Denny's Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 10 speakers on the call.

Operator

Greetings. Welcome to Denny's Corporation 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I'll now turn the conference over to your host, Curt Nichols, Vice President of Investor Relations and Financial. You may begin.

Speaker 1

Good afternoon. Thank you for joining us for Denny's Q4 2023 earnings conference call. With me today from management are Kelly Valade, 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 Q4 earnings press release along with the reconciliation of any non GAAP financial measures mentioned on the call today. This call is being webcast and an archive of the webcast will be available on our website later today.

Speaker 1

Kelly will begin today's call with a business update, then Robert will provide a development update and recap of our Q4 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 For the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be 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 forth 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.

Speaker 1

With that, I will now turn the call over to Kelly DeLayd, Denny's President and Chief Executive Officer.

Speaker 2

Thank you, Kurt, and good afternoon, everyone. Thank you for joining us today. We were pleased Closeout 2023 was solid domestic system wide same restaurant sales of 1.3% in the 4th quarter, reflecting sequential improvement throughout the quarter. And because of that improvement in momentum, we delivered system wide same restaurant sales growth of positive 3.6% for the full year, which was above the high end of our previously guided range, a satisfying achievement given the operational challenges the industry endured again in 2023. In fact, Denny's same restaurant sales outperformed the full service industry benchmark for both the Q4 and for the full year, an impressive statistic for sure.

Speaker 2

Looking ahead to 2024, we entered the new year with a clear focus on what we know is resonating with our consumers and a laser like focus on our 3 strategic areas of focus. These are A best in class breakfast with craveable items and unbeatable value proposition and convenience in the form of unique off premise options. We spent last summer cascading these new strategies to our franchisees, culminating with a comprehensive unveiling of our new playbook and our annual convention in October. By November, we put these strategies in play with bold moves with a new menu, new food innovation and an unbeatable value proposition. The playbook is now working and is providing momentum in this new year.

Speaker 2

First, let's talk about our craveable breakfast items and new menu. According to recent Yelp data, there were nearly 6,000 new restaurant openings with the breakfast and brunch category in 2023. Clearly, there's an enormous demand for breakfast coupled with consumers wanting breakfast items whenever it suits them. This is obviously our sweet spot. We are America's Diner after all and we own breakfast.

Speaker 2

Our November menu launch showcased that breakfast leadership in a big way as we leaned into our unique ownable equities with our Slam platforms, including our new strawberry stuffed French toast slam now made with our delicious premium brioche French toast. And guests are clearly loving it given their reaction to this launch as we are selling over 150 total French Toast plates per week per restaurant. Additionally, this menu launch was a key activation point in our new playbook and that we revamped the look and the feel of the menu also and leaned into what's most important to our guests while being focused on ease of execution for our operators. Specifically, along with new product innovation, we simplified the menu layout while minimizing customizations and the build your own categories on the menu. This not only allowed us to highlight our most popular and most craveable items, but it simplified operations without any impact on the guests or to guest preferences.

Speaker 2

This new menu also led to margin improvements given our strategic approach to highlighting our most profitable items and ones we know to be guest favorites. Finally, the recent menu also incorporated a new pricing model that will help protect our value leadership while better enabling franchisees to make smart pricing decisions are aligned with regional factors and more localized competitive benchmarking. The new pricing structure and approach will help us minimize traffic erosion when we do take price as we now have a heightened focus on the elasticity of certain menu categories and items. At a time when the guest is still extremely sensitive to price increases at the grocery store and in restaurants, This strategy and focus is well timed and will continue to help us with our goal of smart menus, smart pricing. Importantly, this improved approach will also be critically important in as we work to offset the potential impact of AB1228, formerly known as the FAST Act.

Speaker 2

This quarter's results were also aided by approach to leading with value and leveraging our increasingly successful barbell strategy. Our original grand slam starting at the unbeatable price of $5.99 was featured nationwide starting in late November with positive results. We believe we brought this compelling offer to the guests at the perfect moment, helping them balance holiday travel and shopping, knowing they could count on Denny's for the best breakfast out there at an incredibly compelling price. The guests responded well and quickly as we saw traffic and sales trends increase and we immediately noticed share gains against both family dining and casual dining. Mix on our value platform remained consistent at 17%, But we grew check with premium offerings merchandise in restaurant, which is proof positive of our successful barbell strategy where some guests indeed are coming in for our value equity, but others are ordering more premium options.

Speaker 2

In addition, we remain focused on providing convenience through our off premise business and we saw pickup here on a year over year basis also. Specifically, off premise sales were approximately 20% of total sales, up from 19% in the 3rd quarter. We feel good about this sales mix considering that many in our industry are actually experiencing sales declines in this channel. For us, these channels provide a unique to leverage operating capacity at dinner and late night to a distinctly new consumer. For these reasons, this will continue to be a part of our strategies, which is why we're leaning into testing our 3rd virtual brand with Banda Burrito and why we're leaning into a test with Franklin Junction, a global leader in branded virtual restaurants.

