Q4 2021 Denny's Corp Earnings Call
Fourth quarter with domestic system wide same store sales, increasing four 1% above 2019 sales levels in October to 4% above 2019 sales levels. In November we also experienced growth in all sales channels with on premise sequentially growing nearly 3% and the off premise promotions contributing to over 5%.
Of sequential growth this reaffirms that consumer demand remains high through both driving dine in transactions until the case counts are normalized and the ongoing stickiness of our off premise channels. The full service restaurant industry experienced same store sales deceleration during the last two weeks of December due to the <unk>.
Rise in nonrecurring cases, and Denise was no exception. Additionally, we were impacted by the holiday mismatches during December with Christmas and new year's falling on a weekend, where we are typically at capacity comparing to a weekday in 2019, where we experienced greater upside potential endocrine variant impact continued.
In January as well however, as cases have now began to decline our sales are gaining momentum. Once again. We also have a few tailwind that gave us confidence in our longer term outlook with our latest investment in brand wide recruiting we have made it much easier for job seekers to apply for positions Denny's restaurants company and franchise.
Through our new career website, and we are experiencing increased candidate flow as a result, we're excited to offer opportunities for career growth and a love for serving people. This is exemplified by our recent recognition as one of only two restaurant brands in the top 100, most loved workplaces for 2021 by Newsweek and best practices.
Institute. Additionally, the consumer remains.
A generally healthy position right now despite inflationary pressures, while we continue to offer value items guests are increasingly willing to pay for the full service dining experience. They had missed over the last two years turning to our recently announced strategic initiatives. We are progressing on the rollout of our new kitchen modernization initiative as well as our <unk>.
Cloud based restaurant technology platform across the domestic system and both of these are expected to enhance the guest experience and drive operational efficiencies while kitchen.
While the kitchen equipment also provides the ability to enhance our menu offerings across all day parts. We have implemented our heritage two <unk> remodel restart program, which generated mid single digit sales lift during the testing prior to the pandemic. We also have two new domestic development commitment drivers our partnership with reef for Ghost kitchens and our.
Upfront cash incentive for domestic development. These strategic initiatives along with the management team dedicated to supporting our franchisees led to another prestigious award from entrepreneur magazine top franchise in our category.
Also like to mention how proud I am of our brand and the amazing progress. We have made with regards to diversity equity and inclusion and we continue to get back to the communities. We serve through our hunger for education scholarship program, our partnerships with no Kid hungry and St. Jude Children's Research Hospital, and our mobile really diner and closing the last two.
Two years have been unlike anything we've ever experienced.
We're proud of our teams and our franchisees for their commitment and dedication to this brand and the future ahead at gains is bright and I'm. So thankful to be a part of such a dynamic innovate innovative and agile brand with that I'll turn the call over to Mark Wolfinger Denny's President.
Thank you John I also want to reiterate how extremely proud I am of this brand for the recent awards and accolades.
Recognize.
And one of only two restaurant companies on Newsweek's Best places to work list as well as the entrepreneur magazine's number one franchise in our category is truly remarkable.
Turning to our fourth quarter results, we continue to see improvement in our effective operating hours with approximately 72% of our domestic system operating on average at least 18 hours per day.
As of the end of December .
This is a 10 percentage point increase from the end of the third quarter, resulting in 20 effective operating hours across the system.
As John mentioned persistent industry wide staffing challenges continue to impact our effective operating hours.
However, our human resources team has been very proactive in our hiring efforts and has made tremendous progress.
Hourly turnover at our company restaurants is consistently below industry benchmarks and we believe this is largely due to our comprehensive training programs and competitive wages and.
In fact on average when you include tips, our servers at company restaurants make 165% of the full state minimum wage not just a tip credit minimum wage.
Also we now have 100% staffing and our general manager positions across all company restaurants for the first time since the pandemic began.
We believe that once we have the right leadership and the general manager position other levels of staffing in key metrics improve in due course.
This allows us to shift our focus to reminding both new and tenured employees. While why we were voted one of the best places to work and focus on the on our retention efforts Adil.
Additionally, we have developed a comprehensive document that shares our best practices for recruiting hiring and retention, which we have shared with our franchisees to help them succeed as well.
We estimate the domestic franchise restaurants are operating $24 seven have achieved staffing levels similar to pre pandemic staffing and limited our franchise restaurants are operating at approximately 80% of our staffing levels they have pre pandemic.
However, we are encouraged to see applicant flow across the domestic system continued to run higher than our historical average and believes staffing levels will improve in due course.
Turning to development franchisees opened seven restaurants during the fourth quarter, including one international location in Mexico.
These openings were offset by 14 franchise closures, bringing our year end unit count to 616 240.
While John mentioned that we announced three new programs back in early January I want to provide some additional color.
First is our heritage two <unk> remodel restart program.
During the early months of the pandemic, we deferred all of remodel requirements in an effort to alleviate capital constraints.
With approximately two years of delayed Remodels, we've extended the remodel cycle from seven years to eight years and we've also worked with franchisees who have multiple remodels due to map out a more normalized capital spending expectations.
