our guests and driving our Crave strategic priorities, especially during a period of consumer uncertainty and other macroeconomic headwinds. In closing, we remain confident in the strength of our highly franchised asset light business model, which generates meaningful cash flow. We have a disciplined financial framework which allows us to appropriately support the transformation of Denny's and the growth of Kiki's while consistently returning capital to our shareholders. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q and A portion of our

Operator

Hall? Thank you. We will now be conducting a question and answer it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Michael Thomas with Oppenheimer and Co.

Operator

Please go ahead.

Speaker 5

Hi, thanks. Good afternoon. You touched on this briefly in your prepared remarks, but can you walk through what sort of changed on the same store sales front relative to your expectations? Was it just the traffic shift that you mentioned across the industry? Or are you seeing anything else on the average check side relative to what you thought you were going to see?

Speaker 5

And then Robert, if you could just kind of square us all the way here. What is the implied 4th quarter same store sales range? I know things kind of get wonky sometimes With weighting, but is it down 2.5 top 1? Is it around that range? Or if you could just clarify, that would be helpful.

Speaker 5

Thank you.

Speaker 6

Hey, Michael, yes, good to hear you, boys. Happy to answer those questions. So when you look at the same store sales trends, it really is that overall industry that we're talking about, nothing really different from our perspective, we saw that it really kind of happened back to school timeframe, kind of the mid to the later part of August and really kind of stepped down from that point from the trends that we were seeing and kind of persisted that way. So with regard to that, nothing really unique. The reality is, is we were really kind of successful with our value driving strategies Over the course of that timeframe, in fact, Kelly mentioned it in her remarks that we went out with a 599 test in Orlando, that's proven to be really successful.

Speaker 6

The check is holding in that, but we drove To the point that at our franchise convention that Kelly remarked about, we had many other of our marketing Different geographies want to go in and further test out that $5.99 late, potentially a little bit higher. But the reality is, to part of that first question, Michael, that the check is holding. Even in that $5.99 test in Orlando, we've seen the majority of that check hold. So Really good. It really kind of plays to our DNA, frankly, with regard of our ability to drive sales, traffic, profitability through value.

Speaker 6

1 of our key historic tenants is providing that for our consumer. With regard to the guidance that $275,000,000 to $350,000,000 the math that we do on that Michael it is really we see it as functionally down slightly down 1 ish to up 2. So that's the math that we're getting to here in the guidance that we issued. So again, majority on the upside to that in Q4, but Again, if things got worse, we kind of really hedged our bets there with that range. So that's what we're seeing there.

Speaker 5

Okay. Thanks for And then on the Kiki development agreement for or development agreements for 100 units, I mean really impressive There's not even 60 units in the ground today. So can you just expand upon that a little bit more? What's the timeframe on those units? Where do would you expect them to open and just anything else you can tell us about those agreements and what's so exciting to you about them?

Speaker 5

Thank you.

Speaker 2

Yes. Yes, absolutely, Michael. We're encouraged as you heard and can hear our excitement too. So it's 14 franchisees. So and so that's Kiki's franchisees, that's a lot of Denny's franchisees.

Speaker 2

We've been expanding and sharing the story about the potential really great opportunities for growth. So we're excited about that. You asked about the market. So we've already talked about kind of under construction in the Tennessee market. That's still happening as a company and then we've got others that have signed agreements for the East Coast, as well as Texas and California.

Speaker 2

So we're thrilled about the excitement around it. And as you point out, you had to have 100 agreements, 14 different franchisees. We're just incredibly optimistic about what this little concept can do and really excited to see the support from franchisees ready to talk about it and sign those agreements.

Speaker 6

Yes, Michael. And just the timeframe of those, likely typically the agreement start with the give you a year to get the first one in the ground or so. And then the majority of these agreements extend over 5 years, Up to 5 years with that. So they're lighter the bigger ones are up to 5 years, the lighter ones would be done in less time. So to Kelly's point, we're really, really excited.

Speaker 6

Inclusive of the 14 agreements, 11 were Denny's franchisees coming into looking forward to coming into the Kiki system.

Speaker 2

We also finally had the opportunity at our franchisee convention that I spoke of to just literally from the general session stage, talk broadly about the opportunities for Kiki's development. We'll hold another virtual town hall for all interested Denny's franchisees, at the same time, Dave Schmidt and his leadership team are presenting to the Kiki's franchisees this week. So we expect this just to continue. This momentum, we absolutely believe, will continue. So it's exciting.

