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Denny’s Franchisees See Sales Gain of 1.3 Percent in Q3

Denny's new coffee poster

SPARTANBURG, S.C.—Denny's Corporation (NASDAQ:DENN), reported that domestic same-store sales grew 1.3 percent for its 1,522 franchised restaurants in the third quarter, which ended for the company on September 25. Its 164 company-owned restaurants only gained 0.7 percent in same-store sales. Same-store sales system-wide have grown in nine of the past ten quarters.

Casual dining visits shrink

Compare that to the Knapp-Track Casual Dining Index that shows all of casual dining's same store sales and traffic had negative growth for the quarter ending in September. Likewise, foodservice researcher The NPD Group points out to Blue MauMau that visits to casual dining restaurants were down 2 percent in the seasonal quarter which ends in August, not September.

The NPD Group's CREST research shows that casual dining is harder hit compared to the restaurant industry's flat traffic as a whole. Although September's industry results have not yet been tabulated, NPD restaurant industry analyst Bonnie Riggs estimates that when it comes to all restaurant sectors, "total industry traffic will likely be up by 1 percent in the year ending in September." But she pointed out that casual dining won't fare as well. "Casual dining traffic will be slightly down with the segment's declines eased by aggressive dealing," she said.

Look out for IHOP

In other words, Denny's restaurants have performed better than most in the sagging casual dining sector.

DENN Chart

But one major competitor did better. IHOP of DineEquity (NASDAQ:DIN) grew 3.6 percent for the quarter in domestic same-store sales. It attributes the increase to a shift in menu items that gave IHOP a higher guest check. IHOP has 1,421 franchises, 168 area licensees and 13 company-owned restaurants. IHOP's total restaurant count at the end of September is now 1,602. That is up from 1,565 last September.

Denny's store remodels to be completed by 2019

In an earnings call yesterday, John Miller, chief executive officer of Denny's Corporation, stated: "We continue to evolve our strategies to better meet the needs of our guests and our franchisees." Miller went on to speak about a collaborative franchise model in which franchisees through their independent franchisee association organize the company convention to meet the demands of franchise owners. The association even collects revenues for the system's annual franchise convention. Of this relationship, Miller stated, "This week, we had the Denny's Annual Franchise Convention hosted by the Denny's Franchisee Association. We are pleased to say that our partnership with our franchisees is as strong as ever."

Chief executive Miller spoke about how the $2, $4, $6 and $8 value meals have worked well for restaurant owners. He explained that the company will continue to expand on its marketing message of being "America's Diner." It will introduce new menu items as well as upgrade its restaurants. In regard to restaurant renovations, Miller stated that 20 of the company-owned restaurants will upgrade this year. "Our franchisees, I believe, will do 125 to 135 this year," he stated.

In his bullish report of recommending a "buy" of Denny's stocks, Janney Capital Market's restaurant analyst Mark Kalinowski cites an article from the Virginian-Pilot that names a few of the upgrades that Denny's is testing. The Pilot observes, "The kitchen improvements, for example, will include ovens that can bake a lasagna or pot pie from scratch in three minutes. Denny’s is adding flat-screen televisions and high-backed booths."

In yesterday's earnings call, analyst Amitabh Kapoor of Gabelli & Company Inc. asked if the 20 renovations of the last year in Denny's 164 company-owned restaurants meant that there is a re-imaging cycle in Denny's over seven or eight years for system-wide completion. Denny's CEO replied, "Yes," adding, "You can basically divide everything by seven." He went on to say that although franchisees had  backed off in recent years from aggressively upgrading stores because of soft economic times, now "franchisees have been executing a little bit at a faster pace than the company's [restaurants]. He continued, "About 70 percent of the system in 2014 through 2018 is due a remodel, and 2016 and 2017 are the bigger years for that."

Denny's chain shrinks by three restaurants

Denny's chain of casual diners opened six new domestic franchises, including a non-traditional location at Wright State University in Dayton, Ohio.

At the end of September last year, the chain had 1,686 restaurants. At the end of the third quarter in 2013, it has three fewer outlets. Miller spoke about the flattened chain. "I think in a brand that's 60-years old, this is our 60th anniversary, a closure rate that's sort of in that 1.5% to 2% range of total units is not uncommon, I think, when you look at the underlying lease structure, trade area, things along those lines," explained the CEO. Miller later added, "We do expect to grow net units."

In the restaurant sector, franchisors sometimes talk about an "asset light" model, in which chief executives argue to shareholders that having few company-owned restaurants provides more flexibility for the franchisor and fatter profit margins. In contrast, Denny's CEO explained that having 10 percent of the base owned by Denny's Corporation gave him an edge. That mix was important to understand the benefits of the brand's initiatives at the operational level as well as to feel the difficulty of running casual diners during tough economic times. He thought the 10 percent company-owned to franchised restaurants mix was part of maintaining a balanced franchising company that could keep in alignment with the franchise community.

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