The deferral of the compelling heritage to point, our returns drove franchisees to complete remodels during the fourth quarter and we also completed three company Remodels.
Our second announcement was a new development agreement with reef, providing us the ability to launch ghost kitchens, and Honda represented metropolitan markets and use them as a testing ground for new consumer reach.
We anticipate opening the first of several new <unk> locations during the first half of 2022.
And our last announcement was a new development incentive program available to our domestic franchisees.
This program not only provides more lucrative incentives of up to $400000 in underpenetrated domestic markets.
It also provides upfront cash as opposed to our historical practice of reduced fees overtime.
Yes.
Franchisees have shown great enthusiasm for this new program and we expect formal sign ups to begin in the near term leading to new unit development picking up in 2023.
This is all incremental to our existing domestic development pipeline, which includes 73 remaining commitments from our recently completed Refranchising strategy.
The last two years has certainly been a challenge on the development front is our franchisees have navigated.
The pandemic, but with sales recovery in these new programs in place I'm very optimistic about our long term restaurant development outlook.
I'll now turn the call over to Robert <unk>, Denny's, Chief Financial Officer to discuss our quarterly performance Robert.
Thank you Mark and good afternoon, everyone.
I would now like to share a brief review of our fourth quarter results as well as our expectations for the first quarter 2022.
Domestic system wide same store sales during the fourth quarter increased 0.7% compared to 2019.
After highlighting positive preliminary same store sales for October during our third quarter earnings call a positive sales trend continued through November .
However, sales softened in December due to both holiday shifts and the increase in AUM across various cases.
This softness continued into January with elevated Covid cases.
However, as with previous variance same store sales have begun to improve as cases begin to subside.
We continue to see progression in the number of units operating 24 seven.
From 48% of the domestic system at the end of December to approximately 50% of the domestic system at the end of January .
We are encouraged to see these restaurants consistently outperformed those with limited hours by a spread of nearly 20 percentage points.
Therefore, we still believe this performance differential presents an ongoing opportunity as our system looks to extended operating hours, particularly as staffing levels improve.
Now turning to our fourth quarter results.
Franchise and license revenue increased 27, 6% to $62 million.
Primarily due to improving sales from dine in restrictions in the prior year quarter.
Franchise operating margin was $31 1 million or 51, 6% of franchise and license revenue compared to $21 4 million or 45, 2% in the prior year quarter.
The margin increase was primarily due to the improvement in sales performance at franchised restaurants.
Company restaurant sales of $47 $4 million were up 23, 2%, primarily due to the improvement in sales from reduced dine in restrictions compared to the prior year quarter.
Company restaurant operating margin was 7.0 million.
14, 8% compared to $1 4 million or four 3% in the prior year quarter.
This margin increase was primarily due to the improvement in sales performance at company restaurants.
However, we recorded approximately one 4 million in unfavorable legal and medical reserve adjustments during the fourth quarter, reducing company restaurant operating margin by approximately two nine percentage points.
We experienced commodity inflation of approximately 11%, which was offset by sales leverage from improving transaction counts lower value incidents and pricing.
These items collectively resulted in a 20 basis point improvement in our product cost line.
With commodity inflation pressures likely to remain at least in the near term we have continuously work with our franchisees to ensure appropriate pricing strategies, while factoring in favorable mix shifts that we are experiencing.
We will continue to monitor this inflationary environment and have additional opportunities to adjust accordingly throughout 2022 to balance the effects.
Total general and administrative expenses were $17 7 million <unk>.
Compared to $20 5 million in the prior year quarter.
This change was primarily due to decreases in performance based incentive compensation.
Share based.
Share based compensation expense.
Market valuation changes in the company's deferred compensation plan liabilities compared to the prior year quarter.
These decreases were partially offset by prior year quarter benefit of approximately $1 million in tax credits related to the cares Act. In addition to temporary cost reductions.
As a reminder share based compensation expense and market valuation changes are noncash items and do not impact adjusted EBITDA.
These results collected collectively contributed to adjusted EBITDA of $24 1 billion.
The provision for income taxes was $15 $1 million, reflecting.
Reflecting an effective income tax rate of 25, 7%.
Adjusted net income per share was <unk> 16.
Compared to adjusted net loss per share of <unk> in the prior year quarter.
During the fourth quarter, we generated adjusted free cash flow of $3 $4 million after cash capital expenditures of $12 4 million.
Cash capital expenditures included approximately $10 $4 million related to real estate acquisition. In addition to maintenance and remodel capital.
As a reminder, the previously announced sale of two parcels of real estate in December 2021 that generated approximately $49 million and proceeds are excluded from our adjusted free cash flow while the purchase of real estate is included.
Excluding the real estate acquisitions.
Adjusted free cash flow would have been approximately $13 8 million for the fourth quarter.
We anticipate allocating an additional $3 million from the proceeds obtained in December 2021 towards an additional light kind exchange transaction during the fiscal first quarter of 2022.
Our quarter end total debt to adjusted EBITDA level.
Two one times and we had approximately $183 million of total debt outstanding including $170 million borrowed under our credit facility.
