Denny's Corporation

Good day and welcome to Denny's Corporation fourth quarter and fiscal year 2020 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Thank you, Cody, and good afternoon, everyone. Thank you for joining us for Denny's fourth quarter and full year 2020 earnings conference call. With me today for management are John Miller, Denny's Chief Executive Officer, Mark Wolfinger, Denny's President, and Robert Verosteck, Denny's Senior Vice President and Chief Financial Officer. Please refer to our website at investor.denny.com to find our fourth quarter earnings press release, along with any reconciliation of 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. John will begin today's call with a business update. Mark will then provide some comments about our franchisees and development. Then Robert will provide a recap of our fourth quarter financial results and current trends. After that, we will open it up for questions. Before we begin, Let me remind you that in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risk. uncertainties, and other factors that may cause the actual performance of any 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-K for the year ended December 25th, 2019, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.

Thank you, Kurt, and good afternoon, everyone. I hope each of you have remained safe and healthy since we last shared an update on Denny's. Our fourth quarter was setting up to be the best sales performance since the pandemic began until a resurgence of COVID cases caused states and localities to reinstate stay-at-home orders and capacity restrictions in December. While losing access to outdoor dining in California, where 25% of our domestic system is located, was a pause in our recovery story, I'm so proud of how our teams kept up their focus on the future and ensuring that Denny's is well positioned for the recovery. As restrictions began to lift in January, domestic system-wide same-store sales thus far in February have improved to their highest point during the pandemic, despite having a similar level of capacity restrictions as the September through November timeframes. This indicates the consumers are ready to dine with us again, and the sentiment around vaccinations is starting to drive more consumers into our restaurants. The vaccination is expected to be available to a high percentage of the population by mid-year. We're looking forward to the second half of the year, and our exceptional team members and operators are ready to welcome guests back into more and more of our dining rooms. In this dynamically changing environment, we have been focused on four key guest-centric themes, reassurance, value, comfort, and convenience. I'll now touch briefly on each of these. As guests continue to return to our restaurants, it is more important than ever that you remain focused on the health and safety of our team members and our guests. We are committed to reassuring our guests that Dilley's provides a safe dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all customer touch points. We've also provided multiple options for a safe experience beyond our dining rooms, including outdoor seating, curbside pickup, drive-up ordering, and contactless delivery. Our second area of focus is value, and it is known for everyday value, and we believe value will remain important in this economic environment as guests seek to maximize the impact of their dollars on quality food options for the whole family. We understand the value comes in different forms, and we consider our value approach to be a comprehensive balance between price, abundance, convenience, and bundled value. Starting with price value, our well-known 2468 venue has strong affinity with our guests at 14% incident level, We continue to feature abundant value options like our popular Super Slam, which sold nearly 11 million plates in 2020. With off-premise being a large focus, we strive to provide convenience-based value to our guests through free delivery and ordering through our website or mobile app, which has also induced new consumer trial. Additionally, we have seen our Danish Rewards members increase by over 25% since the beginning of the pandemic, allowing us to have more targeted offerings delivering directly to our guests. Lastly, we were able to feed nearly 385,000 families through our new bundled value lineup of shareable family meal packs, offering a delicious, cost-effective way to feed a family of four. Our third focus area is comfort. We strive to ensure that Denny's is a place where our guests feel welcomed and valued. Whether dining with a large family or as a party of one, we believe our guests view the Denny's experience as a time to build connections in an environment that is both inviting and comfortable. After issuing multiple streamlined menus, we began using a full core menu in November, providing more comfort food options, even though the menu is approximately 25% smaller than our pre-pandemic core menu. We will also be launching a comparably sized new core menu next week that continues to feature our culinary innovation with new creations within our bowls and melts categories. Our operations team has also reinforced their critical need for comfort by reminding our entire system of the rules we live by, including expectations that everyone is welcome to dine at Denny's, everyone is treated like our favorite guest, and everyone is shown kindness and respect. Our established heritage restaurant image has also received consistently positive guest feedback, largely due to its welcoming and relaxed feel. Despite the pandemic, our system completed 22 remodels in 2020, including five in the fourth quarter. And our final area of consumer focus is convenience. We believe our guests will continue to expect technology to bring enhanced value to their dining experience, whether in-restaurant or through off-premise options like our Denny's on-demand platform. They've also implemented curbside pickup parking signs to deliver a better experience for our guests and team members while promoting guest-controlled digital ordering from the parking lot. We recently launched our Apple Pay for our Denny's On Demand iOS mobile app, and we continue to promote outdoor dining solutions where permitted. We were fortunate to already have an established off-premise business through our Denny's On Demand platform prior