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Financing

Denny’s profits triple as refranchising accelerates

Sales and pending deals will pare the franchisor’s holdings by nearly 90 stores.
Photograph: Shutterstock

A blend of the old and new tripled Denny’s net income for the second quarter, even as the top line was shaved by one of the fresher initiatives.

Same-store sales for the family chain rose 3.8% overall, with company units outstripping franchised stores, 4.4% to 3.3%. Traffic was essentially flat, with the gains coming from a combination of changes in sales mix and increased prices, according to CFO Mark Wolfinger.

The mix of company-operated and franchised stores shifted during the quarter as a result of Denny’s refranchising campaign. Thirty-seven corporate units were sold to franchisees, who now run about 90% of the 1,709-restaurant system. Denny’s intends to raise the proportion to at least 96%, with 22 restaurants sold thus far in the third quarter and 27 deals pending.

CEO John Miller said the stores are selling at “higher multiples than we had originally anticipated,” without breaking out a per-store average. Proceeds will be used to improve the chain’s real estate portfolio, he and other executives indicated.

“Perhaps most important, we are excited to enable a newer generation of Denny's franchisees to breath new energy into this great brand through their emerging leadership and influence,” Miller remarked during a conference call with financial analysts.

While shifting its role from operator-franchisor to more of a pure franchisor, Denny’s is also focusing on boosting sales through delivery and new food promotions. During the second quarter, the percentage of the chain offering delivery through at least one third-party service rose to 88%, from 79% at the start of the period. Off-premise business now accounts for about 11% of total sales, up from 7% at the time the brand began its delivery push in mid-2017, Miller said. 

These transactions continue to be incremental and deliver total margin rates from the low teens to upper 20% after considering product costs, labor costs and the delivery fee,” he added.

Miller also noted, “Our expanding off-premise strategies enabled us to reach younger guests and increase our brand awareness.” Fifty-two percent of guests are now 34 years old or younger. 

Yet the brand’s sales mix remains skewed toward breakfast, its traditional stronghold. Comps for the morning daypart rose 2.5% for the second quarter, Miller revealed, while dinner and late-night comps slipped.

The chain is aiming to bolster nonbreakfast business with a new limited-time line of hand-formed burgers.

 It is simultaneously aiming for bargain hunters with a new $5.99 offer that runs contrary to the plant-forward trend, an extension to the brand’s highly popular Slams breakfast line, the Meat Lovers Slam.

Net income for the second quarter totaled $34.2 million, compared with a net profit of $11.6 million for the year-ago period. Revenues amounted to $151.9 million, a 3.5% percent decline from the same quarter of 2018. Management attributed the change in the top line to the chain’s refranchising effort.

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