Denny's Shifts Course as Value Wars Heat Up
Since 2009, Denny’s has opened more than 500 restaurants, which represents about 30 percent of its entire system and is one of the more impressive growth charts in casual dining. Following its second-quarter review July 30, the brand revised its outlook for fiscal 2018 for total operating revenue to $626–$634 million from $634–$642 million. A slowdown in net restaurant growth being the main culprit.
Denny’s said it now expects to open 35–45 restaurants this year, down from the 40–50 it forecasted earlier. And overall, Denny’s predicts to end 2018 with five–10 fewer units than it had to start the calendar.
The news was part of a mixed second quarter of sorts for the 1,720-unit brand, which saw its total unit count decline by four. Denny’s opened eight restaurants and closed 12 in the period that started March 28 and ended June 27, and also reacquired a franchised store. Denny’s domestic systemwide same-store sales fell 0.7 percent, including a 0.1 percent decline at company units and a 0.8 decrease at franchised stores. Excluding the negative holiday shift, Denny’s said the comps would have been nearly flat. The Easter spring break shift at the beginning of Q2 hit comps by an estimated 60 basis points. This was also building off a strong Q2 from last year where domestic same-store sales gained 2.6 percent systemwide.
President and chief executive officer John Miller credited a “highly competitive value-focused environment” for the sales drag. Miller said value was rampant across foodservice in the quarter, highlighting McDonald’s and Wendy’s efforts, as well as 2 for $20 deals (likely a reference to the Applebee’s menu). At the same time, Denny’s didn’t have any food on air during April and May. The brand was negative in April and May as it was working on longer-term imaging, Miller said. But the value-driven climate led Denny’s to do a “course correction,” and launch the $5.99 Super Slam, which includes two eggs made to order, two strips of bacon, two sausage links, crispy hash browns, and two fluffy pancakes. Comps turned slightly positive in June and carried into July, Miller said. It generated an incident rate of over 10 percent.
Sales were softer in the dinner daypart, which was another side effect of the value war as it pertains to casual dining. “That said, we’ve been building—this will be our eighth year of positive comp growth with nothing but breakfast and lunch initiative. And we’ve been saying for some time, we were in the middle innings of our revitalization strategy,” Miller said.
Currently, 74 percent of Denny’s restaurants are remodeled, leaving 26 percent of the system vulnerable on dinner initiatives, he added. Franchisees completed 48 remodels to the “Heritage remodel program” in the quarter, and the company refreshed three other restaurants. The units are generating a mid-single digit sales lift, Miller said. Denny’s expects to have about 80 percent of the system completed by the end of 2018.
Denny’s made progress to other key areas, but the overall sales picture didn’t please investors. The chain’s shares fell more than 6 percent Tuesday after net income totaled $11.6 million, or 18 cents per share. Adjusted EPS was 18 cents and revenue totaled $157.3 million, up from $133.4 million. FactSet consensus called for EPS of 17 cents and revenue of $161 million. To date, Denny’s shares have gained 9.4 percent for 2018.
Just Monday, Denny’s beefed up its burger lineup with new options that come with fries and start at just $6.99. The new, hand-pressed 100 percent beef burgers come in a new America’s Diner Cheeseburger option (caramelized onions and classic American cheese covered with Denny’s new All-American sauce); Spicy Sriracha Burger (Cheddar cheese, bacon, jalapeños and a creamy Sriracha sauce); and Bacon Avocado Cheeseburger (crispy bacon, fresh avocado and melted cheese).
Since launching Denny’s on Demand last year, off-premises sales have boosted more than 300 basis points as a percentage of total sales, and delivery continues to drive the expansion of Denny’s business, Miller said. Off-premises sales represented more than 10 percent of total sales at company restaurants in Q2 and about 9.5 percent at franchised units. About 60 percent of the domestic system is now actively engaged with at least one delivery partners, and the to-go transactions continue to be highly incremental, he added. It remains over-indexed to the late-night and dinner dayparts and skewed to the 18–34-year-old demographic.
“While the additional delivery fee to total margin, with the additional delivery fee, the total margin rate on third-party delivery transactions ranges from the low teens to upper 20 percent,” Miller said. “We anticipate continued long-term growth in the off-premises sales from the Denny’s on Demand platform as more restaurants expand their delivery channels.”