Speaker 5

Awesome. Thank you very much.

Speaker 4

Thank you, Michael.

Operator

Thank you. Next question comes from the line of Jake Bartlett with Truist Securities. Please go ahead.

Speaker 7

Great. Thanks for taking the question. Mine is about the same store sales drivers that you see from here on out or the rest of the year into 2024. In 2023, there were some really big ones. You have a new menu launch, 20 fourseven was expanding pretty rapidly.

Speaker 7

That was obviously partially offset by macro pressures. But what are the big sales drivers that you see that you're excited about From here on out, kind of going forward for the next 12 months?

Speaker 2

Yes. Great question, Jay. Thank you. So we have so it's funny you mentioned in 2023, new menu lock. So we have a completely new menu design that is dropping on November 8 and that menu design is very strategic in terms of emphasizing and highlighting our SLAM equities, emphasizing and highlighting Craveability, things all tied to our Crave strategies and things we've learned in our recent research.

Speaker 2

So things that we've called out will all be highlighted in this new menu, really showcasing our fantastic food and our fantastic breakfast items, but all day parts highlighted. In addition to that, you'll see us with our lots of menu innovation, but in this quarter, particularly, you'll see salted banana caramel pancakes, that's in addition to so we've seen this really great play with where we've got great value with our SLAM equity that either $7.99 or $5.99 as we said in our script and in our conversation, but also then people upgrading when they're in to Most recently pumpkin pecan pancakes and then we know the salted caramel pancakes will be a big hit as well. So we've got this great barbell strategy in the way that we're emphasizing innovation. Stuffed French Toast is on its way, Burritos French Toast. It has done incredibly well in test and so there's a ton of excitement going on.

Speaker 2

That will launch on November 8th also with our new cold brew coffee. So there's new things coming in the way of innovation, new things we're leveraging that we absolutely have already in our pantry and are excited to launch now that we've tested them thoroughly. Our pricing model, we've got new pricing we've been very pleased

Speaker 5

with our progress

Speaker 2

on our barbell strategy. And then finally, we showcased our new remodel with Modern Diner. We showcased that in Kansas City where our convention was held it's really great feedback, tweaks that we'll make from here, but we absolutely have new remodels in play right now and under construction. So you'll see that be a part of where we see growth coming from in 2024 as well.

Speaker 6

And just to add to that, Jake, a couple of pieces. We're really, really excited about our off premise business. So and really down 2 tenants right now. As Kelly alluded In her script, we're in the process of expanding our Banda Burrito test concept. It was in 10 test restaurants, we're going to expand that pretty significantly.

Speaker 6

And here's one that really is in the very beginning stages, but we are very, very excited about this. We have a Denny's franchisee right now that is currently in test with Franklin Junction. And as you guys are aware, Franklin Junction is a leading Host Kitchen platform. So this franchisee is in test with approximately 20 restaurants utilizing several of their virtual brands and we look to finalize an agreement with Franklin Junction over the next several months to expand this test and if all goes well, really to roll it out more broadly to the entire system. So this would clearly be an opportunity to expand upon our already successful off premise business and it leverages as we've talked about with our virtual brands for some time, it really leverages dayparts that we have capacity to expand into, which is that kind of that dinner and continuing to leverage late night, which has really been one of the standout dayparts for us is that late night day part.

Speaker 6

So really there's a lot of sales and traffic driving initiatives that we are quite excited about.

Speaker 7

Great. Thank you very much for that detailed answer. I appreciate it. My other question, just on the near term basis, Robert, you mentioned kind of 1 to positive 2. We have 2 months left in the quarter now.

Speaker 7

So there's pretty I guess a pretty wide range for with 2 months left, but can you maybe give us a little more detail on the thinking there? I think you mentioned that the low end was kind of a maybe a really conservative side, but any detail on where you stand so far? What your expectation within that wide range is? What the moving pieces are, whether it's really just dependent on the macro environment or for instance, launching the Grand Slam, any more detail on it? Where do you think we could stand in that wide range?

Speaker 6

Yes, that's a fair Jake, so October, to be very transparent, sequentially declined from September. So what would be the what would get you from down 1 to plus 2? So there is a macro Economic effect, there's no doubt about that, that plays into that. But what are we in control of in that? So I mentioned the 599 test.

