Denny’s Races Ahead in Refranchising Strategy
An ending is in sight for the hefty refranchising goal Denny’s set last year, with the brand closing on the sale of 37 company restaurants in the second quarter of fiscal 2019 alone.
Last October, Denny’s announced a revitalization and growth strategy focused on selling between 90–125 company restaurants to franchisees—a move slated to boost business for development-focused operators, attract new well-capitalized franchisees, and make Denny’s business model lower-risk and asset-light. Since the announcement, the company has sold a total of 70 restaurants, meaning the strategy is ahead of schedule. The projected completion date for the majority of sales is now the end of 2019, the company said.
“We're excited to get loyal, high performing and well-capitalized franchise partners and the opportunity to quickly grow their business. These franchisees appreciate how the sale of an established operating restaurant is a catalyst for further growth. As a result, we have secured more development agreements than originally anticipated,” Denny’s president and CEO John Miller said during the brand’s July 30 quarterly review.
At this point, Denny’s has either sold or has sales pending for 97 restaurants in total, Miller said, with that number including 22 sales that have taken place in Q3 thus far. The program to date has generated $80 million in pre-tax proceeds. While Denny’s plans to hold onto a small portfolio of restaurants in high-volume areas such as the Las Vegas strip, the brand is anticipating further refranchising and put 49 company restaurants up for sale at the end of Q2.
In conjunction with its refranchising efforts, the Spartanburg, South Carolina–based company also pushed forward a plan to upgrade its real estate portfolio by selling up to 30 percent of roughly 95 properties it owned at the time of 2018’s strategy shift. Denny’s CFO and chief administrative officer, Mark Wolfinger, estimated that these sales will produce about $30 million, funds the brand will use to purchase new, higher-quality properties. “During the quarter, we sold three properties for approximately $3.9 million, and plan to redeploy these proceeds to the like-kind exchange transactions in the near term. We are very proud of the team that has worked so diligently to make this strategy a success,” Wolfinger said.
Riding on the Q2 successes of faster-than-anticipated company sales and a lift of 3.8 percent domestic system-wide same-store sales, year-over-year—including increases of 4.4 percent at corporate restaurants and 3.7 percent at domestic franchises—Denny’s increased its same-store sales expectations to between 1–3 percent from a previous forecast of flat to 2 percent.
Since revitalization began last October, the brand opened a total of 360 new restaurants—including the first Denny’s in Jakarta, Indonesia, which opened its doors in Q2. Including the Indonesian store, six new restaurants were debuted by franchisees in Q2, with five of the stores opening in global locations, including the United Arab Emirates, the Philippines, and Guatemala. But these openings were offset by the closures of nine franchised locations and Denny’s ended Q2 with 1,702 restaurants in total—three less than Q1’s end.
Denny’s has also been at work to revamp existing stores, renovating them to fit the Heritage model, a classic, yet modern dining room update that has now been implemented in 84 percent of the brand’s system. In Q2, franchisees completed 40 remodels and one company store was also revitalized.
“Our Heritage remodel program continues to perform well and consistently receives favorable guest feedback. This enhanced diner environment will continue to provide a significant tailwind for our brand revitalization strategy over the next several years,” Miller said.
Combined with the continuing remodels, Denny’s changed it up in Q2 with fresh menu options, too. It introduced a new LTO menu featuring hand-pressed burgers and a Meat Lovers Slam offer starting at $5.99 a plate. These were offered in efforts to meet what Miller said is an increased guest expectation “for higher quality and more cravable product.”
The brand hasn’t left tech innovation out of its strategies for growth, either, and Miller said plans are in the works to expand Denny’s off-premises efforts to reach more younger guests and bump up brand awareness. The company rolled out the “Denny’s On Demand” 24/7 ordering service in mid-2017, and in Q2 off-premises mixed 11 percent of total sales at company and franchise restaurants—up 7 percent from when the platform was launched.
Delivery continues to drive off-premises dining for Denny’s. At the beginning of Q2, 79 percent of restaurants actively engaged with at least one delivery partner. By the end of the quarter that number jumped to 88 percent.
But Denny’s still has some room to grow in the off-premises arena. “These transactions continue to be incremental and deliver total margin rates from the low teens to upper 20 percent after considering product costs, labor costs, and the delivery fee,” Miller said.
The company is also continuing to develop progressive training curricula, such as the Ignite e-learning system and the Delight and Make it Right service programs—all initiatives created with the focus of delivering higher quality menu offerings with a more consistent service experience.
The brand brought in revenue of $151.9 million in Q2, a number lower than the $157.3 million in revenue in the comparable period. Net income in Q2 totaled $34.2 million, up from $11.6 million last year. Despite these shifts and the flux brought about by taking large steps toward becoming a more high-franchise brand during Q2, Denny’s is keeping a laser focus on a few key objectives.
“As we transition to a more asset-light business model, we remain focused on our brand enhancing strategies, including quality enhancements to our menu, everyday value focus, the convenience of Denny's on-demand, investments in training to elevate the guest experience, and our Heritage remodel program. These strategies will continue to support our commitment to profitable system sales growth, market share gains, generating compelling returns on invested capital and highly accretive … allocations of adjusted free cash flow,” Miller said.