Denny's Corporation

Ladies and gentlemen, thank you for joining us and welcome to the Denny's Corporation second quarter 2025 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. I will now hand the conference over to Kayla Money, Senior Director of Investor Relations. Kayla, please go ahead.

Good afternoon. Thank you for joining Denny's second quarter 2025 earnings conference call. With me today for management are Kelly Vallade, Denny's 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 earnings press release, along with a reconciliation of any non-GAAP financial measures mentioned on the call today. This call is being webcast and an archive of the webcast will be available on our website later today. Kelly will begin today's call with a business update. Then Robert will provide a recap of our second 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 25, 2024, and 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.

Thank you, Kayla. Good afternoon, everyone, and thank you for joining us. Today's discussion will focus on the continued progress we've made to bring profitable traffic driving initiatives to our flagship Denny's restaurants. We'll also talk about our continued confidence in our growth brand, Kiki's Breakfast Cafe. After that, we'll provide updates on our quarterly financial results and share our full year 2025 outlook. With that, let's get started. As we talked about in quarter one, we are operating in a very choppy consumer environment, and that has continued through quarter two. Household incomes remain under pressure, and consumer sentiment continues to be volatile, meaning consumers are pulling back on spending across most categories, and they're being more selective about where to spend. Despite these challenges, Denny's delivered system-wide same-restaurant sales of negative 1.3%, which is a 170 basis point sequential improvement from Q1. Results were impacted by our concentration in key states and markets that are particularly under pressure right now. For instance, our top four DMAs of Los Angeles, San Francisco, Houston, and Phoenix represent nearly 30% of our comp sales base and have historically been strong performers for us, lifting our overall system-wide same restaurant sales in Q1 by approximately 40 basis points. However, in Q2, these markets experienced outsized macroeconomic pressures that contributed to a reduction in system-wide same restaurant sales of approximately 30 basis points. This was a shift felt across the industry, and we were not unique. but our concentration in these markets means we may have felt the impact more acutely. Despite this, we continue to remain laser-focused on driving profitable traffic, helping us continue to outperform BBI family in California specifically and for the sixth consecutive quarter. We expect that the volatility in consumer sentiment will moderate over time, but in the meantime, we are continuing to stay nimble, innovating our value messaging and merchandising, and meeting the guests where they are. In March, we introduced the buy one, get one slam for a dollar deal, featuring our original Grand Slam and our All-American Slam. This was a compelling and competitive offer, and it performed well over the 12-week period, driving traffic from new and lapsed users. In fact, over 15% of the new and lapsed users who visited us during the BOGO promotion have since returned to enjoy our latest promotions, and some have even visited multiple times. As we headed into the busy summer months, we opted to refresh our value offer again with something that highlighted our brand equity and slams. In June, we introduced four slams under $10, featuring the Red, White & Berry Everyday Value Slam, which is particularly relevant in the summer months around the 4th of July, as well as the Choco Nana Everyday Value Slam and the fan favorites Super Slam and Everyday Value Slam. The Super Slam incidents peaked at a record high of nearly 10%, demonstrating the significant appeal of this offer, and the four slams promotion is continuing to drive similar new and lapsed user trial as the BOGO promotion did. We are continuing to iterate and evaluate ways to meet our guests' desire for value through a variety of offers that meet their different needs. We also remain confident in our off-premise strategies, which we believe uniquely position Denny's as a leader in the family dining category. Our volatility is concentrated in dine-in transactions, but our off-premise business remains strong. In fact, our off-premise sales contributed a 1.5% improvement in same-restaurant sales during Q2. We attribute our strength in this channel to our continued smart investments in digital, which increase traffic to our website, improve conversion rates, and more effective promotions on third-party platforms. And we'll go deeper with digital as we launch a new points-based loyalty program during the back half of this year. This new program is a best-in-class, one-to-one marketing program that leverages our already strong database of loyal guests to create greater, more compelling reasons for them to engage and spend more. It will allow us to collect valuable first-party data that enables us to personalize offers based on real guest behavior, drive frequency and margin with right promotions, and deliver the right message to the right guests at the right time. These digital guests are more valuable because they tend to visit more often. On average, these guests visit two times more often than other guests. Plus, we're making it easy for everyone to join from anywhere they can access Denny's.com, which includes but isn't limited to just the Denny's app. By launching this new points-based loyalty program, we incentivize engagement every visit, collecting data needed to fuel a personalized CRM program to build frequency and delivering between 50 to 100 basis points in traffic over time. I also want to take a moment and provide an update on our previously communicated strategy to close underperforming restaurants and return to pre-pandemic growth of flat to slightly positive in future years. The surgical and methodical approach, which began in 2023 and will be completed by the end of this year, was specifically designed to optimize and enhance the overall health of the franchise system with the goal of returning to net flat to positive growth by 2026. Rationalizing the portfolio was the right thing to do, and we're seeing the results that we wanted and expected from this process. It has already resulted in a franchise AUV increase of approximately 5% or nearly $100,000 in AUVs. In addition, our rehabilitation plan is also working as expected. We're moving underperforming restaurants to new operators and taking a targeted approach to rehabilitating other restaurants through enhanced training and dedicated support from our field teams. This collaborative effort has resulted in the remaining Quintile 5 restaurants now outperforming franchise same-restaurant sales by approximately 120 basis points during quarter two, further proving the strategy to rationalize the portfolio in this way, though difficult, was