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spk10: Greetings and welcome to the Denny's Corporation fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kurt Nichols, Vice President, Investor Relations and Financial Planning. Thank you, Kurt. You may begin.
spk08: Good afternoon. Thank you for joining us for Denny's fourth quarter 2022 earnings conference call. With me today for management are Kelly Vallade, Denny's chief executive officer, and Robert Verosteck, Denny's executive vice president and chief financial officer. Please refer to our website at investor.denny's.com to find our fourth 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. Kelly will begin today's call with a business update, then Robert will provide a development update and recap of our fourth 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 of Denny's to be materially different from the performance indicated or implied by such statements. Such risk 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 8K and quarterly reports on Form 10Q. With that, I will now turn the call over to Kelly Vallee, Denny's Chief Executive Officer.
spk01: Thank you, Kurt, and good afternoon, everyone. 2022 marked a year of many positive changes in our business, and I'm excited to reflect on that today before turning to this quarter's results. For starters, our Board of Directors oversaw a very thoughtful and significant leadership transition. We thanked both John Miller and Mark Wolfinger for their many years of service and impact, congratulated them on their retirements, and we now benefit from their experience and wisdom as continuing board members. I was thrilled to join as CEO, and I could not be more energized by the opportunity to build upon the great foundation already in place. We also completed the acquisition of Kiki's Breakfast Cafe, which transformed our business into a portfolio company operating two complementary concepts now. To ensure each brand maintains its unique identity and differentiated position in the market, we evolved our organizational structure with the appointments of John Dillon to serve as president of Denny's and David Schmidt to serve as president of Kiki's. Denny's and Kiki's now operate with independent leadership teams, each driving their own strategies, products, marketing, operations, and development initiatives with support from our shared services teams. Importantly, we'll maintain our ongoing collaboration and best practices on all major initiatives with our franchise partners in both brands to ensure we're set up for success. And finally, our seasoned and talented senior leadership team leveraged the perspectives of our franchise partners, operators, and leaders from both brands, along with insightful data about our guests and teams, to refine and refocus our strategic priorities. I'll now spend a moment on each of these. Our first strategic priority is to develop best-in-class people and teams through culture, tools, and systems. I believe a positive, enduring culture characterized by shared values leads to winning teams. A restaurant general manager is clearly the most critical position for any restaurant. We want to ensure we have the best programs in place to attract, retain, and develop these important leaders. In a broad sense, this involves offering transformative experiences and benefits that foster a sense of inclusion, wellness, and belonging. And we've been recognized for our efforts here. Most recently, being recognized by Newsweek as one of America's greatest workplaces for diversity in 2023. We also understand our guests and our employees increasingly expect businesses to deliver quality goods and services while also serving a higher calling. We are a company grounded in strong values at our core, and we're a purpose-driven culture as well. We're proud of the $12.5 million we've donated to No Kid Hungry over the last 12 years, the over $1 million donated to St. Jude Children's Research Hospital since 2020, and the over $1.3 million awarded in scholarships through our Hungry for Education program, including awards to students attending historically black colleges and universities. Giving is clearly a part of our heritage and fuels us every day. Finally, we continue to evaluate, develop, and offer programs to assist our employees' mental and financial health so they can be their best selves at work and at home. Our second strategic priority is to drive profitable traffic through relevant and outstanding guest experiences. Our net sentiment scores have been trending up over the last year, and most recently we experienced a dramatic 600 basis point net sentiment increase just this last month with improvements noted across all major metrics. We're thrilled our franchisees continue to take such great care of our guests and that the guests are giving us credit. To make further gains, we're learning more about our core guests to ensure we provide that outstanding experience they seek every day. In fact, you may be surprised to learn that Denny's is skewing towards younger generations, with Millennials and Gen Z currently representing about 45% of our customer base. Over half of our total guest base is also ethnically diverse, and our breakfast and late-night day parts skew younger and more diverse all the time. So Denny's is a place that is enjoyed by different generations and different backgrounds for a variety of dining occasions across all day parts. We are diverse in every sense, in our guest base, in our supplier network, in our franchise network, and in our workforce. We truly are America's diner for today's America. And that diner positioning has been and will continue to be a unique competitive advantage for us. And Denny's is 70 years young this year and will soon launch an exciting campaign highlighting our diner equity in a way that only we can. With our kitchen modernization initiative also currently nearing completion, we have less than 25 to go. We're at 98%. We'll feature some amazing new craveable products prepared with the new equipment, starting with our upcoming core menu rollout just next month. And while some have noted declines in off-premise, our off-premise business and our virtual brands remain consistently strong at approximately 21% of total