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spk08: Greetings and welcome to Denny's Corporation's second quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. A 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, Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysts. Thank you. You may begin.
spk03: Good afternoon. Thank you for joining us for Denny's second quarter 2023 earnings conference call. With me today for management are Kelly Vallade, Denny's chief executive officer, and Robert Verostic, Denny's executive vice president and chief financial officer. Please refer to our website at investor.denny's.com to find our second 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 second 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 and Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risk, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 28, 2022, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to Kelly Vallade, Denny's Chief Executive Officer.
spk04: Thank you, Kurt, and good afternoon, everyone. Thank you for joining us. Today's discussion will focus on our financial results, our progress towards the long-term revitalization of the Denny's brand, and the growth and expansion of Kiki's Breakfast Cafe. After that, we'll provide updates to our full year 2023 guidance. After the market closed, we reported Denny's system same restaurant sales growth of positive 3%, reflecting sequential improvement throughout the quarter, despite a persistently challenging operating environment. We're certainly pleased to see this. Total value mix in the second quarter was approximately 16%, up slightly from the 15% mix we saw in the first quarter. We continued to deliver strong value options for our guests at a time when discretionary spending is still strained for many consumers. In fact, the return of our signature Super Slam starting at $7.99 was a highlight of the quarter, delivering what our guests truly want, that combination of craveable food and unbeatable value. Off-premise sales remain consistent at approximately 19% of total sales for the second quarter, highlighting the sustained strength of this ancillary channel as our innovative menu offerings appeal to Denny's guests, whether they choose to dine in restaurant or take it home. And with 75% of Denny's restaurants now operating 24 hours, we are not only proud of the great progress we have made, but also the fact that we have cemented our late-night leadership position in the market once again. I want to focus today on the evolution of our existing strategies into a powerful framework which will reignite everything that has differentiated our brand for the last 70 years. I chose that word focus intentionally. It's been our internal rallying cry for the year I've been at the helm of the Denny's brand. It's that laser-like focus that has provided a better and deeper understanding of our guests and also how Denny's can deliver what guests crave. And that word crave personifies this enhanced strategic focus. At Denny's, crave stands for creating leading-edge solutions with technology and innovation, robust new restaurant growth as a franchisor of choice, assembling best-in-class people and teams through culture, tools, and systems, validating and optimizing the business model to maximize restaurant margins, and elevating profitable traffic through the guest experience and uniquely craveable food. More than a mnemonic device, Crave is a roadmap to how we think, operate, and ultimately how we evolve and improve the total guest experience. And this move towards codifying these strategies into the CRAVE framework has been supported with and steeped in research. We engage with a respective consulting firm to help us identify our strengths and opportunities for improvement, but just as important to make us smarter on who the Denny's guest is and what they want from the Denny's experience. And who is that guest? I could take up this entire call articulating all that we've learned. But in a nutshell, our updated guest understanding consider demographic, psychographic, and behavioral data. And we now know a lot about who our guest is, but also about how often they are frequenting family dining and casual dining restaurants. Through the research, we have pinpointed two cohorts of guests that present growth opportunities for the Denny's brand. These guests are motivated by quality, craveable food at a reasonable price, delivered in a convenient, welcoming atmosphere, all things Denny's is positioned to deliver. The research also validated strategic levers that will translate into winning with our guests. Our guests count on us to deliver a best-in-class breakfast, an unbeatable value proposition, and now more than ever, convenience in the form of our off-premise options. And we delivered on value and credibility this quarter. I already mentioned the return of our Super Slam offer that delivers on our core equity, but we also brought back, after a 10-year hiatus, the popular and highly craveable offering we call Baconalia, featuring new Hormel, black label, thick cut, cherry wood bacon. Baconalia is not only a great example of craveability at work, but it's also putting our recently installed kitchen equipment to perfect use. In short, we delivered on these key areas of focus this quarter and are pleased with the