Speaker 6

So again, there was much, much interest coming out of our franchise convention. So we can really get to that pretty quickly. Kelly just talked very eloquently about our new menu that's coming out next week. We anticipate that Q really performed well. It really kind of focuses on breakfast, really, again, the heart of what Denny's is about, along with value, so it's the focus on breakfast there.

Speaker 6

So we'll see how well that plays. We also she also talked about the new pricing schema Within that, so the reality is that we do expect it to likely pick up some benefit from the way we have arranged that menu. There are some differences with regard to the geography, right? So you look at the Florida is down pretty significantly right now and Orlando in and of itself is that, but the Midwest is strong, South Texas is strong, California is at or just slightly below kind of the averages. So a lot of different pieces that still even though we only have 8 weeks to 9 weeks left in this quarter, there's still a lot of pieces that could come together that would push it one way or another within that range.

Speaker 7

Great. Thank you so much. I really appreciate it.

Operator

Thank you. Next question comes from the line of Nick Setyan with Wedbush Securities. Please go ahead.

Speaker 8

Thank you. You guys kind of hinted at seasonality with back to School and trends deteriorating since mid August. But then the October sequential decline from September you think what's happening Q3 to date is seasonality versus just a consumer slowdown or the debt is Seamort slowdown, because the October sequential slowdown versus September that would actually go against At least somewhat go against some industry trends we're seeing out there.

Speaker 6

Yes, that's a fair point, Nick. With regard to that, We did step down as I alluded to in August and that kind of precipitated through September And it hasn't returned yet in October. So we're looking at things such as trade downs within that. So we do believe that Casual probably is trading down into us, but we also believe that we're probably trading down into QSR a little bit. So the impact of that, We do pay close attention to the benchmarks.

Speaker 6

BBI and Sales Track Weekly are 2 that we look at routinely. And again, it's been fairly volatile. Weeks we are at par with our family dining competitors and other weeks they're floating above us. So it's hard to we're just kind of keeping our head down. We know that we are providing a really good guest experience.

Speaker 6

We measure that through our Black Box Intelligence data, so when you look at net sentiment, we are outpacing both the casual dining players and our family dining players in a pretty material way, so we believe that you kind of put that together, you keep your head down, you give value, you focus on breakfast, you get the right pricing strategies and while this in the very short Term, it may be working against us. We really see all of these things kind of coming together to look more towards a much brighter future, so.

Speaker 8

Got it. And then just on pricing, could you just tell us what the actual menu pricing was? I know the A four commentary is for the whole system and I think that's inclusive of mix. Is there a way for us to kind of get to the pricing versus mix in Q3? And then what you expect that to be, at least the pricing portion in Q4?

Speaker 8

And then just with FastAct starting in May on April 1 in California, how are you thinking about pricing to offset that margin impact?

Speaker 6

Yes, there's a lot in there, Nick. Happy to tease that out for you. So the 84 it's made up of basically 8.6% pricing and let me break that down further for you. It's 5.8% current year pricing and 2.8 percent carryover pricing. And then you have mix discounts and other that are weighing on that By 0.2.

Speaker 6

So again, basically, 2 thirds of that is current year pricing, a third of it is carryover pricing. When you look into Q4, we do roll off another 2 percentage points of carryover pricing that will roll off in Q4. But there is basically another 2% of pricing that will be taken next week with that menu. So when you add when you do that math, it looks to be it looks to us like GCA, given these pricing decisions, will we continue to move down in that point range. So we do see Q4 with lower pricing than Q3.

Speaker 6

And we do believe that that trend will continue into the Q1 of next year. There were 2 pricing windows last year, again, if you recall, we were the hyperinflation that we were experiencing in 2022 was very, very relevant on people's mind at that point in time, so we took basically 2% in pricing in January, another 3% in March. So that will begin to roll off in Q1, which again should put some downward pressure on overall pricing as we move Into the 1st part of next year. With regard to the Fast Act, so that is, as you would expect, clearly on our minds and what we one of the key things that we are focused upon. Clearly, there will be pricing that will be required and we look to take that in a very strategic way.