sales. We believe this will remain a strength, particularly with our growing mix of younger guests and an overweighting of our transaction from our virtual brands occurring at dinner and late night. Our third strategic priority is to optimize the business model to maximize restaurant margins. Given the persistent, challenging inflationary environment, our teams are focused on identifying margin improvement opportunities, including opportunities to drive profitable traffic growth. As we increasingly focus on our core guests, we will thoughtfully consider ways to reach those guests with key marketing messages, optimize existing pricing strategies, and address key customer pain points. Our fourth strategic priority is to lead with technology and innovation. With kitchen equipment installations functionally complete, We'll begin rolling restaurant technology updates to the system soon, including a new cloud-based POS system. We anticipate this technology deployment will enable an improved overall guest experience, greater operational excellence, anticipated labor efficiencies, and improved payment experience, and serve as a platform for future innovation. Our fifth strategic priority is to grow new restaurants as a franchisor of choice. Based on some recent consumer research, we're taking a close look at our restaurant reimagined and our remodel elements to ensure we are delivering an environment that meets guest expectations for the modern American diner at a compelling return on investment for our franchise partners. Our current Denny's development pipeline remains strong with over 200 global commitments and we believe successful execution against these other strategies will yield greater franchisee interest going forward. We're also excited about the opportunity to support and acceleration in the long-term development opportunity for Kiki's. Turning now to our fourth quarter results, Denny's domestic system-wide same restaurant sales grew 2% in the fourth quarter and 6.3% for full year 2022 compared to 2021. Our 24-7 restaurants continue to outperform the Black Box Intelligence Family Dining Index by approximately 550 basis points during the quarter compared to 2019. We remain focused in the near term on our big three initiatives, staffing, 24-7 operations, and values. The progress we're seeing with staffing and reduced turnover rates at Denny's and across the industry gives us reason to be optimistic going forward. In fact, Denny's rolling 12-month management turnover during the fourth quarter was better than the Family Dining Index by approximately 750 basis points. We continue to support our franchisees with virtual hiring events, and over 1,400 interviews have been conducted through this platform to date. We're also making headway in our return to 24-7 operations. I'm pleased to say the modest incentive we offer to motivate our franchisees to accelerate their path back to 24-7 is indeed working. Currently, approximately 67% of the domestic system is open 24-7, which represents a 14 percentage point improvement since mid-year 2022. This also includes approximately four percentage points, or roughly 12 to 15 restaurants per week, opening at late night in just the last four weeks. Our third area of focus is value. As a reminder, we launched our all-day diner deals platform in the third quarter. We experienced notable improvements in guest sentiment scores around value generally and affordability in particular. Total value mix in the fourth quarter was just over 14%, which was comparable to the mix we saw in the third quarter. We'll continue to evolve this platform, including our upcoming menu refresh next month, reaffirming our everyday value promise for our guests. Our barbell strategy is working as guest check average has remained strong. We believe those looking for a deal at Denny's can find it on our all-day diner deals menu, but most choose our more premium LTO and core menu products. Moving now to an update on Kikis. I'm pleased to report that we have completed technical system integration so far. In doing so, we've uncovered some opportunities for future optimization in areas like technology, supply chain, facility management, and site selection for development opportunities. We look forward to bringing those opportunities to fruition in due course. We anticipate 2023 will be a foundational year at Kikis as we continue to leverage the support of our shared services function, round out a leadership team position for growth, and begin accelerating the development of Kiki's as a franchisor of choice. We remain impressed by the sophistication of the existing 18 Kiki's franchisees and their desire to grow, particularly given the opportunities to expand within Florida. We're also thrilled with the cult-like following this brand enjoys in that state where Kiki's was just voted Florida's best pancake house. We're currently conducting brand ethos work to ensure we appropriately capture the secret sauce that has made Kiki so special as we develop plans to expand into other states. We anticipate the first step out of Florida will be with a small number of company restaurants to demonstrate the brand's potential. With an updated disclosure document in the spring, we'll have the ability to begin signing development agreements in other states for openings that will likely occur in 2024. At the same time, we'll continue to support development within Florida with both Kiki's and Denny's franchisees. In closing, the positive changes we've experienced in 2022, including the acquisition of Kiki's, provide momentum for continued success for many years to come. We have the right leadership structure at Denny's and Kiki's, each supported by our shared services teams. We have focused and refined strategic priorities. We are leveraging an even greater understanding of our evolving customer base and their expectations to better inform our strategic initiatives with a new campaign and new products on the horizon. And finally, we have great franchise partners in both brands who remain steadfast and focused on the future. We're very excited about the opportunities to propel Denny's and Kiki's into 2023 and well beyond. With that, I'll turn our call over to Robert Borostek, Denny's Chief Financial Officer.