results. And that focus on food will also have an impact on our menu and its design. While we are leaning into craveability, we're also leaning into simplification. Craveable food doesn't have to be complicated, and there's great work underway that will provide a streamlined menu that will be a huge win for our guests and our operators. We're also in the process of introducing a new pricing model that will help protect our value leadership as only Denny's can. This will ensure that we stay aligned with our franchisees and true to what our guests need from us. Guests are also craving unique engagement with the Denny's brands, and we knew we had an opportunity to reinvigorate our rewards experience. Earlier this year, we announced our partnership with SparkFi and Olo with the goal of forging a next generation intelligent customer engagement ecosystem designed to surprise and delight our guests with personalized offers and experiences. And we did just that with the launch of our revamped Denny's Rewards program in June, delivering personalization and introducing gamification into the rewards experience through the introduction of exclusive Denny's Rewards challenges. Every month, rewards members will get an exclusive opportunity to complete challenges and earn additional rewards the following month. And through this increased engagement, we are bolstering knowledge about our guests and their preferences. This will unlock the ability to recognize our guests across the omnichannel guest experience and reward them accordingly. Since the launch on June 22nd, we have seen over 200,000 new rewards member sign-ups, bringing our total to over 6 million loyalty members and growing. In time, we expect our data investments to result in additional ROI opportunities and be a traffic driver. Finally, the work we have done to enhance the guest experience is paying off. Our overall net sentiment for the second quarter was 43%, up nearly 600 basis points from the first quarter, and outperforming the Black Box Intelligence Family Dining Index, candidly, by over 1,100 basis points. We're also incredibly proud of our 4.2 Google rating. As I mentioned earlier, assembling best-in-class teams is also a key element in our crave strategy, and our team members are also craving opportunities for education and career advancement. And our new Denny's Gain program is poised to do just that. GAIN includes four key areas, GED accreditation, college credits and certifications, life skills, and career pathways for high school students. Denny's is helping to create opportunities that may have been otherwise out of reach for our team members. The GAIN program is a true embodiment of Denny's purpose and I can't wait to see how this program helps to transform lives. We're really pleased with the progress we've made with staffing and reduced turnover rates and we believe our commitment to the GAIN program will continue that positive momentum. Finally, turning to Kiki's Breakfast Cafe. We've mentioned in the past, Kiki's also concluded its own comprehensive research to better understand its core guests, what makes the brand so special, and help us map the path for growth. The results were clear. Kiki's is known for its high-quality ingredients, made-from-scratch philosophy, and providing guests with some of the most generous portions in the industry. As with Denny's, we now have a playbook built on Kiki's that articulates what makes this brand so special. Kiki's new tagline, Mornings from Scratch, is one that we believe will separate us from the competition. The hallmarks of this great little brand are about using the freshest, highest quality ingredients made from scratch daily. So Mornings from Scratch is the perfect tagline. Like freshly whipped cream, coffee ground in-house, and dishes you won't find anywhere else, we're leaning into Kiki's special sauce to ensure that as we grow, we continue to demonstrate a differentiated offering to all of our guests. Now that we are smarter than ever before on the Kiki's Guest, we've begun to make brand decisions and test elements that are going to support what we believe to be a long runway of growth in Florida and beyond. And while it's still early, we do know our first Kiki's outside of Florida will be located in the greater Nashville, Tennessee market. We're excited to bring the winning Kiki's experience to a new set of consumers soon. We're also excited to bring the Kiki's concept to the Denny's franchise system. Robert will share details in a moment, but I can tell you, The interest among Denny's franchisees is indeed growing. We've been traveling this past month doing mid-year roadshows with our Denny's franchisees, launching the new strategies that I've just reviewed. Their excitement for those strategies is obvious, but while on the road, we also continue to receive new requests and inquiries to learn more about the Kiki's opportunity. I've, in fact, passed on a lot of names to our development team as a result, and we expect to officially sign up with a few of our strongest Denny's franchisees soon. In conclusion, we're smarter than ever before on the Denny's and Kiki's guess. We believe those insights coupled with our crave strategies will translate into a long-term winning proposition for each brand and for the business. With that, I'll turn the call over to Robert.