Speaker 2

We should be able to speak to both of these tests in more depth in our upcoming calls, but we continue to be hopeful and encouraged by the results we're seeing so far. Now I'd like to provide updates to some of our other priorities captured in our Crave framework. Here we'll focus on technology and innovation first. We're pleased with our recent progress on our new cloud based POS platform as we are now moving forward with installations in all company restaurants expected to be completed by the Q2 of this year with franchise restaurants to follow. This foundation will enable improved kitchen visual systems or KBS, server handhelds and QR pay resulting in more consistent operation execution, labor efficiencies and enhanced guest experiences.

Speaker 2

In addition, our culinary and operations teams are continuing to lean in and explore opportunities to further leverage our ovens and other kitchen equipment to drive menu innovation and kitchen In fact, next quarter, you'll see new exciting products which will leverage our new ovens as the primary cooking platform. Importantly, we've also seen improvement in our food quality scores year over year and a high percentage of this improvement can be attributed to our new kitchen equipment. And of course, we have to talk about our people and our guests. We're extremely proud of the progress we have made with our people programs, including the launch of our GAIN program this last year. We're impacting lives and careers by offering education and attainment for all.

Speaker 2

As a result, we continue to see improvements in staffing and reduced turnover rates at Denny's. In fact, management turnover for 2023 improved 400 basis points compared to 2022 and was approximately 400 basis points lower and GuestXM Family Dining Index, formerly Black Fox Intelligence. As for the guest experience, our overall 2023 net sentiment score was 41% compared to 32% for the Family Dining segment and 23% for the overall restaurant industry. And our Google ratings continue to improve as we recently reached a 4.3 rating. I can't say enough about the progress of both our teams and our guests as we have our company and franchise operators to thank for taking such great care of our guests always.

Speaker 2

Their continued commitment to delighting every guest is appreciated and apparent. We also continue to remodel restaurants with our Heritage 2.0 program while testing the next evolution of our prototype, which will lean into our unique diner image with a modern updated and fresh Early results from the modern diner test are strong with positive marks for a unique, brighter, yet warm approach to a modern diner. Sales and traffic results are also promising. We'll have full results from this test to share soon and we'll begin incorporating the modern diner remodel program into the mix in the back half of the year. Finally, I want to pivot and talk about the growth and expansion of Kiki's Breakfast Cafe.

Speaker 2

We are thrilled to have opened our first Kiki's location outside the state of Florida A couple weeks ago in Hendersonville, Tennessee, just outside of Nashville. Despite opening during a snowstorm, sales were strong for the 1st week and continue to be impressive. We also recently held an official grand opening ceremony for the new cafe, receiving a warm welcome as we were joined by the Hendersonville community, including the mayor, the city chamber and local businesses. With this new location, we debuted a new cafe design, an updated look and feel that was developed through our learnings from last year's brand ethos work. It's a beautiful design highlighting the things unique to Kiki's that we know our guests love.

Speaker 2

Mornings from Scratch is a prominent tagline and our unique positioning which serves to highlight our core differentiators of fresh from scratch cooking daily made with the highest quality ingredients offered in great abundance. We've also now launched a new menu in this location and in all existing Kiki's restaurants. This menu offers a simplified approach with less items and a focus on what we know Kiki's does best. In addition, the alcohol program test was a success and a system wide rollout now is underway. This program will become a brand standard and a requirement for all new cafe openings.

Speaker 2

For us, this has been a critical year building a strong foundation for the brand and integrating the Kiki's brand into the portfolio at Denny's. We're incredibly pleased with the progress President Dave Schmidt has made as he has built a strong team, cemented a unique position in the AM breakfast segment and a competitive differentiated path that will allow us to win in new markets this year and beyond. As a reminder, we have a franchise disclosure document in place 14 signed development agreements for over 100 Kiki's cafes across multiple states, 11 of those with Denny's franchisees and 3 with Kiki's existing franchisees. We expect this number to grow and we'll soon be talking about many more. Our approach to KIKI's and our early results are in line with our expectations.

Speaker 2

Our strategic intent in purchasing Kiki's was to compete in this highly fractured yet steadily growing daytime eatery segment. We have the unique opportunity to leverage our model franchisor approach and our strong network of franchisees in both brands to grow exponentially and capture market share. We are well on our way with the work we have done so far. Finally, we have been laser like in our focused approach to understanding what the guests love about Kiki's and the results here are also phenomenal. The Kiki's brand 2023 overall net sentiment of 54% significantly outperformed the family dining index of 31% in addition to significantly outperforming the segment in scores for service, ambiance and intent to return.

Speaker 2

This tells us we have a winning formula and a brand that guests absolutely love. The future is bright for our small but mighty Kiki's brand. In closing, 2023 marked another year of resilience for our dedicated franchisees, our operators and support teams and we look to build on our achievements in 2024. This past year, we honored our past, celebrating our 70 years in the business at Denny's and we chartered a clear path to winning for the next 70 years. We couldn't do this without the strong partnership and collaborative approach with our incredible franchisees and owners.

Speaker 2

They are the reason we push to deliver our best every day. They deserve it and our guests deserve it. It's clear we have the right approach to win in today's environment with committed leaders and partners and a game plan for our 2 unique incredible brands prime for growth and continued momentum for 2024 and beyond. With that, I'll turn the call over to Robert.

