Denny's Corporation

and welcome to Denny's Corporation third quarter 2023 earnings conference 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, VP, Investor Relations Finance. Thank you, Mr. Nichols. You may begin.

Good afternoon. Thank you for joining us for Denny's third quarter 2023 earnings conference call. With me today for management are Kelly Vallee, Denny's President and Chief Executive Officer, and Robert Verostik, Denny's Executive Vice President and Chief Financial Officer. please refer to our website at investor.denny's.com to find our third 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 third quarter financial results before commenting on guidance. After that, we will open it up for questions. Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risk, uncertainties, and other factors that may cause the actual performance 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 Valade, Denny's President and Chief Executive Officer.

Thank you, Kurt, and good afternoon, everyone. Thank you for joining us. Today's discussion will focus on our third quarter results, the continued progress made towards our crave strategies, 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 1.8%. While we maintained positive same restaurant sales throughout the quarter, same restaurant traffic levels softened as the quarter progressed. This was similar to the trend experienced across the industry. Consumer confidence declined in August and September, driven by concerns around rising interest rates and the potential economic impacts of recent geopolitical events, and we anticipate consumer uncertainty and discretionary spending pressure to persist, at least in the near term. While the operating environment remains challenging, we are laser-focused on making strategic choices in places we know we can win and where our guests count on us to deliver, such as best-in-class breakfast, an unbeatable value proposition, and convenience in the form of off-premise options. During the quarter, we wrapped up our Baconalia promotion, which delivered quality, craveable menu options relevant to our guests. Our Baconalia platform outperformed our last Baconalia LTO and exceeded all of our projections. Following Baconalia, we leaned into seasonal flavors, launching our relevant and craveable pumpkin pecan pancakes promotion, which just ended last week. Now, as we head into the holiday season, we've introduced our turkey and dressing dinner and seasonal pies, and we're bringing back our salted caramel banana pancakes, which are seasonally relevant and a guest favorite. And next week, we'll be launching our new fall core menu, which will incorporate many of the learnings from our comprehensive research to better understand our core guests, as well as help enable operational efficiencies and improve margins. The menu architecture and design amplify what we've learned is most important to our guests and business while not decreasing the overall number of menu items. For example, we simplified the menu layout by decreasing the number of customizations and build your own categories that currently occupy large areas of the menu. Those areas will now be utilized to highlight breakfast items and craveable value while also leveraging and reigniting our equity in such areas as our SLAM platform, including our new strawberry-stuffed French toast SLAM. This new core menu item has four slices of brioche French toast stuffed with sweet cream, cheese filling, and topped with strawberries, strawberry sauce, and powdered sugar. It can be enjoyed as a SLAM or a la carte. In addition, we're leaning into guest feedback and their desire for varied beverage options, such as cold brew coffee. The fall core menu also incorporates a new pricing model that will help protect our value leadership while also better enabling franchisees to make smart pricing decisions that are aligned with regional factors and more localized competitive benchmarking. Lastly, in addition to the food and menu work happening within our four walls, our marketing team is continually optimizing our targeted messaging, delivering across effective channels to drive engagement and awareness. Now, let's talk about value. We are pleased to see a steady increase in our total value mix. Total value mix in the third quarter was approximately 17%, up from the 16% mix in the second quarter and 15% mix in the first quarter. With growing concerns around consumer spending, delivering on our promise of everyday value for our guests is even more relevant than before. Understanding this need, we are choosing to double down on value to improve traffic trends. We've always been known for our strong value positioning, and we're able to drive profitable sales and traffic through our value propositions. In addition to our signature Super Slam starting at $7.99, most recently we began testing our original Grand Slam at the unbeatable price of $5.99 in several markets, with test results showing a profitable traffic lift and little impact to check compared to system trends. As a result, we will be extending the offer to several other markets in the coming weeks. Next, let's talk about the convenience of our off-premise business. Off-premise sales were approximately 19% of total sales for the third quarter, flat with quarter two. We feel good about this, especially considering that many in our industry are experiencing actual sales declines in this channel. Even better, most recently we've started to see an uptick in our off-premise sales, hitting above 20% by the end of quarter three, further showing that off-premise channels are consistently strong for us and a way to leverage operating capacity at dinner and late night to a new consumer. Whether delivering convenience through our Denny's app or our Burger Den and Meltdown virtual concepts, families rely on us for great off-premise experiences with craveable food options. That's why we remain focused on capturing further off-premise opportunities, including current testing of a new virtual burrito brand concept we call Banda Burrito. We've been in alpha testing of Banda Burrito in 10 locations And based on positive results, we'll be expanding it to an additional 80 locations next month. We are primarily focusing this concept in California and believe it has potential to efficiently expand our off-premise business with popular regional flavors while leveraging many existing SKUs in our pantry. In addition, last week at our annual Franchisee Convention, we unveiled our first complete remodel and new prototype under Modern American Diner. Not only does the new prototype feature an improved overall look, it embraces off-premise with a dedicated pickup area staffed by a dedicated to-go specialist. So while we're focused on these three areas, food, value, and convenience, we have not lost sight of our other strategic priorities captured in our CRAVE framework. 