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spk03: 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.
spk09: 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.
spk04: 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.
spk06: Thank you, Kelly, and good afternoon, everyone. Despite a persistent, challenging environment, we were pleased to deliver third-quarter results in line with or better than the guidance we provided on our previous earnings call. I'm excited about the way in which our leadership team is coming together, the launch of our new value platform that is resonating with Denny's guests, the completion of our acquisition of Kiki's, and our path toward extended operating hours, all culminating in accelerated adjusted EBITDA expectations for our fourth quarter. I will now provide a development update and a review of our third quarter results before sharing more on our guidance in a moment. Starting with development highlights, Denny's franchisees completed 16 Heritage 2.0 remodels and we completed three company remodels during the quarter. The elongated hyperinflationary environment weighed on lower volume restaurants, resulting in a higher than average number of franchise closures during the quarter. However, confidence in the Denny's model remained strong as Denny's franchisees opened seven new restaurants during the quarter, including one international location in Canada. Turning to Kiki's development, I am pleased to report that a Kiki's franchisee opened one location in the last month of the quarter. Year-to-date through September, the brand has opened two new franchise units, including one opening prior to the acquisition. In addition, a third new franchise unit was opened in the last week of fiscal October. I am also excited to announce that we have finalized the Kiki's franchise agreement document laying the foundation to officially expand our business into the fast-growing daytime eatery segment. Moving to our third quarter results, as Kelly mentioned, our Denny's domestic system-wide same-store sales growth in Q3 was 1.5%. This growth came from an approximately 9% increase in guest check average, which was comprised of approximately 2% carryover pricing from the prior year, over 5% pricing taken in the current year, and approximately 2% of product mixed benefits. As highlighted in our Q3 earnings investor presentation, domestic average weekly sales for Q3 were approximately $35,000 compared to $34,000 in the pre-pandemic third quarter of 2019. This represents a 4.5% increase in average weekly sales compared to 2019, whereas same store sales only increased 1.7% relative to 2019. The variance between these two metrics demonstrates that while our system portfolio is smaller than it was three years ago, it is also generating higher average weekly sales as lower volume restaurants exit the system. Franchise and license revenue was $65.2 million compared to $57.3 million in the prior year quarter. This increase was primarily driven by $5.6 million related to the kitchen modernization rollout and $1.1 million of Kiki's Breakfast Cafe franchise revenue in the quarter. The revenue recorded related to the sale of kitchen equipment has an equal and offsetting expense recorded in other direct costs. Franchise operating margin was $30.7 million, or 47% of franchise and license revenue, compared to $29.9 million, or 52.1% in the prior year quarter. I would like to note that while franchise margin dollars were not impacted by the kitchen equipment rollout, the franchise margin rate was reduced by approximately 440 basis points through this accounting requirement. more information can be found in our 10q however we expect this margin rate impact to persist throughout the remaining rollout of kitchen equipment while still having no impact to franchise margin dollars company restaurant sales of 52.2 million dollars were up 12.4 percent this increase is primarily due to a strong same store sales growth of 7.1 percent and 2.7 million dollars of tiki's breakfast cafe company restaurant sales in the current quarter. Company restaurant operating margin was $3.8 million, or 7.2%, compared to $7.9 million, or 17.0%, in the prior year quarter. This margin change was primarily due to commodity and labor inflation and a $1.6 million in legal settlement costs, partially offset by the improvement in sales performance at company restaurants. The legal settlement cost impacted company margin rate by approximately 300 basis points. While commodity inflation was approximately 18% during the quarter, we saw improvement throughout with September at approximately 16%. Additionally, labor inflation continues to moderate as we experience 7% inflation during the quarter. We continue to monitor this inflationary environment in collaboration with our franchisees while remaining thoughtful with regards to pricing strategies and decisions. Therefore, we did take approximately 1% of additional pricing with the launch of our fall core menu last week, and we expect fourth quarter total pricing to be similar to the third quarter. These results collectively contributed to adjusted EBITDA of $19.2 million. The provision for income taxes was $5.5 million reflecting an effective income tax rate of 24.3%. Adjusted net income per share was 12 cents, and we generated adjusted free cash flow of $8.7 million. Our quarter end total debt to adjusted EBITDA leverage ratio was 3.3 times, and we had approximately $278 million of total debt outstanding, including $266.5 million borrowed under our credit facility. As a reminder, we adjusted our