Denny's Corporation

Greetings and welcome to Denny's Corporation first quarter 2024 earnings conference call. At this time, all participants are on a 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. I would now like to turn the conference over to your host, Kayla Money, Senior Director of Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining us for Denny's first quarter 2024 earnings conference call. With me today for management are Kelly Vallade, Denny's president and chief executive officer, and Robert Borostek, Denny's executive vice president and chief financial officer. Please refer to our website at investor.denny's.com to find our first 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 recap of our first quarter financial results and a development update 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 27, 2023, 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 President and Chief Executive Officer.

Thank you, Kayla. Good afternoon, everyone, and thank you for joining us. I'm excited to share our first quarter results with you today and provide highlights for the quarter. I'll do that in the context of our unique playbook, which includes our crave strategies and our specific areas of focus for both the Denny's brand and Kiki's Breakfast Cafe. Denny's Q1 domestic system-wide same restaurant sales were negative 1.3 this quarter, with both sales and traffic outperforming both the family and casual dining segments. I'm incredibly proud of our teams. and our franchise owners and operators who demonstrated incredible resilience and focus even in the midst of a tough operating environment. Denny's dine-in business showed progress this quarter with the breakfast day part showing strength. Continuing to strengthen and grow dine-in traffic throughout all day parts is a primary focus, and we believe we have a great approach and lineup to do this. And for those guests seeking alternative dining experiences, our digital and off-premise strategies are strong and deliver for many guests who want convenience. In fact, while off-premise sales as a percentage of total sales had been at 19% or greater since Q1 2020, this first quarter we delivered 21%, stealing share from others that have scaled down in off-premise channels. The proof points for us are clear. Denny's off-premise guests skew younger than dine-in. Approximately 70% of our Gen Z and millennial guests utilize our off-premise channels compared to the same groups utilizing dine-in at approximately 40%. This simply means that this part of our business, though yes, lower margin, is highly incremental and delighting a different guest. For that reason, off-premise channels continue to be a strategic opportunity for us to grow new guests and transactions through our unique virtual brands and through Denny's On Demand. In addition to capturing share with our off-premise business, our current areas of focus for Denny's are clear. We will continue to innovate and dominate breakfast and do that with a focus on unparalleled value. This past quarter, we delivered on both. Our most recent spring menu launched just a few short weeks ago but is already delivering for us through both pricing and positive product mix changes. On this menu, we added to our signature slam platform with the introduction of our new berry waffle slam featuring the new highly craveable liege waffle. We are thrilled with the performance of these new waffles as they are outperforming sales expectations and getting fantastic feedback from operators and guests. We also have several other new menu items beyond breakfast that are really resonating with our guests, including our new barbecue bacon chicken sandwich and the new Oreo brownie sundae. And our approach to simplify and minimize customizations on the menu is also making a difference with the create your own categories down as a percentage of mix on the menu and signature curated plates increasing. As we have mentioned, this helps us with order accuracy, makes service lives easier, and speeds up ticket times without any impact to the guests as they are always welcome to customize any order. We've also continued to highlight our most popular and most profitable items on the menu, delivering improved margins. Delivering compelling value leadership is also critical. Our guests choose Denny's because we offer an incredible experience at a great price for the foods they love, from familiar breakfast favorites to late night cravings. With approximately 70% of our guests at household income levels at or below $75,000, price and value remain front and center for many guests as they think about where they want to spend their dollars. This quarter, we responded to that by offering our original Grand Slam at the incredible starting out price of $5.99. Guests responded favorably, with traffic and sales coming out strong into the new year. Total value mix in the first quarter was approximately 19%, up from the 17% mix we saw last quarter. Additionally, our year-over-year share of wallet increased against family dining and casual dining from Q4 to Q1 across all income cohorts, proving our value messaging is resonating with all of our guests. And for this quarter, we are again leaning into value, now featuring our reprised all-day diner deals menu, which is a lineup of six entrees, also with an impressive starting at price of $5.99. We are pleased with the results we are seeing in the first few days and optimistic about the potential impact for the quarter. And because we know that guests also crave our many premium items, we continue to elevate our barbell strategy by merchandising dishes like the berry stuffed French toast in restaurants. Even with a price-conscious consumer, our check has remained whole with minimal to no check erosion. We consider this a success and will continue to leverage our effective barbell strategy to offset costs and improve the model for our franchisees. The third area of focus is convenience. I've mentioned a few of the stats related to our off-premise business already, but I'll dig in a bit more here, sharing what you'll see us do next. We've known that convenience is important to many of our guests, and since the onset of the pandemic, there's been a growing preference for off-premise dining. We continue to believe that our guests want convenience and that off-premise channels will continue to see growth, despite a shift by many companies to deleverage this part of the business. This belief was supported recently with data shared from Circana, formerly NPD, that showed that while off-premise channels were slightly down in the first half of 23, they spiked in the back half of 23 and will continue to increase. We believe by leveraging our operating capacity at dinner and late night, we are positioned incredibly well to capture the share and leverage the strength, as others focus only on their dine-in business. The growth is also meaningful both in terms