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A slimmer Denny's looks past damage control to growth opportunities

The latest flurry of comeback measures includes the launch of virtual concepts, a tweaked menu and growth through conversions.

Saying the worst of the pandemic is over, Denny’s is aiming to accelerate its rebound with two new virtual concepts, a slimmed-down menu skewed toward comfort and value, and an eye toward seizing conversion opportunities.

The family dining chain is also smaller by some 73 units, including 67 stores that were shuttered because their sales fell below $1 million a year, compared with a systemwide average of $1.7 million. The weaklings would have likely been pruned over a four-year course, but the pandemic accelerated the process, Denny’s President Mark Wolfinger told financial analysts. The other six closed units lost their leases.

He and other executives indicated that the breakfast-heavy brand still faces considerable challenges, including a march back to having units opened for 24 hours. Currently, only about a third of the chain’s 1,000-plus units are open ‘round the clock. Those stores saw their sales for the fourth quarter climb to within 23% of pre-pandemic levels, compared to a same-store sales decline of 39% for the system as a whole.

During the first two weeks of February, the 375 units with open dining rooms and 24-hour operations pushed their sales to within 6% of pre-coronavirus levels.

Many areas of the country have limited restaurants’ hours of operation in a bid to curb the spread of COVID-19. Curfews of 10 or 11 p.m. are just now being eased or lifted in many states.  

Still, “we believe we have weathered the worst of the pandemic and are on an upward trajectory toward historical recovery,” Wolfinger said. “We look forward to returning to net restaurant growth in the future.”

He characterized the industrywide closings of restaurants as an opportunity for expansion, noting that 60% of the Denny’s restaurants that have opened since 2011 were conversions.

Nearer term, the chain is looking to roll out two virtual concepts, one focused on burgers, the other on melt sandwiches.

Cash results have been favorable and suggest the transactions from these tests are highly incremental,” said John Miller, Denny’s CEO. “These brands provide opportunities at dinner and late-night to leverage underutilized labor and kitchen space.”

Both concepts have helped in Denny’s longstanding quest to bolster dinner sales, Miller observed. They’ve also boosted late-night sales, a traditional strength of Denny’s.

The first venture, a burger concept called Burger Den, is currently being introduced in half of Denny’s domestic stores. About 70% of the delivery-only brand’s sales are coming during the dinner and late-night dayparts, according to Miller.

The second concept, The Meltdown, will be rolled out to half the domestic system starting in the second quarter, he added.  “Test results have been similarly encouraging,” Miller said.

He also mentioned that a new Denny’s menu will be introduced starting next week. The revamped bill of fare will still be 25% smaller than the listing used by the chain pre-pandemic, but with new creations within our bowls and meals categories,” Miller said.

Currently, said Wolfinger, 98% of Denny’s units are open for some level of service, a 25% increase over the number in December.  Many, however, are still limited to outdoor dining, takeout or delivery. About a fourth of the chain is located in California, which is just resuming on-site service.

Off-premise sales have doubled since the start of the pandemic, to an average of $8,000 per week, Miller said.

For the fourth quarter ended Dec. 30, Denny’s posted a net income of $2.4 million, down 87.3% from a year ago, on revenues of $80.1 million, down 29.6%.

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