spk06: Thank you, Kelly, and good afternoon, everyone. Not only was 2022 a year of positive change for our organization, it was also another year of resiliency during which our dedicated franchisees, operators, and support teams remain focused on serving our guests in a persistently challenging environment. We were therefore pleased to close out the year delivering fourth quarter results in line with or better than the guidance we provided on our previous earnings call. Today, I will provide a development update and review of our fourth quarter results before sharing our guidance for fiscal 2023. Starting with our development highlights, Denny's franchisees continue to grow, opening 12 new restaurants during the quarter, including five international locations. This resulted in 28 Denny's restaurant openings for the full year, consistent with pre-pandemic opening rates. A Kiki's franchisee opened one location during the quarter, resulting in three new Kiki's franchise restaurants for the full year, including one opening prior to the acquisition. However, the persistent inflationary environment has continued to weigh on lower volume restaurants, and we experienced a higher than average number of Denny's franchise closures in the back half of the year. As inflationary headwinds continue to moderate, we anticipate returning to our longer-term historical trend of consistently opening 2% or more of the system annually, while closing 2% or less of the system through normal attrition. Denny's franchisees completed six Heritage 2.0 remodels, and we completed one company remodel during the quarter. This brought the brand total to 49 remodels for the year, including 38 at franchised restaurants. Our successful heritage remodel program has consistently delivered a warm and welcoming environment for our guests and mid-single-digit sales list for our franchise partners. We want to ensure our remodels deliver the same compelling returns we have come to expect while also meeting the expectations for a modern diner among a growing base of younger multicultural guests. Therefore, considering the higher cost of remodels due to inflationary pressures, we are taking an opportunity to make certain we have the most appropriate remodel elements. With this consideration in mind, we plan to execute lower scope restaurant upgrades at targeted restaurants in 2023 before returning to a full remodel cycle in 2024. Moving to our fourth quarter results, as Kelly mentions, Denny's domestic system-wide same restaurant sales grew 2% in the fourth quarter compared to 2021, or 3.3% compared to 2019. Off-premise sales have remained strong at approximately 21% of total sales compared to the pre-pandemic trend of 12%. This 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 remarkably consistent and highly incremental, representing about 3% of domestic average weekly sales. Denny's domestic system-wide same restaurant sales growth came from an approximately 8.5% increase in guest check average, which was comprised of approximately 7.5% pricing and approximately 1% of product mixed benefits. As highlighted in our Q4 earnings investor presentation, Domestic average weekly sales for Q4 were nearly $37,000 compared to $34,000 in the pre-pandemic fourth quarter of 2019. This represents a 7.1% increase in average weekly sales compared to 2019, whereas same restaurant sales increased 3.3% 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 healthier and generating higher average weekly sales as lower volume restaurants exit the system. Franchise and license revenue was $66.5 million compared to $60.2 million in the prior year quarter. This increase was primarily driven by $5.6 million related to the kitchen modernization rollout and $1.5 million of Kiki's Breakfast Cafe franchise revenue in the current quarter. the revenue related to the sale of kitchen equipment has an equal and offsetting expense recorded in other direct costs. Franchise operating margin was $31.6 million or 47.6% of franchise and license revenue compared to $31.1 million or 51.6% 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 impacted by approximately 450 basis points through this accounting requirement. With the kitchen equipment rollout 98% complete, the margin rate impact will lessen while still having no impact on franchise margin dollars. More information can be found in our recent 10Q and forthcoming 10K. Company restaurant sales of $54.4 million were up 14.8%. This increase is primarily due to strong same-restaurant sales growth of 6% and $3.5 million of Kiki's Breakfast Cafe company restaurant sales in the current quarter. Company restaurant operating margin was $6.8 million, or 12.6%, compared to $7 million, or 14.8%, in the prior year quarter. This margin rate change was primarily due to commodity and labor inflation, partially offset by the improvement in sales performance at company restaurants. Commodity inflation moderated sequentially from 18% in Q3 to 13% in Q4, and we anticipate continued moderation. Additionally, labor inflation continues to moderate as we experience 5% inflation during the fourth quarter. G&A expenses for Q4 total $17 million compared to $17.7 million in the prior year quarter. This change was primarily due to decreases in share-based compensation expense and performance-based incentive compensation, partially offset by an increase in corporate administration expenses compared to the prior year quarter. These results collectively contributed to just an EBITDA of $23.4 million, which was above the high end of our previous guidance. The provision for income taxes was $3.3 million, reflecting an effective income tax rate of 20.7% for the quarter, compared to an annual effective tax rate of 24.9%. Adjusted net income per share was 18 cents. We generated adjusted free cash flow of $14.6 million. Our quarter end total debt to adjusted EBITDA leverage ratio was 3.4 times, within our target leverage range of between 2.5 times and 3.5 times of adjusted EBITDA. We had approximately $273 million of total debt outstanding, including $262 million borrowed under our credit facility. As a reminder, we utilized swaps to mitigate interest rate risk associated with our revolving credit facility, essentially pegging our interest at a favorable rate of approximately 5%. During the quarter, we allocated $7.8 million to share repurchases, continuing our commitment of returning capital to our shareholders. For the full year, we allocated $64.9 million to repurchase approximately 6.3 million shares at an average share price of $10.33. As a result, at the end of the quarter, we had approximately 153 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 year 2023. We anticipate Denny's domestic system-wide same restaurant sales will be between 3% and 6% compared to 2022. As we start 2023, we are rolling over the impact of the Omicron variant, which will magnify our sales comparisons, particularly in the first quarter. Consistent with our existing reporting policy, we will begin sharing same restaurant sales results for Kiki's in the third quarter. once we have a full year of comparable sales activity following the acquisition. We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of 8 to 12 Kiki's openings, with a consolidated net decline of 15 to 25 restaurants, as the residual impacts of inflationary pressures persist throughout 2023 before achieving a more anticipated steady state in 2024. We are projecting commodity inflation for 2023 to be between 4% and 6%, with roughly 50% of our market basket currently locked. We expect labor inflation of approximately 5% for the year. We took approximately 2% of pricing at the start of 2023, and we will remain thoughtful about our pricing strategies within our customary two to three annual pricing windows. Our expectations for consolidated total general and administrative expenses are between $79 and $82 million, including approximately $14 million related to share-based compensation expense, which does not impact adjusted EBITDA. This consolidated range contemplates a full year of Kiki's DNA and assumes fully reloaded incentive plans. As a result, we anticipate consolidated adjusted EBITDA of between $86 and $90 million. In closing, I am very excited about our strategies and where our dedicated franchise partners, restaurant operators, and support teams will take both the Denny's and Kiki's brands in the many years to come. 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.
