Denny's (NASDAQ:DENN) Corporation (NASDAQ:DENN) reported a 1.8% growth in same-restaurant sales for the third quarter of 2023 despite a decline in consumer confidence and restaurant traffic levels. The company's focus on value proposition and off-premise options, alongside the introduction of new menu items and technological innovations, have contributed to its performance.
Key takeaways from the earnings call include:
- Denny's reported a 1.8% growth in same-restaurant sales in Q3 2023.
- The company introduced a new fall core menu and extended testing of the $5.99 Grand Slam offer.
- Denny's is focusing on technology and innovation, including kitchen optimization programs and new solutions like QR pay and a cloud-based POS platform.
- The company launched the Denny's gain program for employee development and announced the expansion of Keke's Breakfast Cafe.
- Keke's is undergoing a menu redesign and has opened three cafes this year with plans for more.
- Denny's anticipates domestic system-wide same-restaurant sales to be between 2.75% and 3.5% compared to 2022 and expects to open 35 to 45 restaurants on a consolidated basis.
- The company expects commodity inflation of 1% to 2% and labor inflation of approximately 4% for 2023.
The company remained committed to its strategic initiatives despite the decline in consumer confidence in August and September. Denny's wrapped up its successful Baconalia promotion and introduced seasonal flavors like pumpkin pecan pancakes, while also launching a new fall core menu. The company also emphasized value, with a steady increase in its total value mix, and saw an uptick in off-premise sales.
Technological innovation was a significant focus, with Denny's implementing kitchen optimization programs and new solutions like QR pay and a cloud-based POS platform. It also launched the Denny's gain program to support employee development.
Keke's Breakfast Cafe, a Denny's subsidiary, is undergoing a menu redesign to better showcase its high-quality ingredients and made-from-scratch philosophy. The redesign has already led to check growth, and the company is also testing alcohol in several cafes with promising results. Keke's opened three cafes this year and has signed development agreements with current franchisees to open four more.
In terms of financials, Denny's domestic system-wide same-restaurant sales grew 1.8% in Q3 2023. Franchise and license revenue was $61.0 million compared to $65.2 million in the prior year quarter. The company restaurant sales were $53.2 million, up 1.8%. Adjusted EBITDA was $22.2 million. The company anticipates Denny's domestic system-wide same-restaurant sales to be between 2.75% and 3.5% compared to 2022. They anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of four to six Keke's openings. The company expects commodity inflation of 1% to 2% and labor inflation of approximately 4% for 2023. They project consolidated adjusted EBITDA of $85 million to $87 million.
During the earnings call, CEO Kelli Valade discussed the development agreements for Keke's, stating that there are 14 franchisees involved, including Denny's franchisees. The agreements cover a hundred units and are expected to open in various locations, including the Tennessee market, the East Coast, Texas, and California. The timeframe for these agreements typically starts with a year to get the first unit up and extends up to five years for larger agreements.
In response to a question about sales drivers, Kelli Valade highlighted the upcoming launch of a new menu design on November 8th, emphasizing breakfast items and value. She also mentioned menu innovations like salted banana caramel pancakes and upcoming remodels. CFO Robert Verostek added that the company is excited about the off-premise business and mentioned expansion plans for the Banda Burrito test concept and a potential agreement with Franklin Junction for virtual brands.
In terms of pricing, Robert Verostek shared that the 8.4% increase in menu pricing for the system is made up of 5.8% current year pricing and 2.8% carryover pricing. He stated that pricing in Q4 will be lower than Q3 and that the trend is expected to continue into Q1 of next year. He also mentioned that the company will take a strategic approach to pricing in response to the FAST Act in California, considering elasticities and utilizing targeted pricing clusters.
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