As we have stated in the last few earnings call. We are currently more comfortable with a leverage range of between two times and three times adjusted EBITDA in the near term, whereas prior to the pandemic. We would have been we would have targeted longer term leverage somewhere between three times and four times.
During the quarter, we allocated $24 million to share repurchases, resulting in $36 million allocated to share repurchases for the full year.
Between the end of the fourth quarter in February 11, 2022, we allocated an additional $10 $7 million to share repurchases, resulting in approximately $207 million remaining under our existing repurchase authorization.
Since beginning our share repurchase program in late 2010, we have allocated over $595 million to repurchase approximately 57 million shares at an average price of $10 50 per share.
Excluding our follow on offering during the pandemic, we have reduced our total net share count by 46%.
In addition to share repurchases our financial flexibility has provided other opportunities to continue our long standing practice of returning capital to shareholders. While also investing in the business.
Recent brand investments such as optimizing our real estate portfolio, the technology transformation and kitchen modernization initiatives and the new cash development incentive program that Mark mentioned earlier give us great confidence in the future of this iconic brand.
Let me now take a few minutes to expand on the business outlook section of our earnings release.
Given the dynamic impact of COVID-19 case, COVID-19 cases on the Companys operations and volatility around commodity inflation and labor availability, we cannot reasonably provide our business outlook for full fiscal year 2022 at this time.
However, the following estimates for our fiscal first quarter of 2022, ending March 32020 to reflect management's expectations that the current economic environment will not change materially.
Starting with our first quarter 2022 earnings call, we will return to our standard practice of comparing 2022 same store sales to the prior year as opposed to 2019.
Additionally, we intend to return a normal to our normal practice of reporting quarterly data instead of monthly data. However, we will still provide as much clarity as possible as we navigate through the ongoing recovery.
With that said, we anticipate first quarter domestic system wide same store sales to be between 26, and 28% compared to 2021.
Our expectations for total general and administrative expenses are between 17 and $18 million, including.
Approximately $4 million related to share based compensation expense, which does not impact adjusted EBITDA.
Based on the guidance I just described we anticipate adjusted EBITDA of between 17, and $19 million, including approximately $2 $5 million related to cash payments for share based compensation.
This deceleration from fourth quarter 2021, adjusted EBITDA is primarily due to seasonality in sales and the weight of Omicron on January and early February results. However, as we mentioned earlier, we are starting to see the omicron impact dissipate.
In closing, while we experienced another temporary impacts from Covid variant, we're still well on our way through the recovery curve from this pandemic.
Yes on the horizon.
That wraps up our prepared remarks, I will now turn the call over to the operator to begin the question and answer portion of our call.
Thank you, ladies and gentlemen, if you would like to ask a question at a star one on your telephone keypad for using a speakerphone. Please make sure I meet function is turned off to allow your signal to reach our equipment.
Again, it is star one to ask a question well pause for just a moment until everyone an opportunity to signal.
Our first question comes from Michael's from US with the Oppenheimer. Your line is open. Please go ahead.
Hi, Thanks, everyone. Good afternoon.
Hey, Michael.
You guys mentioned.
Long term vision in the press release and talked about it a bit in your prime.
Paired remarks, and I wanted to dive into that a little bit more than what that might mean or what it could look like for investors.
No longterm same store sales of average low single digits or so but the unit growth has really been the elusive piece. So now that you've got some of these building blocks in place with the Refranchising development agreements the reef partnership.
And the new franchisee incentive program do you think there's a situation where we can be looking at your unit growth as you talked about and 23 and beyond also being low single digits combined with that low single digit sort of same store sales have a nice little algorithm there.
Sure Great question I think obviously.
We've been terrible not to guide with that kind of precision around that but they they go of course is to get back to.
Do a longer term double digit growth and growth, which we still believe that there's a little purging off the bottom, but that as evidenced by where we finished last year.
Slowing well all of these other initiatives are designed to accelerate.
Growth on the other and we do have the agreements that we have in Canada in the.
It will be.
That has stimulated growth faster than the pace than we anticipated in the early going like those age.
Agent agreements.
At the same time, we think this stimulus.
For new development Shields for additional growth that we can guide on a little bit with a little bit more precision in the coming quarters. It does take a little time to build that pipeline, but once it builds it does like apply will continue to gain momentum as we evidenced.
From our flying J, you should build some new interest for denny's and spiritual growth.
And then and then F. T. P programs have also accelerated some of our development efforts will come at the head of this though is.
<unk> will be on a remodel program with getting the restart inside this year.
First.
Portion of the year will go a little slower as it builds momentum towards the end, but we do expect a fairly substantial you remodels this year, which is another catalyst for building.
<unk> and building momentum and visibility in our brand.
Gotcha that makes sense and then you also talked about the new technology and kitchen modernization strategies. So can you talk about maybe one of the biggest advantages that those are going to unlock for you. That's gonna allow you to do something different than what you're doing now.
You mentioned operational efficiencies, but is there also a sales benefit that's gonna allow you to roll out some sales driver maybe you could implement today.
Alternately all of these channels have are are sort of coming at the pace guess will adopt them.
Right now we have cashiers at Denny's, we don't do tableside banking with our servers, but with new technology will be able to sort of mimic what is tableside with high degree of control and efficiency will be able to take orders tableside will.