Speaker 3

Thank you, Kelly, and good afternoon, everyone. Today, I will provide a development update and a review of our Q4 results before discussing our 2024 annual guidance. Starting with development highlights. Our brands opened 32 combined restaurants in 2023, marking the highest number of openings since 2017. Within the quarter, Denny's franchisees opened 7 new restaurants, including one international location.

Speaker 3

This resulted in 28 Denny's restaurant openings for the year, flat with 2022 and consistent with pre pandemic opening rates. Kiki's opened 2 franchise cafes during the quarter, resulting in a total of 4 cafes for the full year. As Kelly noted, we also opened an additional Kiki's company cafe in late January in Hendersonville, Tennessee, marking the 1st cafe outside of Florida. This marks the first of several company cafes as we plan to utilize company capital to develop oversight efficiency in various markets within and outside of Florida. In addition, Kiki's currently has 4 cafes under construction with several others in permitting and site approval phases.

Speaker 3

Moving to our Q4 results. Denny's domestic system wide same restaurant sales grew 1.3% in the Q4 compared to 2022, anchored by a 1.5% increase at domestic franchised restaurants. Denny's domestic system wide same restaurant sales were 3.6% for the full year 2023, Exceeding the performance for 8 of the 9 years prior to the pandemic, Denny's domestic system wide same restaurant sales growth was primarily driven by pricing of approximately 7.5% along with a product mix benefit of approximately 0.3%. Denny's domestic average weekly sales for Q4 were approximately $38,000 including off premises sales of approximately $8,000 or 20 percent of total sales. As a result, average unit volumes for 2023 were approximately $1,900,000 Franchise and license revenue was $61,300,000 compared to $66,500,000 in the prior year quarter.

Speaker 3

This change was primarily driven by a $5,300,000 decrease and initial and other fees associated with the sale of kitchen equipment in the prior year quarter. Franchise operating margin was $31,500,000 or 51.4 percent of franchise and license revenue compared to $31,600,000 or 47.6% in the prior year quarter. Approximately 4.30 basis points of this favorable change in margin rate resulted from the completion of our kitchen modernization rollout during 2023. Company restaurant sales were $54,000,000 compared to $54,400,000 in the prior year quarter. Company restaurant operating margin was $5,400,000 or 10% compared to $6,800,000 or 12.6 percent in the prior year quarter.

Speaker 3

This margin change was primarily due to $1,800,000 in legal costs in the current quarter, partially offset by improvements in product costs compared to the prior year quarter. The $1,800,000 in legal costs had an unfavorable 3.40 basis point impact on the company restaurant operating margin rate For the current quarter, commodity inflation was in line with our internal expectations at approximately 2% in Q4 2023 compared to 1% deflation experienced in Q3 2023. Additionally, labor inflation for Q4 2023 was 3%, flat with Q3 2023. G and A expenses for Q4 totaled $19,300,000 compared to $17,000,000 in the prior year quarter. These results collectively contributed to adjusted EBITDA of $18,600,000 The provision for income taxes was $1,700,000 reflecting an effective income tax rate of 36.9% for the quarter compared to 20.7% in the prior year quarter.

Speaker 3

Adjusted net income per share was 0 point 14 dollars We generated adjusted free cash flow of $7,400,000 Our quarter end total debt to adjusted EBITDA leverage ratio with 3.26 times. We had approximately $266,000,000 of total debt outstanding, including $256,000,000 borrowed under our credit facility. During the quarter, we allocated $16,200,000 continuing our commitment of returning capital to our shareholders. At the end of the quarter, we had approximately $100,000,000 remaining under our existing repurchase authorization. Since beginning our share repurchase program in late 2010, We have allocated over $700,000,000 to repurchase approximately 67,000,000 shares at an average share price of $10.39 Let me now take a few minutes to expand on the business outlook section of our earnings release.

Speaker 3

We anticipate Denny's domestic System wide same restaurant sales will be between 0% and 3% compared to 2023. We anticipate opening 40 to 50 restaurants and cafes on a consolidated basis, inclusive of 12 to 16 TIKI's openings and a consolidated net decline of 10 to 20 restaurants. We are projecting commodity inflation to be between 0% and 2% for 2024. We expect labor inflation between 4% 5% for the year. This labor inflation guidance takes into account the anticipated impact from AB1228 in California.

Speaker 3

Our expectations for consolidated total general and administrative expenses are between $83,000,000 $86,000,000 including $12,000,000 related to share based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplates a full year of G and A for Kiki's new management team and a fully reloaded incentive plan, which is paid out at approximately 70% over the last 4 years. Additionally, this range would suggest corporate administrative expenses have grown at a compounded annual rate of 2.5% to 3% from pre pandemic 2019 before considering the investment in Kiki's team who will drive that brand's growth. That compares to a compounded annual growth rate of 4.3% nationally for private industry salaries and wages between 20192023. As a result, we consolidated adjusted EBITDA of between $85,000,000 $89,000,000 Finally, I would like to thank our engaged franchisees and results driven brand teams who have remained focused on serving our guests while supporting the transformation of the Denny's brand and the growth of Kiki's.