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. I'll touch on creating leading-edge solutions with technology and innovation and assembling best-in-class people and teams. First, I'll start with technology and innovation. Technology touches everyone and everything in our business, which is why technology and innovation are part of our plan to win. Our new ovens continue to unlock menu opportunities and efficiencies for us. Currently, about 50 plates on our menu are prepared, at least in part, using our new ovens, including our proteins and our oven-baked entrees and desserts. The culinary and operations teams are continuing to learn and explore opportunities to leverage our kitchen equipment further, driving menu innovation and kitchen efficiencies. We believe the pursuit of additional efficiencies through our ongoing kitchen optimization programs will be critical as we anticipate further wage impacts, especially related to the FAST Act in California. We look forward to sharing more about these kitchen optimization strategies on future calls. In addition, we remain focused on implementing new solutions that not only solve points of friction, but also introduce relevant tools to streamline processes and deliver efficiencies such as QR pay. We are also still testing a new cloud-based POS platform from which we are learning and enhancing ahead of a broader rollout. Going forward, this will be driven under the leadership of our new Chief Digital and Technology Officer, Pankaj Patra. We are excited to welcome Pankaj, who can help us build on the solid foundation already in place while leading us in identifying new, relevant, and innovative solutions to serve our guests, employees, and franchisees in the future. And of course, we have to talk about our people. We are a restaurant company, but also a people business, which is why it's important that we put people first in everything we do. We officially launched our new Denny's GAIN program in August, creating opportunities that may have been otherwise out of reach for our team members. GAIN includes four key areas, GED accreditation, college credits and certifications, life skills, and career pathways for high school students. We're really pleased with how the program has been received so far and are optimistic about the positive impact the program may have on attracting new talent and staffing and turnover rates. Since the launch of the program, 17 members have already earned their GED, while 102 are currently enrolled in the program. Finally, I want to pivot and talk about growth and the expansion of Kiki's. Now that we have a playbook built on Kiki's that articulates what makes this brand so special, we're leaning into that Kiki's special sauce to ensure that as we grow, we continue to demonstrate a differentiated offering to all of our guests through the new tagline, Mornings from Scratch. This quarter, we rolled out a new menu design, incorporating learnings from the brand Ethos work that was concluded earlier this year. The new menu has fewer items, which reduces kitchen complexity, while also providing a cleaner look that allows Kiki's to better showcase the high-quality ingredients and made-from-scratch philosophy it's known for. The menu redesign has already led to check growth, and we're still testing alcohol in several cafes, also with promising results. We also continue making brand decisions and leveraging our learnings to support accelerated long-term cafe growth within and outside of the state of Florida. We have opened three cafes already this year, including one that opened after quarter end. In addition, we have signed development agreements with current Kiki's franchisees to open four more. While we have faced construction challenges and needed to adjust the timelines for several openings, we are extremely pleased with the progress we've made. We're also excited to bring the Kikis concept to the Denny's franchise system. Interest in Kikis remains high among Denny's franchisees, and we're excited to announce securing several development agreements. Kikis has also garnered interest from new franchisees, having held several meetings over the past couple of months with potential new operating partners. Lastly, we have a new cafe prototype ready to go as we look to bring the winning Kikis experience to a new set of consumers soon. So as you can see, the foundational work we've been doing at Kiki's is starting to drive potential momentum, and we're excited for what's to come. In conclusion, we just wrapped up our annual Denny's Franchise Association Convention and Trade Show, which is an incredible opportunity for us to gather with our franchisees, talk about our business today, and rally together for our future. We used our time together to share our plans to continue to strengthen and revitalize the brand through new and relevant strategies, all under the Crave umbrella. and we showcase new leadership and bold thinking. While not avoiding the realities and challenges of the current operating environment, our franchisees walked away with a clear understanding and alignment of the strategies and initiatives that will strengthen both top and bottom line results and continue to grow our brand, and they were pleased with our bold thinking. Next time, we'll share further progress against those strategies for both Denny's and Kiki's. With that, I'll now turn the call over to Robert.