spk07: Thank you, Kelly, and good afternoon, everyone. Today, I will provide a development update and review of our second quarter results before discussing our annual guidance. Starting with development highlights, Denny's franchisees opened nine new restaurants during the quarter, including four international locations, while Kiki's opened one franchise cafe during the quarter. We also opened an additional Kiki's franchise cafe in July. We are excited to see the development pipeline for this growth concept start to take shape. In fact, property control has already been secured for nine future franchised and company-operated Kiki's locations. An updated Kiki's franchise disclosure document has been filed and we have recently conducted over a dozen meetings with Denny's franchisees who are interested in the Kiki's brand. A similar number of meetings with Denny's franchisees are scheduled to take place over the next few weeks as we prepare to accelerate the growth of Kiki's over the next several years. Moving to our second quarter results. Denny's domestic system-wide same restaurant sales grew 3% in the second quarter compared to 2022, consisting of a 3% increase in both domestic franchise restaurants as well as company restaurants. Denny's domestic system-wide restaurant sales growth was primarily driven by pricing of approximately 8.5%, net of changes in discounts and product mix. Approximately half of the pricing for the quarter was carryover from fiscal 2022. Denny's domestic average weekly sales for Q2 were approximately $38,000, including off-premise sales of approximately $7,000, or 19% of total sales. This translates to average unit volumes of approximately $1.9 million. Franchise and license revenue was $62.0 million compared to $65.9 million in the prior year quarter. This change was primarily driven by a $5.2 million decrease in initial and other fees associated with the sale of kitchen equipment in the prior year quarter. These impacts were partially offset by Denny's franchised restaurant's same restaurant sales growth in addition to $1.7 million of Kiki's Breakfast Cafe franchise revenue in the current quarter. Franchise operating margin was $31.6 million, or 50.9% of franchise and license revenue, compared to $30.6 million, or 46.4% in the prior year quarter. This favorable change in margin rate compared to the prior year quarter was primarily driven by an approximate 440 basis points impact from the kitchen modernization rollout. Company restaurant sales of $54.9 million were up 11.6%. This growth was primarily due to $3.7 million of Kiki's Breakfast Cafe company restaurant sales in the current quarter and benefits from Denny's price increases compared to the prior year quarter. Company restaurant operating margin was $8.3 million or 15.1% compared to $4.3 million or 8.8% in the prior year quarter. This margin change was primarily due to approximately $2.3 million of unfavorable legal reserve adjustments in the prior year quarter and the improvement in sales performance at company restaurants in the current year quarter, partially offset by labor and commodity inflation. Commodity inflation continued to improve, moderating sequentially from 10% in Q1 2023 to 1% in Q2 2023. This quarter saw commodity inflation fall below double digits for the first time in two years. Additionally, labor inflation was 4% during the second quarter, flat with Q1 2023. G&A expenses for the second quarter totaled $20.2 million compared to $16.6 million in the prior year quarter. This change was primarily due to increases in deferred compensation valuation adjustments corporate administration expenses, and performance-based incentive compensation, partially offset by our reduction in shared-based compensation expense. These results collectively contributed to adjusted EBITDA of $22.3 million. The provision for income taxes was $2.7 million, reflecting an effective income tax rate of 23.8% for the quarter. compared to 25.3% in the prior year quarter. Adjusted net income per share was 14 cents. We generated adjusted free cash flow of $12.7 million, which represents 57% of our adjusted EBITDA. Our quarter ended total debt to adjusted EBITDA leverage ratio was 3.1 times. we had approximately $258 million of total debt outstanding, including $247 million borrowed under our credit facility. During the quarter, we allocated $10.4 million to share repurchases, continuing our commitment of returning capital to our shareholders. Since beginning our share repurchase program in late 2010, we have allocated over $669 million to repurchase approximately 64 million shares at an average share price of $10.45. As a result, at the end of the quarter, we had approximately $133 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. We anticipate Denny's domestic system-wide same restaurant sales will be between 3% and 6% compared to 2022. However, as inflation headwinds are expected to moderate over the balance of the year, we also anticipate pricing could moderate. Accordingly, our current expectation is to be towards the middle of this range. We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of 8 to 12 Kiki's openings skewing later in the year. This amounts to a consolidated net decline of 15 to 25 restaurants. We are projecting commodity inflation for 2023 to be between 1% and 3%, with roughly 70% of our market basket currently locked. We expect labor inflation of approximately 4% for the year. Our expectations for consolidated total general and administrative expenses are between $78 and $80 million, including approximately $12 million related to share-based compensation expense which does not impact adjusted EBITDA. This consolidated range contemplates a full year of Kiki's GNA. As a result, we anticipate consolidated adjusted EBITDA of between $86 and $90 million. In closing, I would like to thank our dedicated franchise partners, restaurant operators, and support teams who have remained focused on our guests and strategic priorities to ensure both Denny's and Kiki's continue to thrive 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.