Speaker 6

It's not going to be some blanket level of pricing, should be in the very spirit that we came to the November, a very targeted, where the elasticities exist with RMS in these new pricing clusters that we talked about, so it should be very strategic. We will also look to utilize other means that I went into the just a minute ago with Jake, quite a bit on off premises that whether that be our virtual brands, Franklin Junction, whatever that may be, that has been a very beneficial part of our story that we look to continue to drive forward. And then beyond that, you would look to for us to do what any good brand would be doing. We're looking into automation to understand, to ensure that the labor that we deploy in California is the most efficient. So we are clearly Paying attention to that, on if you were just to put your thumb in the air with if it was only to come through pricing and nothing else, not driving traffic, you'd probably be somewhere in that 3% plus range to just cover Fast Track.

Speaker 6

As you are aware, this is a FAST QSR initiative, we do believe that it will have repercussions into all of the restaurant industry. But right now, as we sit here right now, our servers with tips are materially above $20 per hour and our cooks right now are just ever so slightly underneath. So we don't all of our labor won't be exposed to this. So on a relative to position to QSR where we believe the majority of their labor will be exposed to this and we do believe that we're at a relative advantage and likely will have to take less pricing Then QSR. Yes.

Speaker 2

Yes. And that's exactly what I was going to add, Robert. So you alluded to it there in your last sentence, but I think you're going to see fast food, QSR, fast casual, we've already seen some of those announcements of having to take increased price to cover it because you have to very directly cover it versus an indirect impact that we know will be there and we're not naive to that, but working with our franchisees and really being very focused, we have an excellent employee proposition all across the country, we talked about our GAIN program, over 100 people are working on getting their GEDs. I was in California and celebrated an area director getting her GED with Denny's and we had a huge celebration on that. So our industry turn our turnover company ops including California where we have 20 it's exceptional and we beat the family dining and casual dining industry handedly.

Speaker 2

And again, we just keep adding to the value proposition for employees. So we're really comfortable there and yet we know. We'll look at everything we have to in partnership with our franchisees, automation robotics while early in our proof of concept on a couple of those things, you'll hear us talk more about it because we do feel like there's things that we can absolutely do to offset that labor and to help with the business model at a time where it's really critical. And those virtual brands we've mentioned a couple of times adding Banda Burrito And testing Franklin Junction, you can be sure we'll look to that market to be able to do whatever we can there first.

Speaker 8

Thank you. And then just last questions for me. The margins, the company owned operating margin was actually much healthier I thought they could be with comps where they are, the company on comps where they are. Instead of going maybe like line by line, just kind of tell us if any of those items kind of exceeded your expectations going into the quarter or where some of your upside came from if there's anything one time that we need to

Speaker 5

be aware of.

Speaker 6

Hey, Nick, this is Rob. Nothing really of one time nature to call out, internally, the kind of a moniker, a term that we've been using internally to for robust margins is called no stone unturned. So we have been looking across that P and L to ensure that the margins remain as healthy as positive. So it really is a focus We've kind of moved those forward clearly off the depths of the previous 2 years. So again, nothing of any significance to call out is one

Speaker 8

time. Thank you.

Speaker 3

Thanks, Nick.

Operator

Thank you. Next question comes from the line of Todd Brooks with Benchmark Company. Please go ahead.

Speaker 9

Hey, thanks for taking my questions. First question, and Robert, if I heard you right, you're looking for kind of a 100 basis points step down in pricing in Q4, but you talked about and Kelly you were pointing out that there's some menu construction and less customization. I'm just wondering if the mix impact that was only the 20 basis points in Q3, are you expecting a higher mix impact one way or the other with the new menu launch in early November?

Speaker 2

Yes, it's a fair question. So we're optimistic and obviously we went into this. We had some external support in addition to the research we've been doing and doubling down with RMS and even had this design done externally just for a fresh set of eyes and the parameters were really highlight our incredible equities, highlight credibility, highlight the things that our guests always want from us. We do not expect at all that the customization So we'll always customize when asked. We're just kind of downplaying it a hair.

Speaker 2

For the in the interest of improving And lessening the complexity, so improving operations and lessening the complexity where we really don't get credit for it. So those are some of the things. I think to check, One of the things that we went into this with was really looking at where are the best items for not only what the guest is craving, but then also From a margin standpoint. So that went into the design, the layout, front to back and everything that we did have that in mind as well. So While difficult to tell yet, we don't expect it to have a negative impact at all.