Speaker 3

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 call.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Michael Tanase with Oppenheimer and Company. Please proceed with your question.

Speaker 4

Hi, thanks. Good afternoon. You provided same store sales guidance of 0% to 3% for the year. So can you first touch on maybe what level of menu pricing you're anticipating within that for 2024? And then can you talk about the cadence?

Speaker 4

Should we see sales build throughout the year? Or how do you want us thinking about that trajectory? Thanks.

Speaker 3

Yes. Hey, Michael, how are you? Hope you're well. With regard to pricing for the year, we are going to roll into some rollover pricing on the year of approximately 2% And there will be additional pricing. We have 2 pricing windows.

Speaker 3

We're getting back to our normal cadence of the year, which is an April menu print and an October menu print, which will have 2 additional menu opportunities for pricing within those menu prints. So we've rolling over 2, you have 2 additional pricing. The April pricing will allow us to contemplate AB1228 in California. So I would expect that window to probably have more pricing than the October window. So I would that the pricing will be in the range of the 5% to 6% with that build that I just described there.

Speaker 3

With regard to The cadence, I think you probably captured it correctly. I think it does somewhat build over the course of the year. We are rolling over the prior year, some pretty strong numbers from the Q1 of the prior year. And we have seen Some impacts from weather as we started off January here. So I do believe it will build over the course of the year Based on some of those items I just mentioned, along with our initiatives becoming even further baked as we move throughout the year with regard to menu innovation, value messaging, off prem with regard to the virtual brand.

Speaker 3

So I think all of those will continue to mature across the year. So With regard to pricing, I think that 5% to 6% range and I do think as you described it does build over the course of the year.

Speaker 4

Thank you. And I think the unit growth guidance suggests you close about 50 to 70 units this year. Can you talk about maybe what led to that decision? Any help on timing, pacing of that throughout the year? And then can you talk about maybe the financial impact to maybe EBITDA or how we should think about that?

Speaker 4

Thanks.

Speaker 3

Yes. So it's another really good question. So to your point that the midpoint there would suggest about 60 closures, right, that 50 to 70 range that you described. The reality of that situation is having come through the inflation environment that we had, although it did temper quite a bit in 2023. The profitability of restaurants that we're kind of that breakeven for a unit at Denny's restaurant to remain open has really kind of elevated from about $1,000,000 to about $1,200,000 And so we're continuing That used to be that level used to be that $1,000,000 I just referenced that used to be the break point of a closure.

Speaker 3

So we are continuing to work through some additional closures as a result of those inflationary pressures. Our goal, as I've said previously, is to get back to a more normalized rate, but we wanted to be as we started off the year, to be somewhat conservative with regard to that. When you think of these restaurants, to your point with regard to what the EBITDA impact would be, These generally are about $1,000,000 units, dollars 1,000,000 restaurants. So $40,000 to $50,000 in EBITDA that is rolling off. So as we build new, the higher Denny's restaurant openings, so We guided 40 to 50 openings, 12 to 16 of those being KIKIs.

Speaker 3

You would expect us to open somewhere around 30 Denny's. Those are almost double the volume nowadays of the closures. So the reality is that it's somewhat net neutral on the EBITDA between those two, the closings, about half the number of openings as there are closings, but the volume of the openings are about double that of a closings. And we are at that level of openings, the guidance actually suggests the highest number of Denny's openings since 2017. So we got we have that machine back open and with the 12 to 16 Kiki's, that's 3 to 4 times the level of openings that we have seen out of that brand at any point in its history really.

Speaker 3

So we're really excited about what that's starting to produce for us.

Speaker 4

Thank you.

Speaker 3

Thanks. Thanks, Michael.

Operator

Thank you. Our next question comes from the line of Jake Bartlett with Chua Securities. Please proceed with your question.

Speaker 5

Great. Thanks for taking the question. First, I just want to dig into kind of what drove the miss on EBITDA versus your expectations. It looked like Sales is a little bit above. So what was the surprise that drove that miss?

Speaker 5

I think at the versus the midpoint guidance is about 5% lower. So any help there would be Yes.

Speaker 3

That's a really good question, Jake. And hello, good to hear your voice. Some of the it really was and they were in some of our prepared remarks, really kind of revolving around 2.5 to $3,000,000 worth of reserve adjustments that we really didn't have a good line of sight into. More than half of that came from some legal reserves that we had to book into late into the year. 2.5 of that really sat in the company margin.

Speaker 3

And if you right size for that on the quarter, it would have been between 14.5% 15% And that $2,500,000 would have added basically another full point to the year. And there was about $500,000 of reserve adjustments related to our captive within the G and A section of our P and L also. So Again, we really it bothers us. We put out guidance with the full intention of achieving it And the fact that we didn't because of these kind of one time events was truly bothersome to us, but when you adjust for those right size for those, The margin, particularly on the company side, are much better. Of the other pieces of those one time charges, 2.5, the largest part was legal.