spk10: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk11: One moment, please, while we poll for questions. Thank you. Our first question is from Nick Stapan with Web Bush Securities.
spk10: Please proceed with your question.
spk02: Thank you, and congrats on a great quarter. Just given that Q1 is still more or less an impacted quarter and the run rate numbers, Q2 to Q4, may be very different from Q1. Any way to maybe bracket the comp, the inflation, commodity inflation in Q1, comp in Q1, and also pricing, expected pricing in Q1?
spk06: Hey, Nick, this is Robert. Good to hear your voice. Let me see if I can parse that apart a little bit for you. So we're trying to figure out how Q1 will be impacted with regard to the kind of top-line sales and the inflationary pressures, if I think I'm hearing you correctly. So I think the way to look at it is you are correct. It will be an impacted quarter. And I think we were calling out in prior year likely a double-digit impact from Omicron at the heart of it. So when you look at our three to six sales range, that midpoint's about four and a half. So if you factor in rolling over that decline, I think you can see that we're thinking about Q1 is a pretty robust quarter, frankly, in the terms of the cadences. of the year. I hazard to put out a specific number, but it is the most robust quarter in the year the way we see it. When you look at the commodity inflation, that 4% to 6%, that clearly is the most impacted in Q1 also. So the midpoint of that 4% to 6% would be 5 percentage points. I think if you look at the trending of the way we came down from 18 to 13, if you kind of draw a line to get to an average of a 5% on the year, you can still see that Q1 will be highly impacted also and kind of give you kind of a guide to get there also without giving a specific number. So you're right to call out the fact that Q1 will look a little different than the balance of the quarters in the year. There was, just to reiterate what I said in my script, there was 2% pricing in January that we will benefit from that will also benefit that Omicron rollover. The next, the two to three windows beyond that, the next one I think is in March and then about six months later.
spk02: That's very helpful. Thank you. And then, you know, in terms of GNA, what portion of GNA is related to the GNA guidance? What portion of that is related to KIKIs?
spk06: Yeah, so we really haven't parsed that out. Nick, it is one of the reconciling items. If you look at where our GNA came in this year to the guidance range, the 79 to 82. There's a couple of buildbacks there. One is the differential in the stock-based compensation. We gave that as a whole number. You can see what it was in the current year. The other is the buildback in short-term incentive compensation. I think in the release, I've come across between $5 million to $6 million. When you get back to a full pool, that's another reconciling item. Kiki's is another piece. We didn't break that out. Kiki's, it's an investment year for us. One of the key strategies clearly is to grow that brand much more quickly. You can see already that in the current year with 8 to 12, that midpoint of 10 is about double any other year prior to us acquiring it. And we know that we have to go well beyond that milestone. in the 24 and out years. So it does represent an investment into the Kiki's GNA, although we have not called that out specifically.
spk02: Thank you. And just last question for me. In Q1, what's the number for the cash portion?
spk06: I'm looking at Kurt to see if we have that number. We do pay... We did pay out the RSU portions of the couple of plans that were in place. I would suggest it's probably in that three to four range is where I would peg that, Nick.
spk02: Thank you very much.
spk06: Thanks, Nick.
spk10: Thank you. Our next question is from Eric Gonzalez with KeyBank Capital Markets. Please proceed with your question.
spk05: Hey, thanks for taking the question. Maybe the first one, just on the 24-7 locations, can you confirm that there's still that mid-teens comp gap between those 24-7 and non-24-7? And if so, that still translates into the five- to six-point comp opportunity, depending on the timing? And maybe talk about how much you expect to capture this year of that opportunity?
