Denny's Corporation

Good day, everyone, and welcome to the Denny's Corporation First Quarter 2022 Earnings Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Kurt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Thank you, Melinda, and good afternoon, everyone. Thank you for joining us for Denny's First Quarter 2022 Earnings Conference Call. With me today for management are John Miller, Denny's Chief Executive Officer, and Robert Verostik, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.denny's.com to find our first quarter earnings press release along with the reconciliation of any 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. So I will begin today's call with a business update. Robert will then provide a development update and recap of our first quarter financial results before commenting on our guidance. 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 and 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 Denny's 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 29th, 2021 and in any subsequent forms 8K and quarterly reports on form 10Q. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.

John Miller Thank you, Curt. Good afternoon, everyone. The future of our business indeed is very bright. We made two exciting announcements today that I am confident will accelerate our momentum. I will cover each of those in a moment. let me discuss our sales trends, followed by an update on our previously announced transformative investments, which are being skillfully guided by our experienced management team and dedicated franchisees. The spike in Omicron cases weighed on our same-store sales in early January, followed by improving trends in February as case counts declined. We anticipated moderating trends in March as we completed our rollover of both the soft start to 2021 and the third round of fiscal stimulus payments. However, global events in March contributed to additional inflation concerns, driving record high gas prices and additional supply chain disruptions, which ultimately weighed on our consumer sentiment and sales trends in March. Despite these challenges, Denny's delivered system-wide same-store sales of positive 23.3% in Q1 compared to 2021. As April gas prices started retreating from mid-March highs, consumer sentiment began to improve, and we have experienced a corresponding improvement in sales trends in April. We believe the improving labor market has enabled the consumer to exhibit considerable resilience to date in face of broad inflation. And while we continue to offer value products, guests remain willing to pay for the full-service dining experience they have missed over the last two years. And our check growth has helped address the inflationary headwinds, which Robert will cover in more detail in a moment. Approximately half of our same-store sales growth in Q1 came from higher guest check average comprised of approximately 6% carryover pricing, approximately 1.5% of additional effective pricing taken in February, and nearly 4% of product mix benefits, mostly from higher beverage sales with increased dine-in transactions and reduced value product incidents. Off-premise sales remained strong at nearly double 2019 levels, driven by robust third-party channels and our two new virtual brands. And we continue to make steady progress expanding our hours of operation with approximately 51% of our domestic system currently operating 24-7. Approximately 80% of our domestic restaurants were operating at least 18 hours per day at the end of March, which represents an 8 percentage point improvement from the end of the fourth quarter. Both hourly and management turnover at our company restaurants remains consistently below industry benchmarks, and we believe this is largely due to our comprehensive training programs and competitive wages. In fact, On average, when you include tips, our servers at company restaurants make 165% of the full state minimum wage across the states where we operate company restaurants. With 100% of our company restaurants now staffed with a general manager, we believe other levels of staffing and key metrics will continue to improve as we focus on our retention efforts. This allows us to shift our focus to reminding both new and tenured employees how we were voted by Newsweek as one of America's most loved workplaces. We estimate that domestic franchise restaurants operating 24-7 have achieved staffing levels similar to pre-pandemic staffing, and limited-hour franchise restaurants are operating at approximately 80% of the staffing levels they had pre-pandemic. We are encouraged to see applicant flow across the domestic system continue to run higher than our historical average and believe staffing levels will continue to improve and due course. And turning to our other recently announced strategic initiatives, we are in the rollout stage of our new equipment package that will deliver quality improvements to our current breakfast proteins and breads, making bacon crispier, sausage more evenly browned, and allowing for freshly baked bread. Currently, we have installed new kitchen equipment at over 300 locations across the domestic system, and the balance of installations are expected to be completed later this year. And our new cloud-based restaurant technology platform will soon be entering the beta testing phase and is still on schedule to be rolled out to all domestic locations by the end of 2023. Both the kitchen equipment and the technology platforms are expected to enhance the guest experience and drive operational efficiencies, while the former also provides the ability to further upgrade our menu across all day parts. Building on these initiatives, today we announced the exciting addition to the Denny's family as we have entered into an agreement to acquire Kiki's Breakfast Cafe privately held AM Eatery concept consisting of 52 restaurants in Florida, including eight company locations. This is an exciting opportunity to participate in the fast-growing AM Eatery segment through a complementary brand that we believe our experienced team can develop across multiple states with the goal of becoming the AM Eatery franchisor of choice. The current founders have done a great job establishing a brand in a category frequently used by millennials and Gen Z families with kids whose household income levels skew above $75,000. Kiki's entree prices are approximately 20% higher than Denny's, and their locations are in different trade areas, resulting in very low risk of guest cannibalization from Denny's. With strong AUVs and unit-level margins, Kiki's made it through the pandemic without closing a single restaurant. In 2021, the brand delivered same-store sales of positive 18% versus 2019, And same-store sales in 2022 are up approximately 12% year-to-date versus 2021. We are excited to welcome the Kiki's management team to our family, and we look forward to supporting their efforts to accelerate unit growth. Kiki's and Denny's will operate with independent leadership teams, each driving their own strategies, products, marketing, operations, and development initiatives, with both reporting into the chief executive officer. Robert will provide some specific details related to the transaction and brand-specific metrics shortly. So let me now address another piece of the exciting news. We are delighted to announce that Kelly Valade will become our next chief executive officer and president. She has 30 years of restaurant industry experience in multiple executive leadership positions and brings a proven history of developing and executing bold strategies. She is absolutely the right person for the job, with the energy to not only drive our business forward, but to accelerate our growth. Kelly will begin work on June 13th, and I will remain involved through August 3rd to ensure a seamless leadership transition. At the same time, we will be saying goodbye to Mark Wolfinger, who has decided to retire effective June 1st, after faithfully serving Denny's for 17 years as our Chief Financial Officer, Chief Administrative Officer, and most recently as our President. So I join our board, employees, and franchisees in expressing our sincere appreciation for his many contributions and congratulate him on his well-deserved retirement. And as I said earlier and will reiterate again, the future of this organization is indeed bright. We have a steadfast and thoughtful board of directors, a new energetic and experienced CEO and president joining shortly, an exceptionally talented and tenured management team, and a new complementary brand that will accelerate our growth. That is on top of a fantastic group of franchisees ready to invest in Denny's future through development commitments, new kitchen equipment, new restaurant technology platforms, and remodels, which will collectively transform the Denny's guest experience through continued enhancements to our food, service, and atmosphere. And I'm so proud of our teams and franchisees for their commitment and dedication to this brand. And I'm so thankful to be a part of such a dynamic, innovative, and agile organization whose best days are yet to come. With that, I'll turn the call over to Robert Vrostic, Denny's Chief Financial Officer. Robert?