Speaker 3

We also had some claims development into workers' comp and general liability and some minor medical that impacted that. So just kind of pervasive across the board, nothing really going in our favor this Q4.

Speaker 5

Got it, got it. That all makes sense. My other question was about traffic and your expectations in 'twenty four. Given the guidance for same store sales and the pricing that you talked about, you said pretty negative traffic. So I guess I'm wondering what is driving that?

Speaker 5

Are you seeing trade out of the category? I know at some point you were talking about kind of trade down and trade out and kind of being maybe a net neutral on that. But what are you seeing with the consumer? Why do you think you're seeing this pressure on traffic? And what can you do about it?

Speaker 5

Is there a I know you're working on some innovation on the lower end of the menu. What's your confidence that you can kind of try to really move

Speaker 6

the needle here with the traffic?

Speaker 3

Yes. So another really good question, Jake. So when we look at it and we pay Tension to what's happening in the general economy, we're seeing somewhat there's not a lot of confidence into what we're seeing in the 2024. So we our guidance in to your point on the guest traffic side is really a reflection of that. As you're aware, our consumer set is half of our consumer has an income base of less $50,000 So again, we're just being conservative there.

Speaker 3

We are really bullish about everything that we have into the hopper. We have new we've constantly original Grand Slam, that $5.99, dollars 7.99 messaging that we launched into In mid November, really changed trends in a very material way. We have concept new value concepts in various levels of testing. We have multiple virtual brands in various levels of testing. So In large part, being conservative because the rhetoric in the environment is there, but bullish about the other things that we have going.

Speaker 2

Yes. Jake, I think, hi, it's great to hear your voice as well. And just to echo what Robert said and just piggyback, it really is about just watching The predictions from economists just watching those that we track and those that are putting out those reports that just tell us whether it's inflation in the recent reports that just came out or just A lot went into thinking about it and being optimistic yet just realistic. I would also call out our value mix has been ticking up And we've seen that just in January alone. So we feel like we're probably projecting it the right way and looking at it the right way, and yet we are still optimistic.

Speaker 2

Lastly, I would tell you in both in the Q4 of last year and in January, we can tell that we are stealing share both on sales and traffic against our competitive benchmarks, which are both benchmarks for family dining and casual dining. So is there trade down from casual? Perhaps. Is there trade out from us? Perhaps we also see evidence that people in fact are still anxious enough to maybe visit less often.

Speaker 2

But again, for us, We can see what we're doing against the competitive set. The last thing I'll say relative to this, Jake, is that our value mix, while ticking up and an indicator Indeed, where people are being cautious, our GCA is still up. And we continue to just be really about and encouraged by our barbell strategy and that those that Robert called out less than 50,000 may be the ones definitely coming in Sensing that we do have great value at this unbeatable price and great food, are also though there are also people coming in and then upgrading to our amazing new products like the strawberry French toast, stuffed French toast just continues to just sell incredibly well. So I feel like we're balanced. We thought a lot about it and we're really still pretty optimistic about the things we have in the hopper as you heard from Robert.

Speaker 5

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

Speaker 2

Thank you.

Speaker 3

Thanks, Jay.

Operator

Thank you. Our next question comes from the line of Nick Sachin with Wedbush. Good proceed with your question.

Speaker 7

Thank you. I just want to first clarify the pricing commentary. The did I understand correctly that Q1 pricing is 2%?

Speaker 3

Yes. Sorry, Nick. No, sorry if I misled you. We have we're rolling off 2% in pricing in the quarter. The pricing that we will see throughout the year is in that 5% to 6% range And it will that will be fairly steady across the year, maybe a little bit tick higher in April as we take into account pricing related to AB1228.

Speaker 3

I apologize if I misled with my remarks, but no, no, the pricing in Q1 will be more in line with the 5% to 6% that I referenced today.

Speaker 7

Okay. And Q4 sounds like it was in that mid-five percent range just to kind of get to that 7.5% for the year, is that correct? So

Speaker 3

we so the math of it is that we actually layered in additional pricing with a November print. So while we're rolling off various pieces of that over the As we move into Q1, the actual pricing effect in the quarter in Q4 2023 was more in the 7.5% range. So that's the number you should think about. So the 1.3 Would suggest about a 6 point traffic decline.

Speaker 7

About a 6.3 traffic decline?

Speaker 3

Yes, about that. Again, it's not perfectly perfect math in that when you're dealing with same store sales. So but yes, in that 6% range. Yes, I appreciate you giving me the opportunity to clarify those remarks.

Speaker 7

That's very helpful. Thank you. And then just on the G and A guidance, It does sound like you're pretty much assuming sort of a full payout across the board. And When it's all said and done, it seems like G and A may not be as high As the full year guidance implies, I mean, hopefully it is and everything across the top line and margins are great. But if not, it sounds like G and A is actually going to be a little bit lower.

Speaker 7

Is that a fair understanding of how you're guiding G and A?

Speaker 3

Given the last 4 years, Nick, it would represent 70%. But I liked your more bullish claim that we're going to hit all of our guidance and actually pay out that level Buddy, we'll be excited to do that. But yes, the $83,000,000 to $86,000,000 range does include 100% short term incentive compensation assumption.