We'll be able to do that curbside will be able to take advantage of.
Any number of technologies that reside better in the cloud for updating.
All those mundane tedious things like many management and updating prices and.
Mix shift changes when you have challenges with the shift or product.
Inventory, we're able to sort of add or delete items on the fly for like you know a busy Friday night shift on what maybe shows up on to go out and then you'd QR code.
Check out there is there is there is a long list of things that come with.
These technologies now many of these exist right now in the marketplace in one form or another the advantage of this platform that were unfolding as all resides in one integrated system across the entire franchising company Bay. So we can all move together rather than disjointed initiatives.
So we wanted to do a product promotion or something across the system on a single platform a lot of those things become easier to hear the merchandise certain.
Products on.
Different shifts to.
To our customers and then they'll be able to do more things through ultimately kiosk or curbside ordering out their own the interface on these apps and the upgrades are.
More intuitive.
And I'd say best in class compared to where we've been historically.
Where we might be middle of the pack or lower with few too many keystroke entries for our guest maybe did not as you remember addresses or credit card data is sufficiently as it does now this new platform is best in class and when it's easier to use we tend to see a lot higher adoption rate Meyer Meyer gas.
When they're hard to use you just sort of return to to to some other moderate or you don't download the app at all so we see this as being pioneered the other benefit is that.
The bigger picture is that as these become ubiquitous in the market. They there was an expectation they go with vast casual and with retail ordering.
And in full service dining there is not the same expectation that you have this level of technology or technological capabilities, whether its inside dining or to go and so I think it is these unfold more and more people will be able to.
Just default to those that are technology that have the technology relationship with the brand burst.
Other than a human interface, they will be able to eliminate some pain points that are associated with full service dining.
How are you in or how you wait how your order how you settle how you leave how you look at calorie information promotional information.
And there will be those that would rather navigate the digital menu can pick up an actual menu they touch them flip through the pages for safety sanitation reasons and just to use search engine capabilities. So all these things just enhance.
The way in which consumers interact with brands and we're proud to say that we will soon be at the forefront rather than in the middle.
Awesome. Thanks, so much.
[noise] well I'm thinking I might start wondering if you had a question. We will go next to Jake Bartlet. What's your security is your line is open and please go ahead.
Great. Thanks for taking the question Yeah. My my first as it is about the quarter to date the impact of all my card and I'm, hoping you can help us understand how much. Okay has hurt sales so far and we saw the celebration in December .
Give us an idea of maybe just to just to kind of go the whole you're digging out of four in relationship to to the guidance for the first quarter, where do you what do you have to make up to get there.
Sure well, let's just.
Go John .
Go ahead Robert.
Hey, Jake that's Robert sorry about that yeah.
So when you look at the Omicron, we distinctly saw that impact it came in.
Late into December you you you solve the trends that we were on we did talk a little bit about the mismatch of the holidays, but clearly by the time you hit the end of December that impact. It came in pretty substantially I think it's reflected as you would expect in our guidance ranges, but you you can see it both in the 2000.
6% to 28% if that is easily seen but you can see it in the $17 million to $19 million adjusted EBITDA range that would be typically several a couple of million dollars lower than what seasonality what would otherwise.
Just would be in that quarter and it carried the biggest impact of that did carry through the heart of January we made it we tried to be very clear in our prepared remarks that as we've we've as we have moved into February I am, particularly further in the February we.
I've seen that drop off dramatically in what you have seen if you look at it.
Pretty consistently because we haven't guide and I can't get really get into the exact numbers, but if you look at the way Delta impacted us back in the August and September timeframe.
If you look at the magnitude of Delta and the change in trend there and then look forward to to literally the omicron.
The steep curve there you may get a sense of how that portrayed now delta with with a small less.
Less highly popped out impact, but over a longer period of time Omaha Omaha was much more intensive but for a shorter period of time.
But despite to say it's hard to give you the exact number but we do see that winning crime.
Great Great. That's helpful. And then my next question is is on the restaurant level margins, if if I understood correctly batting back to 2.9 kind of one time charging there and think you'd get to 17.7% restaurant level margins, which is which is even with the fourth quarter of 19.
And that's despite pretty significant I think labour inflation, but also the the commodity inflation that you mentioned I'm wondering how you are able to sustain those those margins kind of have flat margins, we assume that there's delivery costs and other other costs in there what what what's what's offsetting what's driving some of the efficiencies isn't isn't.
Abby running fairly lean still in the labor side, but just what are the moving pieces to it being able to hold those restaurant level margins onto your basis.
[noise] Yeah, that's an excellent question J. Thanks. Thanks, Thank you for asking that.
I do just to set the context correctly, that's really kind of the way that we are looking at it also that 14 eight plus the 2.9, we do want we do internally believe that those were more one time cost at the wait why we frame get the the way we did I think it's a combination of various lever.
Or is that we are pulling as we move move through this very volatile timeframe. So a partially a menu mixed management issue within their so we really.
Look at some of the best performing items with some of the the best food costs and candidly some of the ones that are easier from an operational aspects that we've made manage that menu inclusive of keeping some of the value of plays within their so it's not all just taking the higher priced items. We we have maintained our value positioning we have.