spk06: Yeah, that's an excellent question, Eric. Thank you for that. So we can confirm that we are seeing that mid-teens gap between the 24-7 and the non-24-7 units. So yes, we can absolutely confirm that. With regard to that five to six percentage points, I think as I was speaking to that through the back half of last year, I think we've captured some of that. As you can see, we've moved from 53 mid-year to 67 at this point with four points in the last four weeks here. So I think we've captured some of that five to six points already. So I would bring that down. I would temper that probably to four to five now. And if you look at the cadence, right, we're adding about a point a year that would translate to probably somewhere in that three percentage points range when you – yeah, that four to five percentage points annualized. So when you look at it, the effect to the current year, it's probably in that two to three points when you consider that we're adding about a point a week at this stage.
spk05: That's helpful. Then just on the off-premise, you said it's 21% of sales. I mean – Arguably, it's held up fairly nicely since the stores have reopened. And I'm just wondering, why do you think these channels have held up better at Denny's than the industry? And then looking ahead, do you think this channel, particularly delivery, is more or less vulnerable to a pullback in spending?
spk01: Yeah, I think that's a great question. This is Kelly. I think why it's held up for us, I think the guests that are using us in that day part. So I think we are uniquely positioned, by the way, to continue to grow this. I think as others... start to think about why or why it does not make sense or if it hasn't been as sticky, you can see and you've already mentioned it has been for us. I think we were early in, we were really smart about the acceleration of both of the virtual brands. And our technology has really helped us to not only get there early, but stay there and sustain that. And so given that we uniquely have that capacity at late night where others may just say it's not necessarily worth it for the long term or seeing others get out of the market, I think it's still an area of opportunity going forward. So we know it's incremental. We've said that. We love our two virtual brands. It's younger guests coming in. So we know, again, it's a different guest using us in that late night occasion. So It just positions us, given who we are as a brand, to continue to focus on it and continue to watch it grow, hopefully.
spk05: And then just the last one for me. Directionally speaking, from a franchisee profitability perspective, as you think about your guidance, the 3% to 6% comps and where you see commodity inflation, labor inflation, do you see this as a year where restaurant margins or franchisee margins expand materially? Do they stay relatively flat? Or do you know, what can you tell us about how much you think that they can either expand or contract this year?
spk06: Yeah, Eric, another excellent question. So a couple of things to try to parse apart that question. First off, in our three to six guidance range, we would put the franchisees closer to the top end of that range and the company closer to the bottom end of that range. Clearly, one of the differentials would be 24-7. But again, that's how we would kind of speak to that range of where the company portfolio and the franchise portfolio sit. I will also tell you that we are keenly focused upon franchise profitability and franchise margins. In fact, kind of the internal talking points around here would be this concept of no stone unturned. In this post-pandemic world, we're really focused upon ensuring that our franchisees are profitable. And we do see that with this, the inflationary pressures somewhat subsiding, still from a historic perspective, somewhat elevated, but compared to what we've seen over the last 12 to 24 months, that 4% to 6%. Commodity and 5% inflation is on the lower side. We do believe that we will make headwind with their profitability and their margins as we move throughout the year.
spk11: Great. Thanks. Thank you.
spk10: Thank you. Our next question is from Jake Bartlett with Truett Securities.
spk07: Please proceed with your question. Great. Thanks for taking the question. My first is just the trajectory of sales. I understand that lapping Omicron is going to be a benefit, but I'm wondering whether you can say that maybe it's comparing versus pre-COVID or whatever way you want to kind of frame it, but are you seeing your sales momentum increase here? We've heard some pretty good things just from industry-wide sales. I know Omicron is driving a year every year, but it seems like things are improving versus 19 as well. And I'm just wondering whether you're seeing that same trend.
spk06: Yeah, Jake, again, good to hear you. I would tell you that the year started off pretty strongly, right? We do have that Omicron rollover We still are continuing to build back with the 24-7 units. So December to January was clearly a build period for us. The quarter will be a very strong quarter for us. As I mentioned to Nick's question, I would tell you that we are going to lean hard on value. We are back on air with regard to value. When we were on air last year with value, we clearly could see that it was working. So that, again, is a strong point for us. We will leverage that. So in this terms of what this environment holds in this recession, not recession, we believe that we are a trade down play. We believe that we are also a value play, that we are known for value. So those two things are really kind of dovetailing nicely together.
spk07: Got it. Maybe just digging into that last comment a little bit more. I'm wondering what you can say about just the behavior of the consumer so far. I know you're leaning into value. Is that really necessary right now because the consumer is kind of demanding it? So one question is just on the lower end consumer, how are they behaving right now? Is value kind of the only thing that gets them in the door or maybe are they being stronger than that? And then are you experiencing trade down from other you know, higher end demographics, you know, at this point.
spk01: Yeah, I think, hi, Jake, this is Kelly. I think there have been, there's certainly a lot of conversation about the potential for trade down. I think we are, again, well positioned that if there is a trade down coming from other segments, to family dining, we benefit from that. I think to your question, you know, the consumer, so because we're still seeing the check hold, I think your question about is the consumer only coming in for that, you know, we've got, we're on air. So, you know, given our weights right now and given what we're doing, we're seeing movement. And we are seeing the incidents or the mix go up a little to a place where we feel really good about. But we're also, given that the check's holding, we're still seeing people order and excited about the more premium LTO and core offerings. So that gives us encouragement about the health of our barbell strategy and the fact that we've got that mix all year long. You'll see us, we'll have new innovation, we'll have LTOs that usually work very strongly for us, and then we will continue to enhance our all-day diner deal so people do know that need it, do know that they can count on us for the great value.