target leverage range to be between 2.5 times and 3.5 times of our adjusted EBITDA with the closing of the Kiki's acquisition. During the quarter, we allocated $7.9 million to share our purchases, supporting our commitment to continue returning capital to our shareholders. On a year-to-date basis, we have allocated $57 million to repurchase approximately 5.5 million shares. As a result, at the end of the quarter, we had approximately $160 million remaining under our existing repurchase authorization. Let me now take a few minutes to expand on the business outlook section of our earnings release, where we are providing the following estimates for our fiscal fourth quarter ending December 28, 2022. We anticipate Denny's fourth quarter domestic system-wide same-store sales to be between 1% and 3% compared to 2021, taking Denny's seasonal patterns into account. Our expectations for consolidated total general and administrative expenses are between $17 and $18 million. including approximately $2 million related to share-based compensation expense, which does not impact adjusted EBITDA. As I mentioned, we are seeing early signs that commodities are starting to moderate, and we believe we'll continue to see wage inflation moderate. As Kelly detailed in her comments, our focus on helping our franchisees extend their operating hours with improved staffing levels and leverage value messaging to drive transactions has yielded our guides for fourth quarter consolidated adjusted EBITDA of between $21 and $23 million. In closing, I want to thank our extraordinary group of franchisees and our dedicated restaurant teams for their consistent focus on serving our guests. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A portion of our call.
spk03: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Michael Tamis with Oppenheimer.
spk01: Hi, thanks. Good afternoon. Kelly, in the press release... Hey, Michael. Hey, guys. How are you? Kelly, in the press release, you mentioned that the all-day diner deals was driving new customer trials. Can you expand on that a little bit, maybe loop in what you're seeing overall with consumer behavior? Are those new customers that you're attracting to the Denny's brand that you were referring to? Is it greater frequency among your existing customer base that's trying that new value menu? Thanks.
spk04: Yeah, thank you, Michael. Great question. Yeah, I think, look, we're pleased with, and I think we think it's probably a little bit of both. It's probably increased frequency. We've probably brought a few more guests in. We know that that value offer is compelling for us given the change in preference. We saw that change, you know, pretty quickly, and we're pleased with that. As we have also mentioned, we were able to balance guest check average by merchandising in restaurant, a little higher menu, higher margin play. So we're pretty happy with it given the price-conscious consumer that we know still exists, and we feel like it's definitely resonating with them.
spk01: Thanks for that. And then, you know, you mentioned, you know, a more focused strategy to get the system open for late night, and I think you mentioned something about a small financial incentive and then moving on to more accountability after that. So can you walk through maybe, like, what does that financial incentive look like? How is it different from the last time you tried this? How long do you plan to leave it in place? And when you're talking about accountability, what are the ramifications if somebody doesn't get open for late night, or what are the overall impacts that you expect from this strategy?
spk04: Sure, sure. Yeah, fair question.
spk01: And you know what?
spk04: Just because there's a historical bent to that question, I'm going to ask Robert to kind of emphasize what we're doing differently than last time and why we feel strongly about our progress here.
spk06: Hey, Michael. Yeah, that is a really good question. You're referring to late, I think it was Q4 2020 where we tried that incentive. The reality is we were really bullish on it back then. But the timing was not right. If you recall what was happening back then is states weren't even open. California didn't even get open fully to on-prem business until really April of 2021. So the timing of that, while it was not ill-concepted, the timing wasn't ideal to really get there. The reality is if you fast-forward two years and you get to the point that everybody's open, Thankfully, in a way, COVID has really left the common everyday vernacular in large part to really transition to this hyperinflation. So all of the limitations that we were experiencing two years ago really are not in place right now. So we have put a financial incentive in place. it really looks to accelerate. So the incentive is tiered. It gives a little bit more if you get open sooner, a little bit less if you wait a little bit longer. Really all culminating in early 2023 before we turn and pivot to the accountability. Within our brand standards and franchise agreements, it is a requirement to be open 24-7 except for the cases that Kelly described in her comments, which were security or local ordinances or in a handful of cases where it may not make sense to be 24-7 and we've offered similar things such as a 24-3 or 24-4. So we will push on that and really kind of really enact the brand standards that we have in place to drive that forward. So a little bit of a looking, if you use the analogy, we're in the carrot timeframe of our incentive with a potential stick or accountability to use a better word in 2023.