Speaker 7

Okay. And on the franchise margin, can we just talk about sort of the trajectory on the franchise margin in 2024? And then just how many You guys are thinking of within that guidance in 2024?

Speaker 3

Yes. Let me start with the second part. First, I'll give Kurt a chance to help me out with the margin question on the franchise. But with regard to the Kiki's openings, the 12% to 16%, I would tell you that in the current year, in 2024, that those will likely be 40% to 50% company openings as we build the pipeline with additional Kiki's franchisee development And some great strength within the Denny's franchise development related to the development agreements that we announced on the last call, those 14 agreements for 100 additional Cafe Commitment. So in the current year, as we build out operational efficiency in places like Tennessee In Jacksonville, you will see us invest more into the into company operated cafes.

Speaker 3

So the 12% to 16% would likely be 40% to 50% 40% to 50% company Cafe Openings. With regard to the margin, What I'm being shown is that it will be very, very similar to 2023, so approximately 51%. In the changes, as you note in the remarks, is we have this odd revenue recognition standard that impacted prior year where we were having to recognize the kitchen equipment that we were installing for franchisees as revenue with a complete contra offset into the expense, which depressed margins by 4 to 5 franchise margins by 4 to 5 percentage points. So we don't have that same type of impact within the 2023 results. So you shouldn't see you shouldn't expect or anticipate another 4 to 5 percentage point growth.

Speaker 3

It will be very similar that low 50s percent range, 50%, 51% range.

Speaker 7

Got it. Okay. Thank you very much.

Speaker 3

Thanks, Nick.

Operator

Thank you. Our next question comes from the line of Todd Brooks with Benchmark Company. Please proceed with your question.

Speaker 8

Hey, good evening everyone. Thanks for taking my questions.

Speaker 3

Hey, Don.

Speaker 8

Good to talk to you both. One follow-up to Jake's question actually. Kelly, I think when you were answering, you said value mix has ticked up in January. I know it was stable Q4 versus Q3, can you share with us how much it has ticked up just to maybe dimensionalize? Sure.

Speaker 2

Yes, absolutely, Todd. A couple of points.

Speaker 3

We've seen it go up a couple

Speaker 2

of points. It's a recent trend change. But again, We're still seeing that check hold, reiterate that, and we're still seeing people coming in and ordering some of these great new products around innovation. So the value messaging we know is working to get them in the door. We'll refresh that messaging this quarter and, but it's picked up a couple of points as of late.

Speaker 2

Again, probably evidence to what most are saying about how people are feeling, but for us, again, still confident in the strategy on barbell and that is really working for us.

Speaker 8

And if I think back historically, this is run-in the low to mid-20s before, hasn't it? So we're not back to maybe historical peaks for where value is mixed out?

Speaker 2

I think that's correct. Robert is nodding his head as well. Yes.

Speaker 3

Todd, when we during the heights of 2,468 launch, It was in the 23%, 24%, 25% range. And as long as the barbell strategy is effective as Kelly is alluding to. We're not afraid of driving that value instance rate.

Speaker 2

And this is all these are this is not just the original Grand Slam and the one that we're talking about as of late, although that has been incredibly successful as we've talked about. This is other things that are messaged in the restaurant that we would classify our everyday value slam, our super slam. We kind of capture those all in that kind of value incidents bucket for us. The original Grand Slam is the one that is up ticked as of late. Yes.

Speaker 8

Okay. That's helpful. Thanks. And I want to get a little bit on Kiki's. So at the end of Q3, you updated us on the 14 agreements, 100 units.

Speaker 8

And I think Today's commentary was 14 agreements 100 plus units. Are we actively selling agreements now? Are we digesting The explosion that we had in agreements in Q3, I'm just curious, I felt there was more momentum maybe to continue off the franchisee convention, the signings that you saw there. So, if we could talk about that.

Speaker 2

Yes. I think that's fair, Todd. And what we're seeing is, obviously, There's a lot of excitement about it and there's also been a lot of and I think we've mentioned this and talked about it quite a bit. There's a tremendous amount of excitement Still, and there's momentum, and there's a lot of conversations about Nashville. It's that new prototype, it's new design, it's all those things were in play and then we still have levers to pull in terms of just continuing to drive that momentum.

Speaker 2

But a lot of folks Really excited, a lot of things that are in play with the new menu, cocktails, again, successful Tennessee opening. We're really encouraged by what we saw there. So There's quite a few that are lined up as of right now, as you know, the ones that we've talked about. And then we literally had people waiting To come to that opening and say, hey, let's get this thing open. Let's do a great job opening it.

Speaker 2

We got that ceremony. We did the ceremony of grand opening, ribbon cutting with everyone in the community that So that we could get this name out there and it's been really successful, but we also have franchisees waiting to go there, lining up to go there and introduced via our development team and those people are coming in as we speak. So we expect that momentum to continue. There's really pause other than to say, hey, let's get this thing out of Florida and see how it can perform for us. We do also have 4 cafes under construction.

Speaker 2

And then again, these openings next year are pretty accelerated rate as Robert already talked about.