spk07: Great. And then last question, you know, on the new menu that you're rolling out in the the dinner menu that's enabled by the new ovens. I believe that you've been testing that. Anything you can share in terms of how it's been testing, how much of a sales driver do you think that new menu can be?
spk01: Yeah, so what I can tell you is, I mean, in the test markets, in the test restaurants, really well received by operators, craveability, all things that we want to see and look for. I'll hesitate to kind of talk about what we expect to see from that just for kind of obvious reasons that you will start seeing it soon. But these are items we can only offer because of kind of launching and finishing the launch of the kitchens. There's ease of execution that comes with it. But, yeah, just the opportunity to have some exciting new really craveable items that you couldn't have before at a Denny's. We'll have to probably just kind of leave it at that for now and really excited that we do think it'll drive trialability and that these are really credible, exciting items for us.
spk07: Great. I appreciate it.
spk11: Yeah, thank you. Thanks, Jake.
spk10: Thank you. Our next question is from Michael Kamoff with Oppenheimer. Please proceed with your question.
spk03: Hi, thanks. Hope you're all doing well. You know, the same-store sales guidance for 3% to 6% comps is pretty strong, and I just wonder if you can unpack your assumptions, maybe touch on a couple things, like how much pricing or average check gains have you built into that? Are you also including any assumptions for the future price gains, future price increases that you're thinking about taking over those next two windows? And then how much of that benefit from late night are you baking in? Are you giving yourself the full credit for that 2% to 3% lift? Just trying to understand the thought process there. Thanks. Hey, Mike. Yeah, thank you.
spk06: Let's try to unpack that. I hope you're doing well also. So I think the 2% pricing in January was fundamentally across the board. So that'll live through in that 3% to 6% guidance. Then you were trying to reconcile, I think it was for Eric a little bit, trying to reconcile the impact to 24-7, particularly into the franchise base. Again, building upon that, adding about 1% of the units a week at this point. I believe that would probably add in that two to three percentage points range to the franchise side particularly. And then we have additional pricing windows, right? So in March and September, to give you kind of the way that works, right? If we took another 2% in that, it would add roughly a percent to the impact for the year. So, again, we're pretty – we're really kind of – and that will all be based upon inflation, right? It's not a foregone conclusion. We'll read and understand that better because we don't want to outprice this market. Clearly, there's been some consequential pricing over the last 18 months. So we're looking to mirror that against what we're seeing there. So that's really kind of the build that we're seeing. We also have some rollover effect. And I think what you have come to expect from us is that we put out guidance ranges that we are comfortable in achieving. So kind of a build back and kind of a philosophical add point there at the end.
spk03: Okay, thanks for that. And then if I use the presentation and the disclosure about your average weekly sales, it looks like in the fourth quarter the average weekly sales were down maybe 4% or so relative to 2019 levels for the on-premise business. Is that purely just a late-night component, or are there other parts of the business that you think you still have a big opportunity to recapture in addition to the late nights?
spk06: Yeah, I think that's clearly still an opportunity to recapture with regard to that late night day part there, Mike. So, again, we're really pleased that 19 in totality, 19 versus 22 in totality, was up to 7% on a three comp, and we still believe that there's room to capture more of that as 24-7 comes back online.
spk11: Thanks very much. Thank you.
spk10: Thank you. Our next question is from Todd Brooks with the Benchmark Company. Please proceed with your question. Hey, good evening, everyone.
spk00: Hey, Todd. How are you tonight?
spk09: I'm well. How are you doing, Robert? First question, if I could. So the incremental 2% pricing that you took at the start of the quarter here, can you walk through the waterfall of what rolls off in March and September that you'd be deciding about taking further pricing against and what would be a headwind?
spk06: Yeah, I'm looking over at Kurt to pull that out. So we were seven points coming through this quarter. I would, yeah, trying to figure out exactly how to frame that for you. Do you want to grab your second question and as we give them a chance to look and I'll come back and answer that one for you.
spk09: Absolutely. Switching to Kiki's, you talked about the FDD hitting hopefully this spring and starting to really ramp up some of that franchising growth with new partners. But a bridge year maybe with some corporate stores, especially seeding new markets. If you look at the guidance for the 8 to 12 new Kiki's, what do we see, if anything, in there for corporate units? What's the mix of corporate to franchised?