A R value Insulins, if you think about our 2468 value Plaids and are Super Center in place those kept mixed consistently between 10 and 15% over the course of 2021. So it's not just a function of taking all of the higher price place within their.
Obviously, there is pricing within that dynamic also in fact, we did take additional pricing of 2% on the company side. As we entered Q4, we do have a couple of more opportunities to take pricing throughout 2022.
And when that is needed again, we haven't pulled the trigger on that yet, but we do have those opportunities and then R. Op ops teams that has really focused on some savings.
Savings initiatives as we've gone through this pandemic literally again I'm one of those other lever so really tightened down on our waste management. So again, you can see that coming through that only.
Coming through the product cost line as we leveraged 20 basis points. Despite the commodity inflation that you mentioned, there that 11% that we referenced.
Along with targeting some other savings opportunities and packaging costs and the such so there's not any one thing in fact I'll give you another tidbit with with regard to that margin. Another piece. That's in there that's not readily apparent within their I in there and this is really good information.
We have additional believe it or not I'm going to couch. This is good information additional overtime dollars an additional training dollars sitting in queue for between a half point in a full point why that is good is it gets back to our staffing levels within the restaurants are units that are 24 seven.
R C literally like 61 of 65 units on the company portfolio really are at Prepandemic levels of staffing inclusive all of our restaurants now postpay endemic are fully staffed with a general manager, we've really moved in and out of that over the course of the last two years with the volatility in staffing. So the reality is.
<unk> excuse me these new positions are not as efficient as the prepandemic level, so you're experiencing additional training dollars to get them up to speed additional overtime dollars to cover.
Cover more shifts and.
Then I fully see some staff may be able to so even within that 14, eight there's a half point to a point that ultimately goes away as we get further into a season staff, but for the moment. It's really good from the standpoint that we are getting back to that level of staffing so.
Alright, that's all helpful. Thank you so much.
Thank you Jake.
Our next question comes from James Wrath of fared with Steven So your line is open and please go ahead.
Hello, Good afternoon, I wanted to ask about the pace of getting more restaurants open for the full 24 seven operating hours.
And I guess the way I want to ask US is how much of the delay is true staffing Chow that's the true staffing challenges and how much do you think is it that there's some franchise you simply are very content to run limited hours for the simplicity of it or is that a component at all and and also just what's the what's the overall risk it as it goes on longer that consumer.
Habits kind of change and it's sort of forget the place. They can go in the middle of the night. So I just got a couple of questions on the 24 seven.
Sure those are all great questions and obviously, we'd like to see this accelerate.
It is starting to pick up we think will continue to build momentum as Robert alluded to staffing improves the investment and day shifts to build nighttime shifts and the confidence in those continues to improve if you look at our best performing over the last quarter and the quarter before it really is that the weekend.
Dinner.
And and followed by breakfast then.
Late night, and then and then lunch, but in the 24 seven stores. The best performing day part is our late night. So is our franchisees see the strong performance in outperformance of of the brand during that day part.
They recognize a number of benefits from that one it's a younger audience slightly more affluent than the average of who's historically filled up our dining rooms. So this is a tremendous opportunity to get exposure to our.
Newly introduced product lines, especially with the kitchen renovation and the new items will be adding soon associated with that.
There's just no better way then when there's not a lot of other competitors open during that hour. So they're seeing the benefits and the momentum build faster than the 24, seven stores and and so from our franchisee Association Board all the way through our franchise conversations the commitment is there we've not had anybody dig.
Your heels in and say this is not for me I'm not doing it.
And so we just don't see evidence that that's the long term effect now consumer habits and behavior.
You move from.
The full service options available there's not a lot there are a number of quick serve options available.
Say from 10 am to five or six in the morning.
But there's but in terms of full service dining curbside delivery of full service type menu items.
We are in a we enjoy a rare position there being one of the few that has the footprint that we have across the country with 24 seven availability. So we do have confidence that we will earn those transactions back as those stores open and.
Confident that we will continue to build momentum along those lines.
Uh-huh.
We'll go next to Nick sent in with Wedbush Securities. Your line is open. Please go ahead.
Thank you first I just want to confirm that the the 1.4 million.
Legal impact in queue for wasn't adjusted so adjusted EBITDA would've been something like $24.5 million as opposed to the 24 million is that correct.
Hey, Nick this is Robert gear correct. The $24 one is inclusive of that legal impact and the 14.8% margins are inclusive of that legal impact. So if you were to.
Right size for those it would get you closer to 18% restaurant level margins and closer to 25, and a half million dollars, an adjusted EBITDA reconciled for that one item.
Okay, and I mean, just given the.
The <unk>.
<unk> b that would imply.
On on your level of margin and you guys were well above on the franchise Martin.
The comp guidance for Q1 was actually slightly better than than will grow expecting the 26 to 28 is actually above the 25% or so.
<unk> modeling, Florida system calm.
<unk> EBITDA guidance is obviously well below on in terms of all you're expecting and like you said it took over 2 million lower than what we what we would have expected given the omicron impact.