spk04: And the only thing I'd love to add to that is really just the shift in the conversations as of late. I noted in my script that it's really important because what we're seeing is just obviously the evidence is there and the mounting evidence, it continues to be there in terms of the demand. We've highlighted that over and over again. But the conversation truly has shifted given the evidence that we've done it at company restaurants, some best practices we've already shared with our virtual hiring events and our recent campaigns. So the more we've demonstrated that, the more the conversations have shifted to, okay, how do we get there? And, in fact, we also segmented. Our operators have been amazing. They have segmented the whole population of restaurants and really captured them into kind of ways to help triage and then just really understanding the possibilities that exist. And we have very few now that we think will continue to struggle. We really see positive response overall.
spk01: Perfect. Thanks so much.
spk07: Thank you.
spk03: Our next question comes from Nick Setian with Whitbush Securities. Please go ahead.
spk02: Thank you. Just given the inflation commentary, you know, sounds like 7% potentially lower labor inflation in Q4. And given the level of pricing, can we see some labor leverage year over year in Q4?
spk07: So, hey, Nick, this is Robert.
spk06: So if you kind of look at the margins, I still think that we are working towards getting back to that kind of that mid-teens that we've talked about, but it'll be a ramp. I think the reality is when you look at our guidance, I think the more important piece to take away from that is that $21 to $23 million represents the highest level of EBITDA that we've seen at any point this year. So despite these continuing pressures, we do believe they'll moderate, right? So you saw the 16. We've referenced in the commentary that those will come down. We have the seven. If you look at the cadence of that, I believe it was 10-8-7, Q1, Q2, Q3, so you can continue to trend that down. So we believe that the margins will be higher than what we delivered in Q2, Q3. If you see the 7% pricing, it's not unreasonable to suggest that you could leverage the labor line with 7% pricing against 7% inflation. But the reality is if you go back and focus on that EBITDA guidance, again, midpoint at 22 is materially higher than at any point this year. And, again, assumes continuing moderation with commodities also.
spk02: And, you know, in the past you've given sort of the summary of all the one-time hits that we've seen, Tuibada in 22. Can you maybe just go over that again so we can kind of, you know, have a pretty good starting point from 22 and how we should think about 2023?
spk06: Yeah, Nick, you and I have talked about this frequently. So there's some pretty big pieces when you look at, 22, the impacts of 22, and where we will be in 2023. So let's talk about several of those. So the first one, it impacted it. They were in my comments. So kind of a recurring theme from 22 to 23 with the legal. Those were related, it was related, a series of related cases. So we still believe, while it occurred in both quarters, it really is more of that non-recurring type of event. That's about $4 million for that legal piece. The other piece that you want to look at is the cash stock-based compensation, right? Because that is a component in how we define adjusted EBITDA. And we have two plans that actually vested in the current year, right? Because the 2020 plan was a two-year plan one time only from COVID. All of our plans prior to that and post that are three-year plans. But because it was a two-year plan, you had two of those that matured in the current year. Thus, we were overstated there by $2 to $3 million with regard to that. You have the 24-7, we will be successful. You've heard Kelly and I just talk about that. We will make progress towards that there's likely five to 6% more with regard to same store sales that we will capture each points about a million dollars that you're going to pick up there. So then the final piece that I will mention is that we will have Kiki on board for the full year so that we will likely invest because we really want to grow that thing pretty quickly. So there likely will be an investment in there, but it will go beyond what it is adding in the current year. Because right now, if you've met with July 4th, July 20th was the actual date, you had some one-time costs. Think of that between probably one and two million. It will be beyond that, but we will likely be investing into that in 2023. So those are four big pieces that you can build back from 22 to 23. All of those were contemplated in the guidance, that 21 to 23 that is, again, materially beyond any other quarter this year.
spk02: Great. Thank you very much. Thanks, Nick. Our next question comes from Todd Brooks with the Benchmark Company. Please go ahead.
spk10: Hey, thanks for taking my questions. Appreciate it. Robert, you pointed to the 21 to 23 million EBITDA guidance for the fourth quarter and kind of using that as a lever for maybe the pace that the company-owned restaurant-level margin recovery should start to unfold. How about the franchise operating margin? Do you expect it to kind of maintain in this 47% range in the fourth quarter? And I know it's impacted substantially by the kitchen revitalization efforts.
