Denny’s Corp. is focused on returning most units to 24/7 service as franchisees emerge from pandemic hurdles, company executives said Tuesday.
The Spartanburg, S.C.-based family dining company, which completed its $82.5 million acquisition of the 52-unit Keke’s Breakfast Café from Orlando, Fla.-based K2 Restaurants in July, said all-day hours provided strong sales opportunity.
“We are a 24-hour brand,” said Kelli Valade, Denny’s CEO, in an analyst call after releasing earnings for the third quarter ended Sept. 28, “and we have a significant tailwind opportunity as demand for the late-night dining occasion is ever present.”
Staffing improvements have given the brand optimism, Valade said. “Though staffing and turnovers still remain a challenge,” she said, “we've seen significant progress at Denny's and in the industry, which gives us promise.”
However, she said, recent industry data indicate about 30% to 40% of full-service outlets that were open late night prior to the pandemic have not yet returned to pre-pandemic operating hours.
“We know guests want to return to normal behavior and have options for dining out late night, and that's good news for us,” Valade said. “In addition, Denny's 24/7 restaurants continue to consistently outperform the limited-hour restaurants by mid-teen-digits sales comps relative to 2019.”
After discussions with franchisees, she added, Denny’s launched “a modest financial incentive to motivate franchisees to accelerate their path to be followed by an enhanced measure of accountability.”
Robert Verostek, Denny's chief financial officer, said the incentive is tiered. “It gives a little bit more if you get open sooner, a little bit less if you wait a little bit longer, really all culminating in early 2023.”
Verostek said the company was deploying a carrot of incentives with the “potential stick” of accountability, based on brand standards. Some franchise agreements allow for “a handful of cases” that are carved out of the 24/7 requirement, he added.
Steps that Denny’s has used in the past include store openings 24/3 or 24/4, he said.
Valade said about 5% of Denny’s domestic system was not open 24/7 prior to the pandemic.
“We've agreed to review late-night profitability on a case-by-case basis to determine if there are additional restaurants that may not return to 24/7 operations fully,” she said.
Currently, 870 domestic restaurants are open 24/7, she noted. Analyst Mark Kalinowski said that represented about 59.6% of the U.S. brand.
Valade said the Denny’s brand was offering value in a “barbell strategy” that balanced limited-time-offer messaging with more profitable items. In September, Denny’s began offering 10 “All-Day Diner Deals” that ranged from $5.99 to $10.59.
For the third quarter ended Sept. 28, Denny’s net income was $17.1 million, or 29 cents a share, up from $12.3 million, or 19 cents a share, in the same period last year. Revenue was up 13.2% to $117.5 million from $103.8 million in the prior-year quarter.
Third-quarter systemwide same-store sales were up 1.5% compared to the same period of 2021 and included a 1.1% increase at domestic franchised restaurants and a 7.1% increase at company restaurants.
Verostek said the growth came from an about 9% increase in guest check average, which included about 2% carryover pricing from the prior year, 5% pricing taken in the current year and about 2% of product-mix benefits.
“The softer guess traffic experience toward the end of the second quarter extended into July as inflationary pressures continue to weigh on the consumer,” Valade said. “However, with the improvement in both consumer confidence and consumer sentiment in August, along with our new compelling value platform and related messaging, we experienced a positive shift in our traffic trends.”
Off-premises sales also remained strong in the quarter, she said, making up about 20% of total sales compared to a pre-pandemic trend of 12%.
As of Sept. 28, Denny’s had 1,666 restaurants, 1,592 of which were franchised and licensed restaurants and 74 of which were company operated. Of the total, the Keke's brand had 53 restaurants, 45 of which were franchised and eight of which were company operated.
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