So the all kind of impact will not see it unnecessary to calm.
But.
We are seeing it in the margin. So I think there's a little bit of confusion as to why that margin is somewhat slower. So maybe we could peel back the onion.
In terms of what the company owned comp is what you expect that that's embedded in that 26 of 20 a client.
Comp guidance for for the system for Q1.
And then maybe just kind of help us understand what the company or Martin.
<unk>, and then I guess where else or the.
Where else are we.
Seeing that they'll probably but on the franchise margins where else are we soon.
To kind of explain.
While her stomach flu around adjusted EBITDA in terms of the Q1 guide.
A Nick this is Robert.
Get the question that has a lot to unpack there.
So a couple of things. So there is not necessarily as we move now into 2022 the comp differential that we were experiencing between company in franchise becomes a little more muted as you begin to roll over that year over year. We've had the 60 with the 90 plus percent of the units.
On the company portfolio now fully 24 seven for the majority of that time. So when you roll over that again, the comp is not necessarily as pronounced there and I do think with regard to some of the modelling that we have seen is that there is a differential.
Or wait as being.
Allocated to accompany comp.
The other piece that I think if we look at models to models with regard to.
What we're seeing in ours versus what we may be seeing from you guys.
The cash component of the <unk>.
Doc based compensation.
Two and a half million dollars to call that out.
Specifically in my remarks, so what that ends up being at the expense itself and it just becomes a little nuanced, but the expense itself does not come in to the adjusted EBITDA scoped out, but the chairs that are functionally withheld to cover the taxes that are ultimately provided to the partis.
Serpentine those programs come through as an adjusted EBITDA hit so we have two and a half million dollars of that in the current in the current estimate in that $17 million to $19 million range that is clearly outpacing what we were experiencing in 2021 with those payment.
It's.
And then in general some of the other G&A. If we're looking model to model. We do believe that the G&A that we've included within our that $17 million to $18 million in the core aspects outside of the stock based compensation and the deferred adjustments. If you just look at the what we call the kind of the core Jean.
And the incentive compensation may be outpacing what's included in those models I think that's probably the best I'm going to be able to do for you. There is clearly an omicron impact that impact is clearly contained within the 26% to 28% same store sales range.
Ah, but that's probably about the best I am going to be able to do for you at this point.
Got it and is there any way we can maybe can text July .
<unk> sales are tending now versus say off couple of December .
<unk> <unk>.
Extra cream in October or November or Weebelow, that's though.
Yeah. It's a good question I'm looking at Kurt right now that to see what we can say again, we are trying to avoid getting into these intraquarter guide.
But I think.
Thank the reality is is is that omicron curve comes down and you're looking at the same data we're looking at and it comes down dramatically over the last two to three weeks. We are experiencing a sales recovery is about as quickly as it very very highly correlated.
With regard to the spikes in the recoveries in that so.
Okay. Thank you very much.
Thanks, Nick.
And.
And ladies and gentlemen, once again it is star one if you had a question or comment may of next to Todd Breaths, what the benchmark company. Your line is open. Please go ahead.
Alright, thanks, good evening everyone.
Hey, Tommy.
If we can get on the staffing side, a little bit you talked about some of the company specific.
My first around the platform talked qualitatively Seward improvement and and hiring that you're seeing I know one of your peers talked about kind of that's September October timeframe kind of one to two applicants for every open position.
Physician and I've seen 10 to 12 applicants for every open position how does that match up magnitude wise with the improvement in kind of incoming staffing flows that you're seeing currently.
Can you we are seeing.
Again continued improvement an applicant flow and this started some time back unfortunately.
The first wave of that a couple of quarters back resulted in higher advocate flow, but not necessarily higher positions sales and then later a lot more momentum was built in sort of filling positions, but then the retention wasn't near what it was historically for our brand and for our franchisees experience.
Suggesting.
That folks took a position and then.
Maybe weren't quite ready to come back to work or it's pretty burdensome to come back to work in a staff, that's not fully trained and running as smoothly as.
Historical so there's sort of been a bumpy start to reach staffing and we're hearing this across health care retail.
Lots of different industries.
Construction industries, where we hear the similar stories, where it's building momentum and napkin flow way ahead of actual sort of committed.
Service hours and sort of career building efforts, we're starting to see that improve dramatically the company stores are.
Approaching that.
Yes.
90% near 100% staff level, and we are 100 staff that the general manager position. We thank our franchisees are still in that 80% range and so we've got.
About half the system at the end of the fourth quarter not guiding into this quarter or beyond yet, but certainly we ended the year around 48% 24, seven and so but again that that continues to build momentum I don't know how to qualify much further advocate flow is no longer really the challenge.
We are doing a lot of work with exit interviews to hear what it is people are looking for.
Any insight we can get we're trying to solve real time and on the spot.
Again, our retention levels are much lower than.
The full service averages generally Denise corporates, which was once more awards and recognition for best places to work I think that those best practices in the sort of gate to those has been of a lot more interest across our entire franchise system. So we have a lot of people paying attention to onboarding training rich.
That will work environments, and just making sure we get that right.
And.
We're not the only brand focused on it that's for sure.
But.
