Denny's CEO Says Stronger Economy Has Boosted Results

Despite industry headwinds and heightened competition, Denny's (DENN)  continues to deliver consistent sales growth, which its CEO boils down to three factors: good value, a better dining experience and a stronger U.S. economy.

"We saw the economy improve last year and along with that, saw strong sales and traffic numbers all four quarters," said Denny's president and CEO John Miller, who has been at the helm of the company since 2011. The improving economy has led Denny's to introduce some higher-priced offerings to the menu to boost the average check size, such as recently-added meat and veggie skillets.

In business since the early 1960s and comprising about 1,600 U.S. restaurants today, Denny's has put up an impressive 11 straight quarters of same-store sales growth. Over the past 20 quarters, same-store sales have only fallen twice (first quarters of 2011 and 2013). For the fourth quarter of last year, same-store sales rose a solid 2.9%.

The results are pretty impressive given that consumers overall continue to spend cautiously on eating out at traditional restaurants. According to industry research firm TDn2K Black Box Intelligence, the restaurant industry's sales rose a meager 0.5% in November on top of a 0.2% decline in October. The sales results are based on weekly sales from over 22,000 restaurant units and 120 brands representing $55 billion in annual revenue.

Average same-store traffic growth for October and November declined by 2.2%, compared with an average drop of 1.1% for the first nine months of 2015. The tepid sales for the sector come despite a strengthening U.S. labor market.

Also not helping full service restaurants such as Denny's, which prides itself on always having its lights on for customers, is fierce discounting for lunch and dinner business.

For example, to kick off the school year, Brinker International (EAT) -owned Chili's ran a limited-time "after-school special" promotion, offering an appetizer, four entrees -- two kids' meals and two adult dinners -- and a single dessert for $30. Additionally, Chili's has been promoting a "2 for 20" deal, which includes an appetizer and two full-size entrees for $20. 

Darden's (DRI)  resurgent Olive Garden chain re-released its "Never Ending Pasta Bowl" all-you-can-eat deal for a limited time in the fall. For $9.99, customers can choose from 20 types of pasta, sauces, and toppings, and get unlimited soup or salad.


A newly remodeled Denny's is brighter and more inviting. 

One of Denny's new skillets goes for $10.99, a far cry from Denny's typical 2,4,6,8 value menu with items at each of those dollar price points. "Our 2,4,6,8 value menu became such a deal that we had 22% of our transactions coming from it; today it's 16% since we redid the menu in the fourth quarter of 2014 -- people have moved to our full price menu away from the value menu."

Denny's remains keen to keep the wind at its back by staying the course on restaurant remodels and better food quality.

By the end of 2016, Denny's will have remodeled 45% of its entire restaurant fleet, which is mostly franchised. But 100% of Denny's company-owned restaurants, of which it has about 160, will be remodeled by year's end. The new restaurants have a cleaner, more modern look on the outside. On the inside, they appear more open and inviting than an old school Denny's, which tended to feature dark colors for rugs and booth seating.

On Thursday, Denny's became the latest restaurant to commit to sourcing 100% cage-free eggs. It hopes to achieve the goal at all U.S. restaurants by 2026.

Despite the sales consistency, Denny's shares have been swept into the brutal sell-offs that have swept through the restaurant sector. Whether it's at owners of full service dining establishments such as Brinker International (shares -22% in past year) or a hot new concept like better burger joint Shake Shack (SHAK) (shares -31.3% in past year), the market has not discriminated.

Shares of Denny's have declined 17.2% in the past year, worse than the 5.1% drop for the S&P 500.

According to Miller, Wall Street has been concerned about higher hourly wage costs and TV commercial prices in a presidential year, and the subsequent threat to profits. "I think we have seen some correction here, restaurant valuations are at the premium end of the range," said Miller, adding that it may take two quarters of solid results in 2016 for restaurant stocks to come back into favor among investors.

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