Speaker 8

And are the 4 or the 40% of growth this year that's anticipated to be company stores, Are you seeding other states for proof of concept? Are you looking to get that kind of operational efficiency in the Tennessee market as a corporate market? And then Go ahead, Robert. Sorry.

Speaker 3

Yes. So Todd, we're really excited by what we're seeing in Tennessee. We already have another Corporate Cafe under construction in Tennessee right now. We have another Corporate Cafe In Jacksonville under construction right now and you will see us move into Texas, seeding Texas as the next corporate area for development. So we'll be in places other than Florida and Tennessee this year.

Speaker 8

Okay, great. And then just a couple to wrap up on KIKI's, and I'll get back in queue. Can you speak to since the program was successful, can you speak to Can you speak to maybe alcohol incidents or lift in check that you saw in the test that we should think about for AUVs for the concept? And then the second one, just with The new prototype opening in Tennessee, which looks great from the pictures I've seen online. Thoughts on is there a point in Or do the franchisees existing in Florida want to go back and rework their units in the new prototype or is this really a go forward type of prototype for Kiki's?

Speaker 8

Thanks.

Speaker 2

That's a lot in there, Todd, and really great question. So first to take the maybe the last thing that you mentioned in terms of going back in, in Florida, there are a lot really excited about it's a beautiful building, it's a beautiful design, really leaned into what Kiki is known for and what's special about it with an updated really bright fresh look. So I'm glad you got to see that. Pictures don't totally do it justice. It really is a stunning building.

Speaker 2

The franchisees will go back. There's conversations with a lot of them in Florida to go back and look at paint colors, look at some of the things that they could pull forward. There's really not been a comprehensive remodel program for the Kiki's brand up now. So they're excited about the things that we can pull forward and having those conversations for sure. In terms of the alcohol programs, we're really encouraged by what we're saying it's a really simplified approach with mimosas, sangrias and 5% to 7% mix is really what we're seeing there higher on the weekends.

Speaker 2

This is obviously expected, but really in line with what we thought that that would do for us. So it's not been rolled out system wide. In fact, that Tennessee location did not yet open with it. It's one of those things where we're excited about the potential this has. This is a brand where it doesn't have a honeymoon curve that like brands I'm used to, it doesn't have a honeymoon curve where it decreases, it actually grows over time.

Speaker 2

And we're actually not talking about it just yet because we know it's got and we've already seen it starting to grow. And again, we didn't open with the cocktails or the alcohol program. We didn't open with some of the other things that we know we can pull and that will help it to continue to grow for us. So we are excited about what that can do for the Kiki system in terms of rolling that alcohol program as well as even the remodels and what that could do for the Florida market.

Speaker 8

Okay. Thanks, Kelly.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of Jon Tower with Citi. Please proceed with your question.

Speaker 6

Great. Thanks for taking the questions. Maybe if we could start off on the unit closures and specifically I'm just trying to Maybe you can help us ring fence, how many of the stores are potentially at risk of closure? I think, Robert, you mentioned earlier that Profitability breakevens are close to $1,200,000 now at Denny's. I'm just curious if you could maybe Give us some an idea of like what percentage of the system might be at or near those levels and, yes, maybe that's where I'll stop for the moment.

Speaker 3

Yes, John, so happy to try to provide some additional color to that. We With regard to we assess our kind of our the Denny system with regard to the kind of quintiles. And our low I can tell you that our lowest quintile in aggregate is actually above the $1,200,000 So it's only a subset of that lowest quintile that we are really dealing with. The other piece that makes this a little bit harder to predict is that It's made up of there's many franchisees that have restaurants within there and they all have different motivations, right? So they If it's covering the lease cost but not necessarily profitable, it may be a restaurant that remains open in that scenario.

Speaker 3

So it's hard to say of that subsetted unit, of that subsetted quintile, How many are likely to close near in? Over time, right, in elongated timeframe, You may be looking at half that quintile, but right now what we're comfortable doing is to guide 1 year at a time with what we know and really, really watch closely, particularly As we move across this year and with the initiatives that we have in place to hopefully to grow out of it. I can tell you that Of these quintiles, 4 of them actually grew volume over the course of the pandemic, the only one that did not was that lowest quintile. So if we can get that moving also, it may put less of those at risk. Again, another reason why we're just trying to give that 1 year to look right now as opposed to looking out much further than that.

Speaker 3

A lot of nuances that go into predicting how many of those will actually close in the near term.

Speaker 6

Thank you. And I guess on the flip side of that, it sounds encouraging with the new store openings on the Denny side, the gross numbers reaching 20 levels. So I'm just curious, maybe you can give us a little bit color on where these stores are. Are they more infill? Are they new markets?

Speaker 6

Are the new franchisees, existing franchisees? Are they effectively relocations of existing stores? Just curious if you could provide some color.

Speaker 3

Yes, happy to do that also. Generally, not Offsets, not close this Denny's, open this Denny's. So they're not generally offset. 90% of the restaurants that close are what we were just talking about these very, very low volume units. So it's not that we're not offsetting because of a property control issue.