All I can say is that it does continue to improve that budget.
Okay. That's helpful and then Robert if I take with John just.
Commented on how the the.
The recovery has kind of rolled out with Apple Kim's turning into better retention and then.
Just better staffing levels, that's starting to play out here recently.
What's the word I mean, we seem to be tracking on kind of a 2% a month increase in the the stores operating I'm, a 24 seven model with.
With recent staffing improvements what kind of slope should we put on that improvement curve as as we go across 22 I just wanted to make sure that we're all kind of level set against if we're entering at 48% back in the 24 seven model what what's the right way to think about maybe exit right in.
22, or what the slope with that recovery culture look like.
Yeah that that that's the 64 million dollar question, Todd right, because you're spot on when you look at that the rate at which we're adding.
<unk>.
Transparently at the franchisees that are adding because we're fundamentally there on the company side.
You are spot on with your 2% trend right. If you if you look back in in the.
The earnings release from it.
It kind of him even in queue for here it will Pinot at 2% even December to January it was 2% going from 48 to 50, I think I called that out in my script I think frankly, we would expect that in the near term you'd probably see something similar and we would look to accelerate.
That right they are initial.
Thoughts when we were talking about this probably six to nine months ago is that slope would get you to something closer to a full level by the end of 2022, I'm not certain that where there. So you can draw that line somewhere between 2% and 4%.
And again I don't think we're on a 4% curve at this moment.
And it will take that acceleration staffing because John when he spoke he was he was spot on are with regard to the what we are best current thinking of what we know from franchisees staffing levels of units that are not 24, seven our staff that about 80%. The franchisee units that are open 24 seven R V.
Very similar to accompany unit, they're approaching prepaying Democrat if not over prepandemic levels of staffing so going back to James is question about the poor staffing levels of these units yes at the 24 seven is predominantly a staffing issue at this point in time in ramping that up I would like to see.
And again this is not a guide I would like to say that we can move beyond this 2% trend that we've experienced for the last six to eight months, but it's just probably too early to quote that.
And just a map it was operational reality and John talked about this that these people you bring in you don't throw them into an overnight shifts, but I've got a training they've got to.
To work day for Awhile before those bodies are ready I guess operationally a higher made now winter that when are they ready for an overnight shift what's that what's that lag between hiring in readiness.
Right. So a lot of this has to do with experience so servers and cooks can get there are different levels, depending on their experience level coming in.
We are starting to also.
Get a little relief and that the experience level is starting to return over the last couple of quarters entry level employees were.
Much less experienced and so we're starting to see a reversal of that as well.
So you can take.
A couple of weeks to get ready to go.
Or it could it could be three that it just depends on the position they hold the experience of the manager. This on that same shift there's a number of dynamics it affected.
But that that too is shortening which helps the momentum.
And.
And it just reiterate what Robert said because of omicron starting to wane.
We see similar habits of improvement and then we saw the Delta wave on wave.
Great deceleration. So we're just we're careful not to guide you just yet, but we will have a lot of a lot more confidence coming out this year in another month or two.
Okay, great. Thanks for the feedback.
Thanks God.
Our next question comes from Eric Gonzales said Keybanc capital market. Your line is open. Please go ahead.
Hey, Thanks, just maybe following up on that that discussion around that the 2% month over month increase in 24 seven units.
You can discuss what drove that improvement I guess I was a little surprised to hear that that that approved in January .
What you're facing the headwinds from from staffing exclusions, and maybe people calling out sick. So really what drove that 2% improvement in January and do you see a correlation as the.
The week over a week trends get better from an overall sales respect if you see a correlation to franchisee willingness to maybe go.
Go to 24 hours and increase that mix.
Yes, I do I I think I think the there are not really spiritual holdouts per se.
But rather some were just so much further behind.
Other franchisees, where they nearly fully shut down cranked it down to almost nothing and so well they are rebuilding their staff there they're still struggling to get the.
All the way to Brian and their current daytime shifts and so they they wanted to get a little bit more stable.
Stability underneath themselves before they build on top of that.
And.
And we too want to push and.
And drag and pull but at the same time, we don't want to do anything out of sync with.
The reality of customer satisfaction scores. So we do have to March in step with the capabilities at each location.
Management team until when you when you have stores with very Green management.
Their capacity to move at the same pace of experienced management is considerably different you think in the company fleet, they're hiring average volume units backed by.
Some bigger.
Bigger stronger balance sheet and the way we manage through it was a little bit more supportive of staff retention and pay.
Play dividend for the companies sweet longer term franchisees did the same or more fully staffed enjoyed <unk> tremendous upside from 24, seven sales, but not every franchisees in that same position.
Got it and if I could just maybe ask about pricing. You said you just took a price increase in the company owned stores, 2% could you maybe talk about much effective pricing is in the franchise system or at least maybe what you are advising your franchisees to do on pricing and perhaps comment on your inflation outlook I think you said, 11%.
A quarter what are you seeing in the commodity markets for 22.
Sure franchise.
Franchisees.
Again, because the company fleet smaller and scattered about.
Given that we have a big footprint of California on the average experiences either a little head of the company on pricing, but not materially.