spk08: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 key. Our first question comes from the line of Michael Tomas with Oppenheimer. Please proceed with your question.
spk05: Hi. Thanks. Good afternoon. You know, Robert, I know you mentioned being at the midpoint of the four-year same-store sales guidance. But I think the math implies that you could do around flat comps in the back half of the year and still hit the lower end of the four-year guide. So other than changes in menu pricing, you know, what are the big driving factors that would put you either at the lower end or at the higher end of the four-year guidance? Thanks.
spk07: So, hey, Michael, good to hear your voice. So it's really a function of driving traffic, right? Really, that's what it is. And we're going back strong with our value messaging that had strength within it. In the June month, we accelerated with our same-store sales throughout the quarter, relying heavily on our value messaging. You'll see us utilize that as appropriate as we continue from this point forward. So in large part, it's going to be that value and the traffic driving ability. The LTOs are performing well. really, really well. We love the fact that we're back on with Baconalia. They're mixing quite well. But the traffic driving ability of our value is really kind of will be the driver of where we likely end up in that range.
spk05: Thanks. You know, you talked a lot about the research you did to learn more about your guests and how that can help inform your strategies to drive the business going forward. So can you provide any more details on what some of those changes might be and what the timeline is you believe when you actually start to see some of the benefits in your sales.
spk04: Thanks. Yeah, that's a great question. So we learned a lot and it is absolutely informing decisions that you'll see us make even starting in October. I referenced it slightly in terms of streamlining the menu, in terms of really leaning into credibility in our offering. So we learned a lot. They're basically, obviously, they're value-oriented consumers. They're families. They skew somewhat millennial. And then we've got a younger guest, even though he's using us late night and through virtual brands. So we've got a really broad spectrum, but we're being very laser-like in our focus on what that new core, those cohorts I've referred to, are wanting from us. And again, it's really leaning into making sure that our value leadership is clear, it's evidence, We offer everyday value for the consumer that wants that from us. We, again, know that that is absolutely the case. And we know we've been a leader in that space for some time. So it's making sure it's evident as everyone comes out of the pandemic, it's really making sure that everyday value is very clear and that people feel really good about what they've chosen to buy at a Denny's. Our barbell strategy is still in effect because as we have seen even as of late, will go on air with something like Super Slam at a great price point, great value, but then we've got them still looking at things like Baconalia, our bacon obsession platform that is also performing well for us. So it's craveable food, reasonable price. We also know a lot about these families and how much they can rely on us for a great off-premise, a great experience outside of the restaurant. And we can provide that level of convenience for them as well. And we still think there's opportunity as others retract and don't do as much in the area of whether it's a virtual brand or off-premise, we think it's a sweet spot for us in our space just because of late night and the capacity that we do have in our kitchen. So we think there's more to gain there, and we'll continue to look at our offerings and off-premise to kind of solidify that.
spk08: Thank you. Thanks, Michael. Our next question comes from the line of Todd Brooks with The Benchmark Company. Please proceed with your question.
spk02: Hey, thanks for taking my questions. First, if we can spend a little time on Kiki's. It sounds like a lot of progress made during the quarter, positive initial discussions with existing franchisees, FDD filed, and kind of brand ethos work and understanding what the brand is complete. Can you kind of take us through the next All 24 months for how the Kiki's opportunity unlocks for Denny's in your eyes.
