Denny's Corporation

Good day and welcome to the Denny's Corporation Third Quarter 2022 Earnings Call. 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.

Thank you, Rachel, and good afternoon, everyone. We appreciate you joining us for Denny's Third Quarter 2022 Earnings Conference Call. With me today for management are Kelly Vallee, Denny's Chief Executive Officer, and Robert Verosten, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.denny's.com to find our third quarter earnings press release, along with a 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. Kelly will begin today's call with a business update. Then Robert will provide the development update and recap of our third quarter financial results before commenting on 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 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 identities 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 29, 2021, and in any subsequent Forms 8-K and quarterly report on Form 10-Q. With that, I will now turn the call over to Kelly DeLay, Denny's Chief Executive Officer.

Thank you, Kurt, and good afternoon, everyone. Before I discuss our most recent quarter, I'd like to first take a brief moment and touch on recent organizational changes we've made in our Denny's Franchisee Association Convention, including our recent messaging to the franchise community. During the quarter, we appointed John Dillon as President of the Denny's brand, and welcomed David Schmidt as president of Kiki's Breakfast Cafe. John has been a dedicated leader in the Denny's system for 15 years and most recently served as our chief brand officer. Prior to that, John spent many years in marketing and leadership roles at Yum! Brands. David brings 30 years of proven restaurant experience to our newly acquired Kiki's brand, most recently serving as chief financial officer of Red Lobster and at Bloomin' Brands as president of Bonefish Grill. Both have distinguished track records within the restaurant industry and have demonstrated unwavering commitments to delivering exceptional team and guest experiences. These leadership appointments enable John and David to focus their teams on delivering and executing brand-specific initiatives to deliver compelling products and innovation, unique marketing messages, improved execution and guest experiences, and unique unit expansion with support from our shared services teams. Importantly, we'll maintain our ongoing collaboration and best practices with our franchise partners in both brands to ensure they're set up for success, putting our model franchisor experience to work. I'm beyond excited for what the future holds for our respective brands through their leadership. I also recently had the pleasure of attending my first Denny's Franchisee Association convention last month, which included the opportunity to meet many of our franchisees and operators face-to-face for the first time. While on stage, I shared my belief that we are already benefiting from a solid foundation of strategies centered around developing world-class people capabilities, achieving operational excellence, driving profitable traffic, growing our global footprint, and optimizing our business model for margin growth. I also shared that when I joined the organization and met members of the Denny's community, I asked two important questions. The first question was, what should I know? The answers highlighted the great and strong relationships and partnerships franchisor to franchisee, but they also highlighted the persistent staffing challenges and supply chain and commodity headwinds, which both just led to the general theme of current business constraints that we all know exist. Second question I asked was, what do you expect? The answers included providing focus, traffic and sales driving initiatives, support for staffing, and the right strategies for today and tomorrow. I took that feedback to heart, and as a team, we've developed an appropriate and timely game plan to help us continue to strengthen our business in the short term while continuing to invest in our long-term strategies to revitalize and update the brand. The investments we will continue to make in improving our food, updating our restaurants with Heritage 2.0, kitchen modernization, and technology transformation are still relevant and urgent for us, but we also needed a short-term, bold game plan to solve for today's environment. As a result, at the convention, we launched what we're calling our Big Three, which is a maniacal focus on staffing, returning to 24-7 as a brand, and driving profitable traffic with our new value platform. I'll break each of these down for you a bit next to give color to these programs and share the progress to date. First, though staffing and turnover still remain a challenge, we've seen significant progress at Denny's and in the industry, which gives us promise and reason to be optimistic. Our staffing levels at company restaurants are now comparable to pre-pandemic levels, and we're seeing strong results from recent hires as well as reductions in turnover. This is a testament to our strong company operations team, which is providing evidence for what's possible and for what our franchisees can also achieve. We also continue to share best practices around recruiting and onboarding and providing access to our world-class training programs. In addition, we recently established a platform for virtual hiring events That's also driving encouraging participation. Furthermore, fostering an inclusive cared-for and cared-about culture is critical to long-term retention, and Denny's continues to demonstrate its strong foundation here as well. In fact, our give-back culture was recently on full display when we deployed our Denny's Mobile Relief Diner to Florida after Hurricane Ian. Our teams and our executives