Speaker 2

And in fact, we hope there's a bit of upside So what we're doing and how we've looked at this menu?

Speaker 6

Yes. But to confirm, Todd, you are correct in the sequential just from the pricing Aspect the sequential one point decline that we will likely see in the Q4.

Speaker 9

Okay, Great. And then second question, just a quick one, but didn't hear any update on loyalty. I know you launched that in June. Momentum as far as new membership and any kind of ability through the new platform to maybe Stimulate some more frequency of visit yet given the traffic challenges that are out there?

Speaker 2

Sure. Yes, it's great question. It's still early. We continue to gain more members. We continue to leverage our learnings with both our customer data platform and the loyalty program itself and really look to strengthen Over the coming months, a lot of what we're doing is just really leaning in to learn what we can about our guests and then to really create those journeys in those lanes, speaking to them specifically with things that we know they love.

Speaker 2

So, lots of ideas and things that you'll see us leverage over the next quarter and to come. Long term play for sure in terms of having a great rewards program, a great loyalty program that really speaks to our guests and give them what they want. But yes, it's slowly growing And we continue to learn more all the time about our guests and what they want from us and a lot more that you'll see coming from us on that soon.

Speaker 9

That's great. And the final one for me. Obviously, exciting news about the agreements for 100 units for Kiki's kind of an amazing start. I guess demand relative to your expectation and if you look at your franchise support infrastructure that you've built, do you need to kind of manage the amount of agreements that come across the transom here? Or how are you feeling about the readiness if the demand is and it seems that it is robust with existing Denny's franchisees.

Speaker 9

Thanks.

Speaker 2

Yes. Great So always a balancing act. They're spread out enough so that we really do feel like we can handle it and we're investing where we need to. We've invested in this brand this year to put the right KIKI's development team in place, we've invested leveraging our development resources to get to that 14. So managing expectations, I'd say at this point, we've we've exceeded our expectations in terms of signing the 14 that we've signed, and it's been a steady and really progressive thing that we've been able to do with excitement again from both Kiki's franchisees, new franchisees and Denny's franchisees as we've mentioned.

Speaker 2

So, yes, infrastructure has got to be there. This is the small but mighty brands and we're going to be really smart about how we continue to invest and continue to support them, leveraging our great franchise or model to do that. And then, Robert, do you want to talk about the loan pool and ways to continue to incentivize those franchisees?

Speaker 6

Yes. Thanks, Kelly. So Todd, this is kind of a little bit of an add on here. I don't think we've talked about this. I've just signed this within the last week or so, but we do now have a $100,000,000 loan pool that we put into place for a couple of different purposes.

Speaker 6

The first being $25,000,000 for Denny's remodels, we can talk a little bit more about that. But then we have $75,000,000 for additional development, 25 earmarked for Denny's development $50,000,000 earmarked for additional Kiki's development. So we talk about agreements that we talked in that's really, really exciting. It's just the first tranche of agreements by the way. This it doesn't get us to we will certainly have additional ones that we will be talking about at some point in the future.

Speaker 6

But beyond the agreements now we have the capacity to help get this done. This is a new brand And so again, we need once as we get outside of Florida, we're kind of putting our money where our mouth is with this loan pool that we've just signed. Small backstop on the new development pieces. In Austin, our loan pools are not utilized all that much other than for a stocking horse for other loans that they can go out and get with their existing bank facilities, but we're really excited to not only have the agreements, but the capital in place to fulfill those

Speaker 9

agreements. Thanks. And just a quick follow-up. So you talk about 100 units being the first tranche. And Kelly, you mentioned spreading it out.

Speaker 9

So are we Managing the demand in waves of bringing it on with new agreements here. So is there a backlog behind The 100 sign that you're getting that visibility into this brand potentially growing into a strong number 2 over time relative to like a

Speaker 6

first Ward? Yes. So Todd, it's Robert again. With regard to that, it's not like we're doling them out where this kind of real time, we're telling you the development team has really been working hard partnering with the Kiki's leadership team to bring this first tranche, as Kelly remarked, East Coast, as we noted already into Tennessee and Texas and California. But as you guys are aware, we are in all 50 states right now.

Speaker 6

So again, these were the first ones we've signed in this as Kelly alluded to, the small but mighty team, we'll keep working and as soon as we get the next tranche all lined up And ready to go, we'll be talking about that also.