spk04: sure um so todd this is that's a great question so there's a lot that you'll see us now unlock because we wanted to really spend the right amount of time integra building the team right small but mighty team um getting that team getting some synergies with that team and then really leaning into you know how do we be the best version of you know this brand and what this brand stands for and i articulated that a little bit in the script but it is about the freshest highest quality ingredients abundance mornings from scratch, new taglines. We've learned a ton about that, and you'll just see us execute against that in terms of a new menu, in terms of different offerings that we'll do, in terms of potentially a prototype and design that we'll take outside of Florida, and then unlocking that potential really with the Denny's franchisees. Both Robert and I spoke to that, but we see a great amount of opportunity, some of our strongest Denny's franchisees, ones that will continue to grow in the Denny's system that also see the opportunity with a Kiki's Breakfast Cafe, and they just see it as a different opportunity. The demographics are different for that brand, so we know we've got something really special, and we can talk to our franchisees about growth within Denny's, growth within the Kiki's brand. But we're positioning the team to be ready to handle that growth, and you'll start to see that really tick up this back half of the year.
spk02: And are sites the big limiter on growth over the next couple of years or maybe the readiness of the Kiki's team and their franchise support systems to really start to accelerate the growth with existing partners?
spk07: Hey, Todd, this is Robert. So, you know, we're putting that team in place right now. We do have the trainers, the HR support to ensure that we can get people and personnel on staff and trained. We have development teams that are working that right now. And if you think about it, at the midpoint of our guidance, say the 8 to 12, it's about 10. It's about a doubling of the rate of growth that this brand has been able to achieve over the last few years. So we've already accelerated that. And I really just think it's the continuing of the unlock, the acceleration of the Kiki's Franchisees openings within March. Florida is getting development commitments. I think you'll likely hear from us speak to that in the near quarters with regard to the number of commitments that we are garnering from our Denny's franchisees. And then it's just establishing that pipeline to accelerate to 24 and beyond. We clearly invested in this brand because we saw the potential of it and we bought it to grow it. So we need to clearly accelerate beyond what we've guided to today. And all of, as Kelly just described, all of those pieces are coming together nicely and we are very excited about what this opportunity holds. Okay, great.
spk08: Thanks to you both. Thanks, Todd.
spk01: Our next question comes from the line of Nick with Wedbush. Please proceed with your question. Nick, your line is live.
spk09: Thank you. As we look at the 24 and have some incremental visibility now in August, you know, in terms of openings and closures in just the Denny's brand, are we thinking that we can have a flattest sort of net openings number next year, or are we still looking for a decline in the number of stores for just the Denny's brand?
spk07: Yeah, Nick. So this is Robert. Again, good to hear your voice also. So when you look at the Denny's brand, there is – it really is tied to profitability, right? The rebounding of profitability post the pandemic. in the margins within those restaurants. That really dictates the rate of closures. And what I can tell you is that as we progress through the year and you've seen the Denny's corporate company margins improve, our insight to that through our data visibility tool in Lumen suggests that our franchisees are experiencing the same thing. So I would tell you that with these inflationary pressures continuing to abate, both on the commodity side and the labor inflation side, believing that that will continue, I believe margins will improve within our franchise system, which will take pressure off of the closings that you're seeing. I think the number of openings, we are getting back to being consistent to what we have experienced in prior years, that 2% rate of growth, we just need to tamp down those closures. So we are cautiously optimistic that given, if these trends continue, that we can move back to that net, kind of that net neutral place that we had been for quite some time, slightly flat to slightly growing as we progress. But again, it will be seen. We need to grow traffic. We need to expand margins. Things that we are doing currently, that needs to continue, and we are cautiously optimistic that that will drive closures lower.
spk09: That's very helpful. And then, you know, speaking of, you know, traffic and comp, you mentioned that sequentially the quarter improved. And so assuming you exited in June above 3%, and then I think the rest of the year the guidance implies about a 3% comp for the second half for us to get to the midpoint of your full year guidance. So is it reasonable to assume that July is off to a sort of better than 3% start?
spk07: Yeah, I think that's very fair, Nick, to say that July is better than where the full quarter ended. It did, it's slightly lower than where June was, though. So to be very transparent, it's not sequential improvement into July, but it is an improvement on the full year, on the full quarter, on the full Q2 quarter. So it is above 3% in July, just slightly below June.