to the pandemic. Average weekly sales for all off-premise transactions have doubled since the beginning of the pandemic, growing from approximately $4,000 per week per store a year ago to approximately $8,000 per week per store through the first two weeks in fiscal February. We have been pleased with our ability to sustain this higher level of off-premise sales as dine-in transactions have evolved. We are also excited that our test and learn culture has yielded two new virtual concepts that we believe will provide additional market share opportunities. The first of these is called the Burger Den. This concept allows us to focus on one of our strengths, great burgers, with new varieties using ingredients already in our pantry. Test results have been favorable and suggest the transactions from these tests are highly incremental. Over half of our domestic locations have signed up to participate in the three-phase rollout. The first group launched earlier this month, while the remaining two groups are slated to launch by the end of the first quarter. The second virtual concept called the Meltdown features handcrafted melts with fresh ingredients. This brand is able to utilize approximately 70% of items currently in our pantry. Our innovative culinary team has crafted new craveable products, such as the Gideon Melt featuring brisket burnt ends with sharp white cheddar, creamy barbecue sauce, and pickles on grilled artisan bread. Or the Talking Turkey Melt made of turkey, bacon, tomatoes, provolone cheese, and a creamy herb spread. Test results have been similarly encouraging for the meltdown, and over half of our domestic locations are expected to launch starting in the second quarter. These brands provide opportunities at dinner and late night to leverage underutilized labor and kitchen space. In fact, over 70% of transactions from the burger bin occur during the dinner and late night day parts. In closing, I sincerely want to thank our leadership team and franchise partners for their continued engagement, steadfast resolve, and unwavering commitment to this brand. I am very much looking forward to this new year and working collectively with our teams to reassure our guests, provide compelling value options, and deliver the comfort and convenience our guests seek, whether it be our dining rooms, on our patios, or in the comfort of their homes. With that, I'll turn the call over to Mark Wolfinger, Phoenix President, to discuss more about our franchise and development. Thank you, John. I want to echo your comments about our innovative and dedicated teams, and I also look forward to what this brand can accomplish in 2021 and beyond. Currently, 98% of our domestic system is open, including over 1,000 restaurants operating with open dining rooms. This is an increase of almost 25% from the end of December. However, we still only have approximately one-third of our domestic franchise restaurants operating 24 hours a day, seven days a week. While we cannot control state and local restrictions and the related impact on our sales trends, we have been working diligently with our franchisees to analyze the incremental sales and profitability potential from expanding their operating hours. Turning to development. We are very encouraged that even in the midst of a global pandemic, our franchisees opened 20 restaurants during the year, including four restaurants during the fourth quarter. This included eight international openings in four different countries, which brought our total number of restaurants to 1,650. Additionally, our system completed 22 remodels during the year, despite remodels being deferred until 2022. These openings and remodels underscore the confidence and future opportunities our franchisees see within the brand. However, the pandemic has also prompted higher closures than our historical run rate. During the fourth quarter, 17 franchise restaurants closed along with one company restaurant, bringing the year-to-date system total to 73 closures. Six of these closures during the year were due to lease expirations. The remaining 67 closures are related to franchise restaurants with averaging volumes of approximately $1 million prior to COVID-19, a level which is well below the 2019 franchise averaging volume of $1.7 million. We believe the pandemic accelerated these closings that we had otherwise anticipated over the next few years. However, this acceleration should ultimately enhance the overall health of the franchise system, allowing multi-unit franchisees to focus on their more viable restaurants. As a reminder, the average restaurant requires approximately 70% of its 2019 sales to cover both fixed and variable cost items. Although December was challenging for restaurants impacted by additional restrictions, we are pleased to say that on average, our restaurants continue to see sequential improvement in profitability with each successive quarter. This momentum coupled with the initial round of PPP funding was very helpful with almost all of our domestic franchise restaurants receiving stimulus support. We are currently supporting our franchisees in their efforts to secure another round of PPP funding and we believe they will be successful again. While we anticipate additional closures, we believe we have weathered the worst of the pandemic and are on an upward trajectory toward historical recovery. We look forward to returning to net restaurant growth in the future and are confident that we will do so, backed by our existing domestic and international development commitments, including over 75 commitments from our recently completed re-franchising strategy. At the same time, we believe our overbuilt industry will suffer an unfortunate and meaningful rationalization of seats through the pandemic, largely at the expense of small independent full-service operators. While we don't celebrate this prediction, we believe brands that survive will have an opportunity to gain market share. We have a proven record of converting existing spaces into Denny's locations. In fact, over 60% of our openings since 2011 have been conversions. These less capital-intensive opportunities provide enhanced ROIs for franchisees, and our experienced development team is already assessing the landscape for future Denny's locations. I will now turn the call to Robert Grostick, Denny's Chief Financial Officer, to discuss the quarterly performance.