spk06: Yeah, I would say, Todd, that a few, typically that would be in the two to four range to get that done. And we do want, from a corporate perspective, to utilize our capital to get it outside of the state of Florida. We're really still bullish upon the Kiki's franchisees within Florida, and we will begin to utilize the Denny's franchisees franchisees within Florida. That's really not the rush to file all of the FDDs in the other states because we didn't want to open it up to the balance of the Denny's franchisees until we proved out the concept outside of Florida. Kelly spoke within her comments about the ethos work that we're completing. We're really excited about that. I would suggest that we're halfway or so through that and getting bits and pieces fed to us along the way. So we're really excited about what that will tell us and what optimizations that we will include in Kiki's as we move outside of Florida. But we're really excited to grow that. The 8 to 12, as I mentioned, if you midpoint that at 10, that's double what Kiki's have been able to do on their own. And we won't stop there. We know that that pace even has to go well beyond that level. So Kurt's drafting some notes up for me. So in Q1 of 22, we took 0.4% pricing. And in Q1 of 23, it equals basically the 2% that we just took. So if I'm looking at them and interpreting that correctly, I think that's what they're telling me to say here.
spk09: Okay, perfect. And then a final one, if I can slide it in. It sounds like, Kelly, when you're When you were talking about heritage, sounds like a bit of a pause here, and maybe as you're attracting a little bit different customer base, you want to reevaluate what's in Heritage 2.0 before getting back to maybe a greater cadence of remodels in 24. Just how big a review is this? And is part of the review maybe getting the ticket cost of heritage down for franchisees to speed the roll going forward? Thanks.
spk01: Well, you've got it. So great, great question. Thank you for the question. It is absolutely not. So as we look at these are really strong returns that we were able to show with the Heritage 2.0 remodel on the gate, that has changed, right? So that has changed given the inflationary environment and the cost of supplies, labor, all that, right? So as we look at that and just try to be really good stewards of our business and great partners to our franchisees, It gave us a chance to just step back a bit, look at our research. We see an opportunity to lean even more of those strong research, strong results and returns. Initially, it's a chance to look at the approach to a rethinking diner a tad more. lean into our unique positioning. We continue to say we uniquely own that as America's diner. So we see an opportunity to kind of tweak from there. We will still do. We've got partners still investing in their business and light touches and making sure we continue to update our assets. So I don't think it's a long process, but we are going to just pull back a hair to be smarter about the investment and getting as strong as returns as we were getting before the prices escalated to the pace that they did.
spk04: okay great thanks everybody thanks john thank you our next question is from john tower with city please proceed with your question great thanks uh i guess maybe starting following up that last question uh and and bringing it back to capex and you're thinking for fiscal 23 i don't think that was part of the guidance maybe i missed it was there but Obviously, you know, remodels, which are not really on the corporate side, slowing, but you're also, you know, potentially going to be investing a little bit more in Kikis. Can you help us think about the CapEx spend for fiscal 23?
spk06: Yeah, I kind of a good reconciling question there, John. Good to hear you. So I think that in the current year we were between 12 and 13 million dollars in our in our capex spend so that we're kind of using using that as a jumping off point. There wasn't a ton of remodel capital in those numbers either. So if you these Kiki's builds were we anticipate being in that million million one area. So if you think about where we are with regard to the number I just quoted there, kind of that few being in that two to four range. You would expect that to be in the kind of the $3 million range. So without specific number guidance, I would suggest that's a mid-teens kind of number that we would be at with regard to CapEx.
spk04: Got it. Thank you. And then just taking a step back on the net closures for the year, First, can you parse out whether or not that's all domestic or a mix of international and domestic? And then more importantly, can you help frame the health of the franchise base? I know the guidance obviously calls for 15 to 25 net closures, but maybe you can provide some guardrails about how many more stores in the system or franchisees out there, maybe getting close to that brink of closure should say the economy soften or inflationary pressures back up again. How are we coming back to this in six to nine months and saying 15 to 25 should have been more like 25 to 50, or maybe it's the other way. Maybe you're being conservative.
spk06: Yeah, that's a really good question. So let's piece that apart a little bit. So the guidance range for the openings was 35 to 45. So midpoints for each, that would suggest 30 Denny's and 10 Kiki's, if you put that at the midpoint of each of those, which puts the Denny's growth back to pre-pandemic levels. It's basically at that 2% level. So what's different is this kind of this 4% closure rate that we experienced in 2020 And really, for 15 to 25 closures, you would need somewhat of a similar closure rate in 2023. I think a couple of things to note. The reality is, given the inflationary environment over particularly the last year, but the last two years in aggregate, The volume at which a Denny's is really kind of profitable has risen. It used to be, we would quote, thumb in the air, that you'd need about a million dollars to be a profitable Denny's. Now, again, that was all a function of your geography and your lease. There are a lot of other components in that, so that's kind of a broad average. That's really kind of grown to about 1.1 to 1.2. So, in that guidance range of 15 to 25, we've kind of taken that all into account. If we get back to 24-7 like we know we will, if the inflationary environment stays in that labor of 5% and commodities in the 4% to 6% range, I think we're very comfortable with that range that we provided. And in fact, if that settles more quickly, then we may have an opportunity with that. We believe and we fully expect that longer term, the 24 and beyond period, that we will get back to that normal attrition rate. We will always have some level of closures within the brand. which is historically, if you look back over a long period of time, about 2%. We do believe that that's where we will get to, although we may be experiencing about one more year in that 4% range, given everything we see. I can tell you that these are primarily, at this point, domestic closures.