Speaker 3

So not offset. Every year we have new franchisees somewhere in the neighborhood of, let's say, 4 to 6 new franchisees. So There will always be some new franchisee development, but generally the vast majority of these openings would be infill restaurants from existing franchisees. So I think that's probably the best way to look at it with and now 13 42 franchise domestic restaurants, another 65 company, We're fairly penetrated into most markets. You can go find some particularly if you look east of the Mississippi that we could potentially build out.

Speaker 3

But in general, these are infills into existing markets where we know the Denny's has a lot of strength.

Speaker 6

Got it. And then just kind of thinking about California a little bit more in detail. Do you have any specific plans to address value in that market given obviously the changes in pricing structure across the industry coming in April? I mean, are there any explicit plans that you might have to attack the value messaging, whether it's on building brand awareness with incremental marketing? Obviously, you've got a lot of innovation in the pipeline when it comes to product, but I'm just curious how you plan on handling that market specifically in April forward?

Speaker 2

It's a great question and lots of conversations that we have. We're working very closely with the California franchisees. In fact, we call it our situation room where we come to them and we partner with them both in them sharing kind of ideas that they might have, many of them have other brands, many of them have QSR brands actually. So while we're not in that same situation, of course, being a full service brand, We're being very mindful of that. So what I can tell you is the value messaging there, so we've got a price point of $5.99 in many markets, but in California, dollars 7.99 that's competitive for there.

Speaker 2

That's been working there fairly well. In fact, we've been working really well there also. So we'll continue with that messaging. The other thing that we have done, we are reimplementing or reinstituting the co op program. And So we'll continue to spend at the local level.

Speaker 2

We'll spend more at the local level working in partnership with them. So we'll do things unique to the market wherever possible. We're doing our match again for that co op program. So we're bringing that back after several years of not doing that, and we know that will help strengthen the market. And then finally, really looking to strengthen the top line for them in as many ways as possible, looking at I've mentioned this before, but looking at the virtual brands, the things we're testing in off premise.

Speaker 2

So not only helping them with analytics and metrics to understand the effectiveness of their off premise channels today, but also potentially bringing those virtual brands to them first, bringing those to enable as much revenue that we could possibly help them drive. So that's really the focus for us. It's almost a triage approach with them and at the same time, making sure just we're available to have the conversation. So we're staying really close to it.

Speaker 6

Got it. Thank you for taking the questions.

Speaker 2

Of course. Yes. Thanks, John. Thank you, John.

Operator

Thank you. Our next question comes from the line of Ashley Groeninger with

Speaker 9

Hi, good afternoon. It's great to hear about all the momentum with Kiggy's development. But just on the franchise comp Could you speak to what is behind the softness there? Is it specific to like the Florida consumer? Or is there a primary driver you point us at?

Speaker 3

Yes. So that's a really good question. Florida remains a you must have been looking at Some of my cheat sheets that we prepared. Florida is by far the weakest state that we've had. There's actually some good strength throughout the Midwest when you look at New York, Pennsylvania, Ohio, Indiana, Illinois, strength there, but the Florida still trails quite significantly with regard to that.

Speaker 3

And the reality is if you look at the pace of our same store sales across the quarter, October was weaker than November and November was weaker than December. And December actually showed some significant strength As we got deep into our value messaging, the $5.99 $7,099 original Grand Slam messaging. So again, we were with regard to that, we were pretty pleased on the way we finished out the year.

Speaker 9

Great. Thanks for that. My second question is on 20 fourseven. Now that we're in 2024, I'm just hoping you could give us an update on What percent of the store base is back to 20 fourseven? And what your expectations are for the return to 20 fourseven this year?

Speaker 3

Yes, again, really good question. That's really stabilized. When we've looked at it, it grew through about The July, August timeframe, we had a pretty concerted effort to get back as many as we could to 20 fourseven and it's kind of leveled off at about the 75% level. And the other piece to note though is even if you're not at 20 fourseven, The vast are already over 20 hours. So I think we've stabilized.

Speaker 3

I don't think you'll see material growth from here, nor do I think you'll see a material slide from here. I think this is somewhat of the new norm.

Speaker 2

I think the other reality Sorry. No, that's okay. I was only going to add to what Robert mentioned in terms of just We just came off the last question on the Fast Factor AB1228 and the impact there in California. So we're just always mindful The profitability of our franchisees, the health of those franchisees that we talked about, so it's about driving top line, it's about just showing them every opportunity, but also just being the best Partner Possible, we still know given the percentage not only of those that are 20 fourseven at 75% and holding, but also the amount of hours that we are open That as a full service brand that used we are back strong and as strong as many other players that used to be 20 fourseven and haven't gotten even close to 70 percent back. So we feel good about it and yet given the pressures in some of the states like California, we're just mindful of that.

Speaker 9

Thanks.

Speaker 2

You're welcome.

Operator

Thank you. And we have reached the end of the question and answer session. I'll turn the call back over to Kurt Nichols for closing I'd like

Speaker 1

to thank everyone for joining us on today's call. We look forward to our next earnings conference call in the spring when we will discuss our first

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Earnings Conference Call
Denny's Q4 2023
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