Speaker 9

And then finally, Robert, who funds the loan pool, Tristan straight on that?

Speaker 6

It's a 3rd party loan pool, not our cash. We only provide a minor backstop to the cash from the 3rd party lender.

Speaker 9

Great. Thank you all very much.

Speaker 6

Thanks, Todd.

Operator

Thank you. Next question comes from the line of Alex Gonzalez with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hi, thanks. Good evening. Can you just clarify, I think you said 3% pricing to offset the fast act, was that 3% effective for the system or is that just 3% in the stores in California? And then I have my regular question after maybe you answer that. Yes, Eric.

Speaker 6

So this is Robert. So the 3% is really my kind of the back of the envelope math that we are doing For the company restaurants alone in California. So it wasn't depending upon volume that could be different. And again, we will be very strategic with regard to that and we will partner with our franchisees. As you might expect, we see our performance has improved with value.

Speaker 6

That's the nature of our brand. So we'd look to limit pricing as much as we can, but understand what the margin implications are of something like the Fast X. So we will partner with our franchisees to get that right level along with the other pieces that we talked about off premises, Band of Burrito, Franklin Junction tests, Automation, all of that will come into play. My 3% reference specifically was with regard to company restaurants in California.

Speaker 5

Got it. And then maybe

Speaker 6

a question on the development outlook. It looks like you expect to close fewer units across both brands despite opening half of May, Kiki. So maybe comment on what's driving the fewer closures this year? Yes. So across the year, Eric, we've seen and we measure this through our iLumen tool that we have in 40% of the restaurants.

Speaker 6

We're really going look to ramp that up to get additional insight over the course of the year, but margins have been improving over the course of the year. You've seen that in our company portfolio. And again, you've seen things like commodity inflation clearly moderate over the course of this year. Labor has been steady in this 3% to 4% range. So again, the improvement that you've seen year to year in the company, P and Ls and margins really have moved forward into the franchise.

Speaker 6

And again, improving margins and improving profitability will reduce the number of closures. So we're really excited to see that. And the further we can get into next year and continue to drive sales and profitability, that is Truly the catalyst of bringing down additional closures.

Speaker 5

Got it.

Speaker 9

And then just with

Speaker 6

the new menu and that new pricing model that you mentioned, could you expand on that

Speaker 4

a bit? Is the goal

Speaker 6

to be more thoughtful about the parts of the menu that you take price and that sort of just an overall menu architecture that you're looking to? Is that the goal of the new menu and this new menu architecture?

Speaker 2

Yes, Eric, yes, absolutely. That's exactly what it is, right? So we've We had a good process in the past, but we really doubled down on sensitivity by category, by item, as well as then being really myopic around all of the cost infrastructure across the country, right? So different by DMA, different by state And that is really helping us to kind of stay aligned with our franchisees as we take price going forward. So it's definitely a more strategic approach.

Speaker 2

And just again doubling down on the insights that we have by item, by category, where we have the most elasticity, where we've got the most opportunity, while not So we feel really good about what we're doing there and think it will absolutely benefit us as we stay aligned with our franchisees on, Yes, at times, there are things we'll have to do, but we also, we know, right? If we can hold, and we can keep providing that great value and that perception of value is there, then we do well and we know that. So that's all part of this new design and our architecture going forward as you Actually, just that. So appreciate that question.

Operator

Thanks. That's all I have.

Speaker 4

Thanks, Eric. Great. Thank you, Eric.

Operator

Thank you. Next question comes from the line of Brian Mullen with Piper Sandler. Please go ahead.

Speaker 2

Hi, this is Ashling on for Brian. I believe I heard you say in the prepared remarks that you plan to do some company owned development with KeyKeep next year. Could you elaborate on those plans? Specifically, how many do you anticipate opening? And how we should think about the cost to build from a CapEx perspective?

Speaker 2

Thanks.

Speaker 6

Yes, Ashling, this is Robert. So the reality is with the Kiki's brand, and we've talked about this for a little while now as we wanted to utilize company capital, Denny's corporate capital to get outside of the state of Florida. So we're doing that in Tennessee right now in Nashville. We have cafes under construction at the moment in Tennessee, we also talked about needing to build out some oversight efficiency within some of the markets where we took over company cafes down in Florida. There's not one market.