were on hand to show support, engage the community, and as a result served over 12,000 hot free meals to those in need. The stories, images, and impacts of this were amazing and I couldn't be more proud of the way our company showed up. We also just launched into our 11th year supporting No Kid Hungry, where our guests, franchisees, and company restaurants have collectively donated over $11 million and counting to this great cause. Finally, I'm also thrilled that for the second year in a row, Denny's has been recognized as one of the top 100 most loved workplaces for 2022 by Newsweek and the Best Practice Institute. In fact, We were again the only family dining brand of scale in the top 100. Moving to our second area of immediate focus, I'll talk a bit about our latest progress on returning to 24-7. As we emphasized on our last earnings call, we are a 24-hour brand, and we have a significant tailwind opportunity as demand for the late-night dining occasion is ever-present. That tailwind continues with recent industry data indicating that approximately 30% to 40% of full-service outlets that were open late night prior to pandemic have not yet returned to pre-pandemic operating hours. Another recent Data Essentials study confirmed that full-service restaurants are open almost seven full hours less than they were before the pandemic. We know guests want to return to normal behavior and have options for dining out late night, and that's good news for us. In addition, Denny's 24-7 restaurants continue to consistently outperform the limited hour restaurants by mid-teens, digits, sales comps relative to 2019. Finally, restaurants operating 24-7 outperformed the BBI Family Dining Index in the third quarter by over 400 basis points relative to 2019. All of this led to great discussions and collaboration with our franchisees, which informed the development of our plan to support our commitment to getting to 24-7. The results in what we launched is a modest financial incentive to motivate franchisees to accelerate their path to be followed by an enhanced measure of accountability. This is gaining momentum every day, and our progress is evident and material. Furthermore, approximately 5% of our domestic system was not 24-7 prior to the pandemic for various reasons, and we've agreed to review late-night profitability on a case-by-case basis to determine if there are additional restaurants that may not return to 24-7 operations fully. We believe through this process we could have an additional 5% that ultimately will not return to 24-7 operations, but we still believe we'll be able to capitalize on this strength of the Denny's brand. As of today, we have nearly 870 domestic restaurants open 24-7, but really we're more encouraged by the conversations with franchisees around getting there, returning to this historical position as America's 24-hour diner. We look forward to providing an update on our next call to this. Turning now to our third area of focus, driving profitable sales and traffic growth through our value platform. Our current barbell strategy balances our LTO messaging with profitable traffic driving value products. And to remain top of mind for our consumers facing these inflationary pressures, we doubled down on our commitment to value with the launch of our all-day diner deals in early September. This new value menu features 10 delicious meal options, perfect to enjoy anytime, day or night, with wallet-friendly prices ranging from $5.99 to $10.59. Total value preference, including the new value menu and SuperSlam, was 14% for the quarter, an improvement of 4 percentage points from the prior quarter. We were also encouraged by a positive change in traffic trends following the launch of this new menu, and we also maintained a healthy guest-checked average as in-store merchandising provided upsell opportunities. We've always been known for our strong value positioning, and we're excited about this new value platform that we know we can continue to massage and leverage as guests look for compelling value offerings. Now shifting to our third quarter results, Denny's domestic system-wide same-store sales increased 1.5% compared to 2021 and increased 1.7% compared to 2019. The softer guest traffic experienced toward the end of the second quarter extended into July as inflationary pressures continued to weigh on the consumer. However, with the improvement in both consumer confidence and consumer sentiment in August, along with our new compelling value platform and related messaging, we experienced a positive shift in our traffic trends. Off-premise sales also have remained strong at approximately 20% of total sales compared to the pre-pandemic trend of 12%. This far surpasses the family dining benchmark and reflects both our speed to market as the first family dining brand to launch online ordering and the strength of our off-premise technology and infrastructure. Additionally, the performance of our virtual brands has remained very consistent and highly incremental, representing about 3% of domestic average weekly sales. In closing, I'd like to express my gratitude for the warm welcome I've received from so many franchisees, operators, and support teams at both Denny's and Kiki's. The conversations, collaboration, and commitment from our franchisees have been incredibly positive, and I'm especially grateful for their enduring resolve and consistent focus on delivering a positive guest experience every day in the midst of a persistently choppy pandemic recovery. I'm also confident in John and David's leadership and the rest of our exceptionally talented and tenured management team. Working collaboratively with our franchisees, we are poised for a bright future at both Denny's and Kiki's. And with that, I'll turn the call over to Robert Prozastic, our Chief Financial Officer at Denny's.