spk06: Yeah, you're spot on, Todd. That really, that accounting machination that we are dealing with there has really impacted that. And we are trying to be ultra clear with regard to the fact that it will persist until the rollout is done. We believe the rollout of the kitchen equipment will, it goes through the end of the year. We think we should be materially done by the end of the year. So it will impact Q4, there's no doubt about it. It will impact that rate, but that rate will bounce back once that flushes through, and that'll come back to us in 2023, once the accounting machinations related to this subside. Because we'll be done, quote unquote, air quotes in the air, selling equipment to franchisees. It was just a way, if you think about it, a little bit of history there, a little story. It wasn't that long ago that supply chains and just getting kitchen equipment, and still is in large aspects, was a very difficult thing to do. So we bought all of the kitchen equipment so we would have it for all of our units, put this on our balance sheet, thus the requirement to actually call it a sale of equipment. And again, it is 400 to 500 basis points that will impact Q3, Q4 from a rate perspective, but not from a dollar perspective.
spk10: Okay, great. Just to follow up on that, I guess, Robert, we've made progress, hoping to have it done by the end of Q4. When should we start seeing at the restaurant level some of the menu initiatives from having the new equipment footprint in place as far as new items? I know you thought that there'd be a benefit and kind of throughput at breakfast, but also some menu enhancement in the later in the day parts. When should Are we seeing that at the restaurant? Any early reads on that? Or when should we expect to be able to find that? Thanks.
spk06: Yeah, Todd. So that's the exciting part, right? And I get to – I have the pleasure, the benefit. I sit with Kelly and many on the leadership team and get to test out all of these amazing products. I wish I could share them in the moment with you because I would get your mouth watering with regard to that. And you will likely see these, probably late Q1 into the early part of Q2, that you'll really see some of the major trends. Now, there are major product introductions with regard to the ozone. We are using them right now as they're rolled out. I routinely, and I don't want to sound like a broken record, but ovens cook bacon better. We have the holding equipment for that. It helps the efficiencies. It relieves grill space and helps the efficiency of the kitchen. So we are using the restaurants that have them. I don't want to say that we're not utilizing, but we're probably six months away at this point from seeing some material product introductions.
spk07: Okay, great. Thanks, Robert. Thanks, Todd.
spk03: Our next question comes from Eric Gonzalez with KeyBank Capital Markets. Please go ahead.
spk05: Hey, thanks, and good evening. Real quick, just my first question is on the company scenes for sales versus the franchise scenes for sales. Is this really about staffing and Is there something we should know about comparisons that maybe aren't a one-year trend or maybe this is a window into the future should you get the staffing better in the franchise stores?
spk04: Well, I love that. Thank you for the question, Eric. I love that because we actually do think it's that. We think it's a few things, right? It's a few things going the right direction based on primarily having the right people in the restaurants. So staffing, our company operators are doing a fantastic job with that. Again, it's proving evidence. It's playing out. And we are also seeing really strong guest sentiment scores. So we're seeing we track that. We've launched through the system, so our franchisees also are measuring it. But we see strength even above and beyond other restaurants just based on being staffed, being open 24-7, and then having a better guest experience. We know all of that is the formula to just growing sales and traffic in the future.
spk05: Got it. And then Maybe if I could just ask about interest rates for a second. You know, a lot of your revolvers is floating off of LIBOR, so can you maybe guide us on interest rates for either the fourth quarter or into next year, and then maybe touch on some of the indirect impacts, such as new unit returns for your franchisees, their ability to build new stores or remodel existing stores just faced with some higher borrowing costs?
spk06: Yeah, thanks for that question, Eric. So here is one of the benefits that we have sitting within our capital structure. We are 100% swapped against that revolver. So the interest rates moving right now for us, right, from a corporate perspective really have no meaningful impact with regard to interest expense or cash interest. And it's right around, fully swapped, slightly under 5%, I believe. So for all intents and purposes, we're fixed at right about 5% for us. So that's a benefit that we have sitting within our balance sheet. I'll tell you with regard to our franchisees and what that might mean, there's two things I think you'll want to take away from the next two comments that I'm about ready to make. I was on a call last week with a franchisee and it was kind of a mid-tier to upper end in terms of unit count. Make no mistake, they were also one of our better operators, but we were having a conversation with this individual and they were looking for opportunities to grow. They referenced their banks. They said that they can get money. They don't have any problem getting money. And they were looking to grow. So that's the first point, right? While there are franchisees that have reworked their capital structures over COVID-19, We have many that are still in a position to grow. That's the first point that you should take away. The second point, and I think it is equally compelling, and we referenced the closures earlier in my script, but the reality is our openings in fiscal 2022, I think it's 16 year to date, and this isn't an official guidance metric. I'm going to be a little squishy with regard to the phraseology here, but our number of openings in 2022 will likely approach what we had opened in 2018 and 2019. So that's kind of that 2% level of opening. So yeah, there is that interest rate risk in the environment. But despite that, we have franchisees that have the right capital structure with the right bank support that are willing to grow. So I think that's Two points you need to take away. We still have growing franchisees, and it's evidenced by the number of units that are approaching pre-pandemic levels of openings, which is that 2% level.