Speaker 6

Typically for us, oversight efficiency comes in somewhere around 6 to 8 cafes or restaurants, that's what we know from the Denny's world. So we'll build out places such as Jacksonville likely put in some capital into Orlando. So at this point, that's where the capital will be going. I would expect through time and as the years progress, once we build out our markets to become oversight efficient, then we will trend back to this highly franchised model a good bulk of the capital will be still the case next year, But on a relative position to what you would have seen in the Denny's world, we will be going in a little bit deeper with regard to opening up Kiki's CAFE is using corporate capital next year. With regard to what it will cost to build one of these things, we're still rightsizing that, frankly.

Speaker 6

Kind of that $1,000,000 to $1,200,000 range was what we were talking about when we first took this over, but we did some exciting work with regard to and Kelly alluded to it, a group called Other Tomorrows did some work for us. It's where the mornings from scratch tagline came from. And the reality is, is we're building those right now in Tennessee. So and the first ones tend to be a little bit more expensive until you get some efficiencies and optimize what you're doing. So what we will ultimately be building these things for and what we talked about a year or so ago when we took over Qigis and where the first few will end up could be slightly different.

Speaker 6

So you may see us invested a couple of $100,000 more into the first ones until we optimize the builds out into the future.

Speaker 2

Great. Thanks. I'll pass it back.

Speaker 4

Thank you.

Operator

Thank you. Next question comes from the line of Andrew Wolf with C. L. King, please go ahead.

Speaker 3

Thank you. I just wanted to follow-up on the cadence, the monthly cadence on the same store sales during quarter and into October, I don't know if you would want to give specifics, I know last quarter you said July was above little above somewhat above 3%. So I don't know if you'd be specific. And if you can't be specific, could give us at least a sense of which month in the quarter between August September sort of had more of the deceleration, so we could sort of back into where you might be trending now?

Speaker 6

Yes, Andrew. Certainly. So generally, we wouldn't be giving Lee, same restaurant sales. So to try to pin to your the second part of that, it really did slow into the kind of mid to the back part of August, second half of August, and then that perpetuated into September. So Again, July was better than August, which was better than September.

Speaker 6

So that real that cadence really kind of devolved over the course of the quarter. I hate to say that, and we looked at and again, I did say that October sequentially declined from September. So we look to kind of turn that with all of these different initiatives that we've Discussed over the course of this Q and A.

Speaker 3

Okay. I'm just well, I guess it'd be I'll just try one more time. Is October was October's decline as severe as coming out of July into the last 2 months of the year or as from late August?

Speaker 4

Yes. I'm looking

Speaker 6

at Kurt and Michael to try to get that. And it's just Again, I'm not sure how to talk about that. We'll give updates on the next call on that, Andrew. Not trying to be cagey, but again trying to live within what our typical practices are with these numbers.

Speaker 3

Got it. All right. Well, thank you.

Speaker 6

Thanks, Andrew.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Kurt Nichols for closing comments.

Speaker 1

Thank you. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in February when we will discuss our Q4 2023 results. Thank you all and have a great evening.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr

Key Takeaways

  • Denny’s reported Q3 system same-restaurant sales growth of 1.8%, though same-restaurant traffic softened late in the quarter amid consumer uncertainty over rising rates and geopolitical events.
  • Total value mix climbed to 17% in Q3 (up from 15% in Q1), and a test of the $5.99 Grand Slam drove a profitable traffic lift, underscoring the chain’s focus on unbeatable everyday value.
  • Off-premise sales remained robust at ~19% of total Q3 sales (peaking above 20% by quarter end), and Denny’s is scaling virtual brands—expanding the Banda Burrito test from 10 to 80 locations—and debuting a prototype with a dedicated to-go pickup area.
  • For full-year 2023, Denny’s expects systemwide same-restaurant sales growth of 2.75%–3.5%, to open 35–45 restaurants (including 4–6 Kiki’s cafes), commodity inflation of 1%–2%, labor inflation of ~4%, and adjusted EBITDA of $85M–$87M.
  • Kiki’s Breakfast Café continues to gain momentum with three new openings in 2023, a new “Morning from Scratch” prototype, and signed development agreements for 100 units across 14 franchisees in multiple states.
A.I. generated. May contain errors.
Earnings Conference Call
Denny's Q3 2023
00:00 / 00:00