of sales and the ability to attract new guests at different day parts, as our virtual brand sales in these later day parts are nearly three times that of our breakfast and lunch day parts, delivering a highly incremental 2% to 3% in sales transactions from those incremental guests. Because of these results, we are bullish in this area and plan to expand Band of Burrito, our third virtual brand concept, to an additional 200-plus locations over the next couple months. These will be in California because it has the unique potential of offsetting the impact of AB 1228. When we offered this option, our California franchisees were quick to sign up, given the perfect timing and the fit of the band offerings. Once we expand fully into the California market, we'll likely roll nationally, most likely starting in early Q4. Finally, and importantly, starting this quarter, we're adding significant media to the market by reestablishing our brand co-ops and providing a match for all dollars from our ad funds. This match was halted during the pandemic, but is critical to our go-forward plans to get our message to more guests. The matching funds provide greater incentive for co-ops to step up their media investment, which will be leveraged locally to add an impressive $12 million on an annualized basis to the ad budget. Now I'll switch gears and provide updates to a few of our priorities captured in our CRAVE strategic framework. For reference, CRAVE stands for creating leading tech solutions, robust new restaurant growth, assembling best-in-class teams, validating and optimizing the business model, and elevating profitable traffic. I'll first focus on creating leading tech solutions. We've made significant progress during the beta testing phase of our new cloud-based POS platform. We can now say we will be partnering with Xenial Enterprise Solutions for this launch. We now have over 110 restaurants complete with the installation with plans to move into general release for the system in Q3. Even more exciting are the recent results we've been seeing and what this platform will enable. The key components of the platform for us are enhanced kitchen video display systems, or KVS, new beverage monitors, server handhelds, and QR pay. Our franchisees have been with us from the very beginning on this test, and they are now weighing in with their results, reporting average check increases given the ease of adding beverages and add-ons, faster table turns, reduced waste, and reductions in labor given less server hours needed in peak periods. We are encouraged by these results, as they not only optimize the model, but they demonstrate a significant opportunity to show a strong return on the investment of this new system. In the kitchen, we're also focusing on menu items that allow us to utilize existing equipment from our kitchen modernization rollout and extend the use of ingredients featured on the menu. In fact, our culinary team created the new leaf-style waffle after exploring additional items that could be prepared in our ovens. This created efficiency for the restaurant while providing new menu options for our guests. The R in CRAVE stands for robust restaurant growth. That growth will come from new units and strategic investments in our physical assets through an ongoing accretive remodel program. This quarter was a big one in that we finalized our research and now know with certainty that we have a home run or even a grand slam with our latest remodel package. In this package, we leverage the learnings from our last remodel program called Heritage 2.0 and combine that with research and new design elements that lean into our unique diner position. We now have a winning solution delivering mid-single-digit percentage traffic lifts. These impressive results, along with our ability to incentivize and support our franchisees with financing through our loan pool, will help them finance these remodels and improve sales and traffic for the entire brand. This will also get us back to a remodel pace consistent with what we had prior to the pandemic. Expect us to talk more soon about the way we'll support our franchisees and work to improve our fleet with a strong focus to gear up in this area. In short, and to summarize what you'll see from the Denny's brand, continued new menu innovation bringing craveable items to our guests, continued strength in providing unparalleled value offerings, tech advancements with our Xenial rollout, and a remodel program set to deliver fantastic traffic results and a great ROI for our franchisees. Finally, we'll reinvest in our co-ops, adding roughly $12 million to our overall marketing spend, capturing the attention of even more guests and driving traffic. Turning now to the momentum at Kiki's Breakfast Cafe. We noted on our last earnings call that we received a warm welcome in the Nashville market as we opened our first location outside of Florida. The local community continues to embrace Kiki's as evidenced by sales volumes that are ahead of our expectations and on pace to deliver approximately 2 million in sales annualized. We believe this pace, which is also ahead of the average sales volumes we see in Florida cafes, validates our optimism for this brand and for the Kiki's team. It also shows that our discipline and determination, making sure we had the right recipe to begin expanding this concept into new markets, was spot on. The refreshed interior, prominent mornings from scratch tagline, and refreshed menu deliver on our core differentiators of an elevated culinary experience, featuring delicious, abundant entrees prepared from scratch daily and using the highest quality ingredients. At Kiki's, you'll see this delivered in an energetic, fun atmosphere where the customer experience is best in class. We now measure Kiki's guest satisfaction through GuestXM and are blown away by the continued stellar results, specifically a Google rating of 4.7 and overall net sentiment and intent to return scores that far exceed other family dining or full service benchmarks. Following the opening in the Nashville market, two additional Kikis opened in Jacksonville, Florida with a new design and another cafe is expected to open in the Nashville market in the next couple of weeks. The team is working feverishly to identify sites for future cafes, help secure property control, navigate permitting, and begin construction efforts against a strong development pipeline. We simply can't wait to introduce new guests and new markets to this fantastic brand. To close out, our thoughtful strategies are driving our actions and our areas of focus are well-timed given the environment and the expectations of our guests and our franchisees. These solutions and the promise of new innovation on the menu with technology and the right investments give us reason to be optimistic about what's ahead this quarter and beyond. I'll now turn the call over to our CFO, Robert Borostek.