absolutely the right thing to do. One more important action we're taking to improve not only the lower quintile restaurants but the entire portfolio is protecting margins and leaving no stone unturned. Our margin improvement efforts to date have already identified significant savings through reduced food and non-food costs and waste savings. These savings are a result of supplier negotiations, product spec changes, recipe changes, menu enhancements, and operational procedure modifications. As we look forward, upcoming areas of opportunities for savings include pack size optimizations, product packaging, and to-go packaging. In total, we believe this initiative can deliver up to 200 basis points of savings over the next 12 to 18 months to mitigate continued rising costs and boost both our company P&Ls and franchise P&Ls. It's important to note none of the savings I've referenced are at the expense of the guests, and all of them have come with complete alignment and working closely with our franchisees. Overall, we remain focused on living our values and executing our strategic initiatives. We are leaning into our strengths as a brand, winning in key occasions like value and off-premise, and engaging the next generation of brand fans to drive meaningful results for our business. I'd like to thank Chris Bode and the entire team at Denny's, along with our dedicated Denny's franchisees. Their resilience and focus are inspiring. Now turning to Kiki's Breakfast Cafe, which was recently named to the Nation's Restaurant News 2025 100 Under 100 list of emerging restaurant chains with staggering results. The brand continues to delight guests, and as we've taken it beyond Florida, we're seeing incredibly strong guest sentiment, including a 4.85 Google rating. Kiki's delivered strong second quarter same restaurant sales of positive 4% compared to the prior year quarter, and they continued their trend of significantly outperforming the BBI Family Dining Index in Florida by over 220 basis points. The brand continues to delight our guests, and as we've taken it beyond Florida, we're seeing incredibly strong guest sentiment, including a 4.85 Google rating. And when you take care of guests this way, they thank you by coming back more often. Because of this and our other compelling initiatives, Kiki's was able to deliver strong second quarter same restaurant sales of positive 4% compared to the prior year quarter. And they continued their trend of significantly outperforming the BBI Family Dining Index in Florida by over 220 basis points. Kiki's has continued to benefit from all the foundational work that was done to capture the essence of this emerging brand. maintaining industry-leading guest satisfaction scores while focusing on operational excellence and speed of execution. This, combined with initiatives such as introducing alcohol offerings and growing off-premise sales, helped to deliver the 4% comp in Q2. Importantly, though, the growth came from both dine-in and off-premise transactions, making it even more impressive. Additionally, Kiki's launched its first ever system-wide promotion in fiscal June, featuring $5 kids meals with every adult entree. This timely promotion set out to capture families traveling during the busy summer months and promote the recently added kids section of the menu. This first ever Kiki's promotion drove substantial incremental traffic during the weekdays throughout the summer and helped introduce the brand to new guests. Another big area of focus for Kiki's is development. In Q2, Kiki's opened eight new cafes, which included reopening two previously closed Kiki's locations now under new management and ownership. In July, we opened two more, bringing our year-to-date cafe openings to 13 already. The brighter, more vibrant new image has been included in all of the new cafe openings, and with the new three company remodels completed, our company fleet is now over 70% converted, and our franchise fleet is starting the journey with nearly 20% representing the new image. We plan to complete a couple more remodels this year in company locations as well as a few new franchise remodels, and will launch into a broader remodel program for the franchise fleet in 2026. As part of the strategic plan to remain asset-light, we also re-franchise three company cafes in northern Florida during the quarter and expect to re-franchise two more in the near term. This allows us to streamline Florida Kiki's company operations to Orlando while expanding into Nashville and Dallas. I'd like to take a few minutes to share an update specifically on these new markets for Kiki's. The Nashville market, which marked the brand's initial expansion outside of Florida about a year and a half ago, now includes six company cafes, one of which opened in fiscal July. Sales momentum has improved with each successful opening, reflecting enhanced brand recognition within the market. The six cafes in the Nashville market currently generate roughly 15% higher average weekly volumes. than the system-wide average, and we are confident that volumes will continue to grow as the market matures. Although we now have six cafes in Nashville, only two have operated for over a year. The rest average just over three months. Robert will speak to this in more detail when you hear from him, but note that margins are improving as planned and are on track to meet the upper teens' targets that were set at Investor Day. Dallas is similar, with six company cafes now open for less than six months on average. We are optimistic about this market as well, having expanded early into many new and developing suburbs, and we expect Dallas to achieve its targets as scheduled. The maturity of these two markets will be crucial for demonstrating success, providing a playbook for openings and growing in new markets, and attracting new franchisees beyond our current internal pipeline. I am confident we are on the right path. I want to thank our Kiki's team and franchisees for their ongoing commitment and enthusiasm as we aim to become one of the largest competitors in the fastest-growing franchise Daytime Eatery segment. In closing, we continue to focus on executing our strategic initiatives and winning with our guests while being nimble, facing challenges head-on, and meeting our guests where they are. We are a value leader, and we know how to leverage that strength to drive profitable traffic and support our guests and our franchisees' needs. We are hopeful that the macro environment will continue to stabilize and improve, and we are confident in our sales levers and smart initiatives. These include a continued focus on value and off-premise, and new digital enhancements such as our new loyalty CRM platform set to launch in the back half of this year. Going forward, we have a lot to look forward to, and I am incredibly proud of our teams, our franchise partners, and all those leading these amazing brands, executing our strategies every day, and taking great care of our guests. I will now turn the call over to Robert Borostek, Denny's Chief Financial Officer, to discuss our Q2 financial results.