spk05: Just a quick follow-up on the first comment about the swap. Are you swapped on the incremental interest that you took out or the incremental borrowings from the Kiki's transaction?
spk06: Oh, yeah, absolutely, Eric. If you actually... look at our 10Q or go back to the 10K for even further. We are actually over swapped right now. We are functionally swapped against that entire facility, even though we are only borrowed against 266.5, I think is what I quoted. So it's sitting, if you look at the balance sheet, it's sitting as an asset on our balance sheet right now.
spk07: Got it.
spk05: All right.
spk07: That's really helpful. Thank you so much. Yes. Thank you.
spk03: Next question comes from Jake Bartlett with Truist Securities. Your line is open.
spk08: Great. Thanks for taking the questions. I had a couple follow-ups from issues that have been addressed or questions that have been answered. My first is on the 24-7 initiative, the incentive as well as the – it sounds like a little bit carrot with enforcement. But should we expect a step function up in the number of stores here? you know, offering 24-7. Is that something that you have kind of visibility into and we should see it, you know, at some point and when would be helpful if that's the case? We should see kind of a real discernible step up in number of stores offering it.
spk04: Yeah, I think, thank you for that question, Jake. I appreciate that. And yes, we absolutely, so since we started just this kind of new messaging thing launched at the convention, conversations after, segmenting the entire population, having one-on-one discussions with every franchisee, we know it's kind of doubled the number of units that we're seeing get back open, and the monthly rate of adoption is definitely moving in the right direction. So we expect to almost triple the numbers we were seeing before this launch, and it's really just start to see that progress even further. When we see it, we'll probably talk about it again. This is something that we're pretty relentless in our focus on this, as you can tell, I hope, and we expect to continue to see good conversations happening. I mentioned this might be important, I guess, to give more context. These virtual hiring events that we're doing, we're just seeing incredible adoption of those hiring events and the partnership there, the best practices that we are sharing Again, they're taking that to heart. They're using those resources and tools. They're doing it on their own, and it's just showing positive results. So we're truly encouraged by what we're seeing right now.
spk08: Great. And my other question was on your consumer and what you're seeing from that consumer. You've obviously, you're leaning in on value, and it seems to be having a positive effect on traffic. But are you seeing... your lower income consumer, I think, you know, being generally pressured, but are they staying with you because of the value is one question. Are you getting trade down? Trying to kind of just understand how, I guess, how you might perform, you know, if the macro gets a little more pressured here.
spk06: Yeah, so that's an excellent question, Jake, with regard to that. I think there is evidence, right? So we listen frequently. to a lot of different sources. We scrub and pay attention. There is what we are hearing some evidence of trade down from other higher priced brands into categories such as ours. So that likely in the eventuality that this turns and it becomes more impactful to the economy, then we do have, there is some evidence that they'll trade down. We were really, really excited, therefore, to launch that all-day diner menu. And it is resonating. And thankfully, as Kelly, I go back to this point, we have not really seen any compromise of our GCA. That barbell strategy with the correct POP on the tables coupled with the messaging outside of the unit has maintained GCA while driving those traffic benefits. And we plan to continue to lean into this thing. It's part of our heritage. And so we will continue to leverage this thing into Q4 and throughout next year. 2468 had a long life to it, and this will also. So we're really excited that we were able to get back to this this quickly and do believe it is a tool that we will definitely use in the eventuality that the economy sours at all.
spk08: Great.
spk06: And then my last question is on units.