spk04: Got it. Thank you for all that, Clark. And last for me... I know it's a little early in the year and perhaps you don't have this level of data, but I am curious if there's any way you've been able to see whether or not some of the, I guess, older demographic have made their way back to stores given some of the shifts in Social Security payments and whether or not you've actually seen it early in 2023 in the form of greater frequency or perhaps higher check within that kind of older cohort of customers.
spk01: Yeah, it's a great question. It is early in the year. We actually can tell that we have had a steady increase in some of the promotional offerings like AARP that we uniquely offer to obviously that demographic. And so we do see that getting better since the depths of the pandemic. And then, you know, the flip side of that, we also do, you know, we continue to skew younger all the time, not just in our virtual brands, as we talked about earlier, off-premise, but continue to skew younger. That's about the late-night day park continuing to be more open all the time as well. That's a good thing. But, yeah, we can see the baby boomer population starting to rebound a bit.
spk04: Thanks for taking the questions. Of course.
spk11: Thank you.
spk10: Thank you. Our next question is from Andrew Wolfe with CL King. Please proceed with your question.
spk12: Great. Thank you. Regarding the franchisees getting to, you know, their stores open 24-7, is labor availability or sort of just their hiring practices and their ability to get people in and hire them, is that kind of still the key reason that you're hearing from them that they're not yet operating 24-7?
spk01: Yeah, it's a great question. So we continue to just, this is a collaboration. This is a, these are conversations daily. These are, I mentioned, we've mentioned in the past, we have literally segmented every single restaurant and have our operators talking to every single franchisee. It's an ongoing conversation. So while there's more optimism as of late that you see everywhere around labor and the availability of labor, you also do see and have to, we have to be aware of and mindful of and consider the inflationary environment that still exists for so many of them. So it is as much now about profitability as it is staffing. So that is eased. You've had other things that have contributed, not just lower volume, but things like 80-20 and things like, you know, just differences in wage inflation or the wage treatment that really do impact profitability. So it's conversations about all of that. It's why we've also got a task force. We've talked about no stone unturned. It's why we're looking at every opportunity to help them with margins. as well as focus on how to profitably get them back to 24-7. And so we've said that before, that we continue to look at every restaurant and assess their situation, and that we may have less, and we definitely will have less than we did before the pandemic, and that remains to be the case. So it's a collaboration for sure and ongoing conversations.
spk12: Okay, and just a follow-up to that is I think in the third quarter you guys reported that – The company restaurants were now fully staffed at that time, so I guess they're still fully staffed. Can you tell us a little about the tradeoff between training of new employees and them getting up the productivity curve? I assume it's something that the franchisees want to know about because obviously new hires are more expensive than seasoned folks who are productive.
spk01: Yeah, that's exactly what's happening. So you're right. So we've been staffed now and have mentioned it, yes, last quarter. And we can now see the stability, what that does for guest sentiment scores. We can see what that does for training dollars. We can see all that in our company restaurants, obviously. So, yes, there's a natural learning curve that's going to happen for every franchise location that gets back up. We're helping them with that in any way possible, helping to kind of lessen that learning curve. But that's certainly at play for all of them. We see the traffic and the sales come back when they do that, but we're also trying to just help them to strengthen all aspects of the P&L. which does, yeah, absolutely include the training costs that go with that. It levels off, and it can level off fairly quickly once you get back into that rhythm, but that's absolutely a good question, and that's part of what is happening as well.
spk12: And the other kind of related question here is, as I understand the incentives to the franchisees, you know, there's a setup to do it sooner than later. So if there's still, you know, a double-digit gap to get to 90% of the franchisees operating 24-7. Am I understanding that right? Are they still being incentivated right now at the same rate they were when things accelerated late in the fourth quarter? Or does that fade? I'm trying to understand. Is it sort of going to get harder and harder to incentivate? Is incentivation still
spk01: Yeah, that's a great question. You broke up a little bit at the end. I think the nature of your question, we do understand. The window is definitely closing on the incentive, so it's a staggered incentive. We've had a lot of people participate in the incentive. We've had a lot of virtual hiring events. We've worked hand-in-hand with them to do that. So we see progress, and we also have line of sight to a lot more restaurants. And again, at the same time, it's really about having those conversations and helping them get there at the right time and helping them to be profitable when they do so. But yes, you are correct that We're nearing the end of the incentive.
spk12: Great. Thank you. Thank you. Thank you.
spk10: Thank you. There are no further questions at this time. I'd like to turn the floor back over to Curt Nichols for any closing comments.
spk08: Thank you. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early May, during which we will discuss our first quarter 2023 results. Thank you, and have a great evening.
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