spk09: And then this last question for me is around pricing. I think you said 8.5% all-in average check, if the scientists did that correctly. Do you mind just breaking out the actual price versus mix and then pricing plans for 2.3 and 2.4?
spk07: Sure, Nick. So the price was somewhere, I believe, right in the, just slightly north of 8, 8, between 8 and 8.5%. The mix was just very fractional within there, a couple of tenths lower. It actually, the mix was a couple of tenths lower, bringing that down slightly. We do, there was price taken in both January, March, and June. June was by far the lowest that we've seen in any of our pricing cycles, so we were very pleased with that. We believe, again, if you think about the value comments I made earlier in the Q&A, we believe that the lower the price that we can take, that will add to that whole value positioning. We do roll off a point and a half in carryover pricing. In Q3, there is another round of pricing in mid-Q4. So until we know what that is, it's hard to say what the rollover pricing roll-off will be there. But in Q3, we roll off a point and a half. And June saw the lowest amount of pricing that we've seen in quite some time.
spk09: Thank you very much.
spk08: Thanks, Nick. Our next question comes from the line of Eric Gonzalez with KeyBank. Please proceed with your question.
spk06: Hey, thanks. If you can comment on your stands for sales performance by day part. You know, late night seems like it's been an area of strength for some of your peers as staffing has become incrementally less challenging. So I'm wondering if you've seen an uptick in competition during the overnight hours. And do you see any risk that that stands for sales gap between the 24-hour and the non-24-hour locations could narrow as more competitors come back online during those overnight hours?
spk07: So, hey, Eric, it's Robert. We are really pleased with what we've been able to accomplish with regard to our 24-hour operations. They're still in the ones that are turning it on still, and we have new restaurants coming back online. With 24-hour operations every single week, that outperformance to the balance of our system seems to be holding. So with regard, I'm looking at a chart here. It looks like that the late night is still, frankly, one of our strongest day parts when you look at it over the course of the total week. So we think it's a strength of ours. If you look at the full service space, we are unequivocally the leader in late night opportunity. And when you look outside of the full service space, whether that be QSR or fast casual, we rival what they're able to accomplish in that space. So we're really pleased. We continue to work it every single week, trying to drive back. We do have some restaurants where we've allowed them to remain closed for a few days of the week with some economic upside to us and a slight royalty tweak. So whether we get them open 24-7 or whether we get the financial benefit, we drive to that every week. And, again, it's a strength of ours and, frankly, is one of the best performing day parts for us still.
spk04: So, I think Eric also, if I would add to that, I think part of your question was, so we see that, you know, we're not the only ones trying to do this and there's more and more evidence every day of that in quick service. You can see taglines on commercials. for bigger brands that are out there talking about, you know, open late night. So we know everybody's trying to do that. It's also why we feel really good about what we've reported and really good about the progress because we don't know, you know, how much more there is to gain there. It's still strong for us, as Robert just said, but it's also not the tailwind it was even six months ago.
spk06: Got it. And then just related to this conversation, you know, the staffing environment, it seems like things have loosened up. So With that as a backdrop, how can you accelerate the 24-7 adoption? What would you say the current limiter or governor is on that store expansion rate as we sit here today?
spk04: Yeah, Eric, it's fair. It's still, I'd say, wobbly, right? It's better. It's absolutely better. Wage growth moderated, of course, but you still see with certain states, Florida being one of them, there's still challenges from a staffing perspective, from a wage compressions perspective. And so, you know, I think it's still tough. Travel centers. So some of the restaurants that have challenges are ones either in a travel center or in locations where tourism is just off. So it's just a bit wobbly. And we're just trying to, again, we've said this before, but just be the best partners to our franchisees. And again, also, we've looked at some amendments to contracts to give us, you know, more hold than we otherwise would be. And it's still showing a bit of patience for those to get it right, take care of the guests, right? We really, we want to be able to take care of the guests. So when our partners at this point are saying, it's still a bit choppy for me, we're wanting to be as flexible as we possibly can.
spk01: Got it. Thank you. Thanks, Eric.
spk08: Our next question comes from the line of Jake Bartlett with Truist. Please receive your question.