spk08: I think you just mentioned that you expect maybe you could open around 30 in 22, if I heard that correctly. So I think that would be, and I assume maybe that's including the Kiki's franchise stores have opened, but any clarity there? Because it looks like a pretty heavy lift for the fourth quarter. Also, there was a pretty big spike in closures in the third quarter. So I guess in this environment, uncertain environment, especially with uncertainty about maybe labor costs. Should we expect closures to tick up here into 23 before they come back down?
spk06: You know, Jake, let me go back to the first part of your question because I wanted to suggest that we were approaching 30 without specifically guiding. I think it'll trend that direction and get as close as we've been since 2018-2019 without officially guiding on that metric. So, yes, you kind of heard me correct with what I was implying there. With regard to closures, I would, obviously, I don't want to sugarcoat it. The inflationary environment did impact some of our lower volume units. And closures did tick up. That 25 in the quarter was a pretty big number given the past quarters. And to the extent that I think what you need to pay attention to is the environment, right? With the moderation in commodities, with the moderation in inflation, it should help focus that. We have not had a fundamental change to our business model just the impacts to the lower end of our system are feeling the effects of this inflation. So could it run above average into Q4, into 23? Yes, but ultimately it will moderate and we will get back on track with opening 2 plus percent and hopefully closing less than 2 percent and getting to this net positive Denny's growth of flat to 1 percent. And then really kind of, and that's a healthier, These closures are at the lower end. It goes to the point that we have made specifically in my script that the A average unit volumes are now higher, right? It's partly because the lower end, the lower volume end is being called and strengthening the balance of the system. And then what we will do on top of that, right, so that's just the Demi side of this. We will accelerate Kiki's growth. They were on a five per year. If you look at the last 15 years, five per year. They hadn't closed any. We will accelerate that in 23 and beyond as we put the right teams in place to really get that thing going. So really kind of excited. Given everything that's transpiring, really kind of excited about how we're positioned right now.
spk08: Great. Thanks a lot. I appreciate it. Thanks, Jake.
spk03: Once again, if you would like to ask a question, please signal by pressing star 1. We'll take our next question from Todd Brooks with the Benchmark Company.
spk10: Hey, thanks for the quick follow-up. Kelly, I'm hoping you can help me maybe unravel some thinking behind the return to 24-7. So I think in the comments, 5% of the units were never required to be 24-7, and after evaluation, maybe another 5% won't be required. So maybe 90% of the franchise-based are about, let's say, 1,400 units. I think you said right now we sit at 870 units, so we're a little north of 60% reopened in 24-7. And I think you mentioned that the monthly opening rate has doubled since the convention. So were we at 2% per month going into the convention? Now we're reopening it kind of a 4% a month rate. Just I'm trying to figure out it kind of. Yeah.
spk07: Yeah.
spk10: Yeah. If you, if you pencil this out, it seems like we get back to 24, seven full operation, mid 23.
spk04: So I think you're correct. I think your math is correct in terms of what we were seeing and what we are seeing now. And I think the other thing to remember is, yes, we now are looking at those viable restaurants, right? So I think we're being smart, diligent, looking at the portfolio pre-pandemic and now maybe have that additional 5%. So, yes, 10% potentially. And we're doing that because we want to do the right thing. as stewards of the brand to make sure they're profitable, to make sure it really does make sense, to make sure traffic hasn't moved out of a trade area, and just overall looking at that. So that 10% is correct. I think your percentage, your numbers monthly are correct. We also, though, have – this is a sliding scale with greater incentives on the front end. And we've yet really to see a full – We're not even at a full month.
spk00: No, we haven't tripped the first trigger.
spk04: We haven't even tripped the first trigger on that the modest incentives are a sliding scale greater on the front end. So, yeah, I think your math implies that we could be there by then. And I think that's what we're shooting for. And obviously, we're shooting to be really strong and see who's taking advantage of it now. And a lot are talking to us about taking advantage of it early.
spk10: That's great. And just success there implies kind of a Denny's specific 4% same-store sales lift to 23% if you do get there by the middle of the year then. Yeah, I think you're thinking about the math right there, Todd.
spk09: Yeah.
spk10: Okay, perfect. Thanks for clarifying all that for me.
spk07: Absolutely. Thank you.
spk03: That concludes today's question and answer session. At this time, I will turn the call back to Curt Nichols.
spk09: Thank you, Rachel. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in February when we will discuss our fourth quarter 2022 results. Thank you all and have a great evening.
spk03: This concludes today's call. Thank you for your participation.
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