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SPARTANBURG, S.C.—Casual diner Denny's Corporation (Nasdaq:DENN) reported its preliminary financial results for 2013 and fourth quarter on Monday. In the soft casual dining sector, same restaurant sales are up again. And for the last quarter of 2013, it is even better than expected.
Mark Kalinowski, restaurant analyst with Janney Montgomery Scott, observed how Denny's surprised analysts with better than expected numbers. Kalinowski had expected company-owned outlets to be down by -0.5 percent and franchises up by only 0.5 percent. But Denny's domestic numbers were higher. Its franchised restaurant same store sales grew by 0.8 percent in the fourth quarter of 2013 and by 1.5 percent for company-owned stores. For the entire year of 2013, franchised restaurant same store sales grew 0.6 percent versus zero percent for company-owned restaurants over 2012. It is the fifth consecutive year of positive net system growth for Denny's.
Competitor IHOP of DineEquity (NYSE:DIN) has not released its 2013 annual report yet. But IHOP's domestic system-wide same-store sales declined 1.6% for fiscal 2012 compared to fiscal 2011. It said its same-restaurant sales performance reflected a decrease in traffic, partially offset by a slightly higher average guest check. It has managed the layout of its menu to highlight higher priced items for guests to order to bring up same store sales in 2013 and 2014.
John Miller, CEO of Denny's Corporation, said at a Tuesday presentation at the ICR Xchange Conference in Orlando that the system's tired old stores are being remodeled and revitalized. Miller pointed out that more than 280 new restaurants have been opened in the last four years with franchise owners opening roughly 90 percent of the new locations. He also saw strong growth potential in what he called "new and emerging markets," where Denny's did not have the top or second market share in family dining spending. These markets are largely east of the Mississippi.
Insiders from within the Denny's Franchisee Association tell Blue MauMau that Denny's Corporation has been making steady improvement in its already strong relationship with franchisees and their independent association. "Franchisees are involved in our strategy," said CEO Miller, quickly summarizing how franchisees collaborate in this brand in ways that other brands do not. Although he didn't explain the details, it is known in the industry that Denny's franchisees helped launch the national marketing of Denny's now famous $2 $4 $6 $8 value menu, for example. Miller pointed out that these menu items at these price points have helped drive one in five visits to Denny's for all dayparts.
Restaurant cost pressures
Analyst Kalinowski observes that cost pressures are a mixed bag for Denny's restaurant owner-operators. According to Denny's Corporation, which oversees the system's supply chain, commodity costs are improving. But, says the Janney analyst who attended the Denny's presentation at ICR Xchange on Tuesday: "Denny's comments that no matter what happens (or doesn't happen) with regard to minimum-wage laws, labor costs likely will continue to go up."
Another focus the brand is leading within its franchise system is to improve customer experience. Miller says that according to surveys of its guests, satisfaction scores have improved by 9 percent over the past three years (see chart).
As a result of all this restaurant-focused effort for the full year, Denny's system netted a growth of 12 additional restaurants. Whereas in 2006 franchises operated 66 percent of its restaurants, its asset-light model now has franchisees operating 90 percent as of 2012. Denny's saw the opening of 46 new restaurants, including five international locations, and closed a total of 34 restaurants. With 1,599 restaurants in the United States, Denny's total restaurant count worldwide at the end of 2013 is now 1,700. That's roughly a hundred more restaurants than its closest competitor, IHOP, with its total of 1,602 restaurants as of the third quarter of 2013.
The casual dining franchisor has 1,537 franchises and 163 company-owned restaurants worldwide.