spk10: Great. Thank you for taking the question. You know, mine was on the commentary on check and the lowering of the sales guidance. So, it sounds like, you know, menu prices, you know, there's not as many moving pieces there. So, it seems like what might be lowered is your expectation that there's going to be more Maybe some negative menu mix or some increase in discounting that's enabled by the lower commodity costs. So just any commentary around, is that the case that the outlook in the back half of the year is kind of lower just by the fact that you think you're going to push value more, which is going to limit the check growths?
spk07: Yeah, Jake, really good follow-up there. We do actually see slowing price. That's kind of our commentary to our franchisees. It's no surprise. I think BBI just came out with this this past week that the lower the price, the better to the traffic. It's really that simple. So we continue to guide and have frequent conversations with our franchisees about that correlation. Again, we don't dictate it, but we can clearly point out correlations between pricing and traffic. So we do see it slowing, frankly. And again, it's in line with the slowing commodity inflation and the slower labor inflation. You also wrap in there additional value And you see that that could have a, to your point, a mixed consequence. And we are very, very confident that we can drive traffic similarly to what we did in June. That performed quite well for us in why we believe in SuperSlam and our value positioning.
spk10: Okay. You know, I guess, you know, how would you frame the the momentum in the business right now. I know we try to look back versus 2019, that gets a little tough in how comps are measured over the years. But would you say that just the overall kind of demand environment is softening a little bit? I think if I look at average weekly sales versus 2019, it did grow a little bit slower, but not by much. But how would you view, how do you characterize the overall demand environment right now?
spk04: Yeah, I think it's a great question. We talk a lot about that and we're watching and listening for cues about whether the consumer is truly being still being resilient, which everything would point to saying yes. At the same time, you think about inflation. We know who our consumer is. And so at the lower income levels, right, because we have such a kind of wide array of guests that we have in our restaurants. lower income levels are still going to be impacted or still feel that more than others, even gas prices as of the last couple of weeks. So while not saying, you know, as much talk of a recession and good news there, you're still saying, you know, reasons to just be cautious, right? Just to be cautious. The amount of value offers, the amount of, you know, not necessarily discounting, but the amount of conversations out there around, you know, trying to capture more share of wallets the deals are everywhere, right? So, which would suggest everyone now understands maybe there's a little relief in some places, so we can not only afford to do that, but we've got to come off of some of the price. So, it's really just the demand seems to be there. We're not seeing a managed check down. We're still seeing them be resilient, and yet we're still mindful of, you know, the kind of experience we have to deliver at the price point that we have to deliver it at.
spk10: Great. And then last question is on the 24-7. And At one point at this point, we were thinking about mid-2023, we were thinking about your target of 90%. I think that was an early target. Now we're at 75% of the system offering 24-7. So what is your level of confidence that you can get to the 90%? Is that six months out, a year out? The pace has slowed pretty dramatically versus what we've seen in the last six weeks, very little progress there. You know, what gets it going is 90% still the right target.
spk07: Yeah, Jake, so this is Robert. Again, I think it goes back to the realization that we are clearly a leader in this space and trying to put that out there that we are and that the 75% is clearly a win. We want to continue winning. Ideally, we will continue to drive back towards that 90%. I did acknowledge that we have now begun with some amendments, and it's not a vast majority of the cases, but it does add to that percentage to make us whole on the royalty. even if the restaurants are only open three nights a week as opposed to seven. So we keep working that every single week, but, again, trying not to, frankly, put ourselves in the box that we put ourselves in earlier. It just is we continue to make progress, but want to take credit for being a leader in this space.
spk10: Great. I appreciate it.
spk08: Thanks, Jake. Thank you, Jake. As a reminder, it is Star 1 to ask your question. Our next question comes from Todd Brooks from the Benchmark Company. Please proceed with your question.
spk02: Hey, thanks for a couple follow-ups here. Kelly, you talked about one of the learnings out of the work at Denny's would be some menu simplification in the future. Are there any details on how broad those efforts would be or any strategic directions you're trying to take the menu in that you can share with us at this point?
spk04: Yeah, Todd, great question, and one I probably won't share an awful lot here. Just as we start to really embark on this and activate this, you'll see changes to our October menu and then even more changes to our March menu. I will tell you, we do an awful, what I can say, we do an awful lot of customization. And so while we still, we know our guests want craveable food, we know we have breakfast obviously breakfast leadership almost every day part breakfast is the food that is ordered so we're going to really lean into craveable food in our innovation we'll lean into craveable food at a great price point as we've talked about a great value but you'll also see us simplify around where we really where we can and where we don't get credit for it. So again, we've got a lot of customization and build your own categories where people can just choose from numbers and lots of, you know, lots of different items to add to omelets, burgers, grand slams even. And we want to lean into the core equities and curate plates where we can. So that's kind of one example, but there'll be others that we'll add over time to this strategy of just simplifying operations where we can and strengthening our execution.
spk02: OK, great in the final one and I'll hop back in. We talked about the Kiki's opportunity accelerating, but I forgot to mention as as you guys are assessing the opportunity and how you want to prove the concept out of the Florida market thoughts on maybe company owned openings over the next couple of years. Any changes to the thinking there to to really kind of kick start the development efforts with franchise partners proving the concept out in non Florida markets. Thank you.
spk07: Yeah, that's a really interesting question, Todd. So just the right size for the current year first. We will have company openings within that guidance range of 8 to 12, probably in the 2 to 4 range with regard to that. You'll see us deploy our capital. We've called out Nashville now. That was very deliberate in the commentary today. So our dollars will be deployed in Nashville first. I think you will continue to see us open company restaurants with Kiki's for the next few years. We need to get some synergies, some efficiencies in these markets, build them out. Oversight efficiency is typically six plus restaurants, so we'll do that in Nashville. So I would see it as probably disproportionate to what you are typically, what we typically say for the Denny's side, but likely in line with regard to kind of that overall 85-15 that currently exists within the Kiki's portfolio. Could skew a few percentage points either side of that. But you'll see us open Kiki's for the next few years, certainly. Okay, great. Thanks, Robert.
spk08: Thanks. Our next question comes from the line of Michael Tomas with Oppenheimer. Please proceed with your question.
spk05: Hi, thanks for the follow-up. Robert, I just wanted to double-check. Did I hear correctly that the second quarter commodity inflation was 1%?
spk07: Yes, sir. Yeah, it was 1%, Michael. 10% in Q1, 1% in Q2. The new guide on the commodity range is 1 to 3. Midpoint of that's around 2. So if you do the math, that puts us flattish likely on the balance of the year. So a really good place considering where we were just a year ago at this point. So yes, you did hear correctly.
spk05: Perfect. That was a great segue to the next part, which was how you're thinking about menu pricing. I think you said you were going to take another round of increases in the fourth quarter. How are you thinking about that magnitude now that commodities are no longer up double digits? Thanks.
spk07: Yeah, I think, Michael, we are trying to be as judicious as possible. Frankly, I think it's part of the guide, again, wrapping all of this kind of Q&A at various points throughout this call. It does, we believe pricing, we would like to see it lower. That will be our guide. We anticipate that the franchisees will likely follow given the abatement in the inflationary environment. So I think what you will see is that we will roll over and roll off pricing. I mentioned in Q3, we roll off a point and a half of pricing. In Q4, I'm hoping we roll off more pricing than we actually add. So-
spk04: And the other important thing to note, part of these strategies, part of the research, and then part of our action items that we're carrying forward and taking to our roadshows this mid-year timeframe is about a new pricing model and new pricing strategy. So we're being very, very calculated and very specific. And then really just talking to our and aligning with our franchise system to talk about the impact of pricing, to talk about what our guests do need from us. Then we've got a new approach that we're rolling out as we speak in terms of how to really look at all the sensitivities, all the costs in certain markets, and then come up with the appropriate pricing, holding and keeping at a minimum wherever we can.
spk01: Thanks very much.
spk08: There are no further questions in the queue. I'd like to hand it back to Curt Nichols for closing remarks.
spk03: I'd like to thank you all for joining us on today's call. We look forward to our next earnings conference call in late October during which we will discuss our third quarter 2023 results. Thank you and have a great evening.
spk08: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
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