Kind of in the same range and we're experiencing.
The check change is coming in about half from pricing have a mix changes were with Rob was moving to earlier, we're seeing these higher lunch and dinner entrees and higher beverage incidents being enjoyed right now instead.
In spite of the stickiness of art to go transactions. So that's really good news for US where people are moving away from just the value.
Placed breakfast items on the menu and that said, we still believe value has a pretty strong place in family dining.
And.
And even inside this quarter, we were promoting some of our milk the national Hot Hot Chicken items are very hot Ivey right now across America caused many brands and so that sounds really high consumer scoring product we want to make sure was out there in the mix and then we also promoted are Super center during the quarter and so we do.
Do have a presence in the value positioning is not as allows us historically.
Because this is a check environment until we get more fully staffed but but it does show that.
We are prepared.
To lean on traffic drivers at the right time and better staffed environment, but also right now to enjoy a higher check in high trial. Some items that historically don't get the same level of attention on our menu.
When it comes to commodities I think just frankly, it's I'd love to our system a little more it's bit too early we're not guiding and and frankly I think it's too early for us to know much clarity at the moment.
[noise] fair enough I'll pass it on.
Thanks, Eric.
We'll go next to Brent Levy at M. Cam partner sure line is open. Please go ahead.
Thanks for taking the questions I guess, just continuing on that point, a little bit how are you thinking about.
What you want to pursue in terms of marketing.
Not just the messaging, but also.
To spend.
And also what would what would it take for you to have one or more tranches incremental price.
Yeah.
I'm, sorry could you repeat one or more tranches of incremental.
Incremental menu pricing.
Got it.
Yeah.
Pricing.
Is.
It's really interesting what's happened over the last couple of quarters with a higher wage inflation and then the short supply some of which people are saying.
Is.
Sort of a justice adjust over time.
But well things were in short supply, we're really proud that it didn't because we did not.
See a lot of product outages. So we were able to maintain the menu we had in mind to offer.
With very little interruption.
That allowed us to do is focus a little bit more on pushing higher trial around these lumps new items that we were talking about and because of that mix shift changed towards some of those items, while they had some price they're really more just mix toward double cheeseburgers and dinner entrees and chicken fried steaks and the kinds of things that.
We're pleased to see people try rather than the there's a little bit lower average check across the breakfast.
At all and a little bit more of a value or frequency among breakfast users heavy breakfast users brand. So this this long revitalization to our heritage as America's diners.
Not just a breakfast all day place, but a place that's got breakfast lunch dinner and late night.
Great.
Diner options.
That the pandemic I wouldn't say it did a favorite anybody.
One.
Silver lining is that we're getting high trial and adoption for both third party delivery channels and diamond channels for items that we wanted to start to get more credibility around so that takes pressure.
There will be pricing and I would say that because of wage inflation pricing will maintain the sort of above historical norms for the industry.
This this.
Invention of product lines has historically not exist somebody's menu through the kitchen initiatives.
Creates a little bit of a blur to that scenario, where will be adding some new items at a price that is appropriate for the market. It's not necessarily a price increase so that'll be there'll be more interesting commentary about that over the next several quarters.
Revolves in these some of these initiatives unfold.
And just.
I know, you're not going to get too much granular detailed in terms of the quarter to date trends, but is there anything you can share in terms of where you saw the the greatest strengths or weaknesses other day part for sure.
Sure. Thanks.
Sure absolutely.
Same with Delta Burke.
Best performing.
Florida.
Texas, California.
This last quarter was really no exception, California, Texas, Florida, Arizona, where our strongest pulling markets, but we also were positive and.
You know.
40.
Some odd plus percent of the system. So you've got a lot of areas that were strong.
In spite of Omicron, Illinois, Missouri, Nevada, Colorado, Oregon, and a lot of places it just <unk>.
Continue to have positive momentum.
But I'd say the northeast Midwest continues to struggle the most when there's the delta and omicron. They were hit harder and that was true again this time around.
Thank you.
Some of them returned to James for Arthur friend with Stephen to your line is open. Please go ahead.
Hey, Thanks for getting me back in I was on mute and I teach into my second wind earlier, but.
But I wanted to ask about value I. Thank you all have been deemphasizing 2468 on your menu correct me, if I'm wrong about that but but just.
Given the overall strong consumer spending environment that the industry has enjoyed it for awhile, now, which which you mentioned a minute ago, John but I'm curious if you look at even the most recent data is there any early signs in your mix or traffic.
Omicron aside that indicate the consumer environment is starting to shift or change at all.
In a way that you may need to pivot somewhat we're back to a value messaging in the near future just what your thoughts are on that.
Sure I think you sort of keep your playbook you have all the plays ready.
Based on the circumstances and situations when you're a little bit less staff and with the Smiths way you'd like me to try to avoid it.
Deep addiction to just driving value for transaction say.
It is not going to give you the lift if you're not going to get the uptake, particularly in the northeast or Midwest. There's no particular, good reason to discount somebody who may come anyway or for me to go anyway at the same time as people get out and about and we start to rebuild these transactions.
On the front environment, we're not going to want to yield customers that are looking for a deal when your competitors offering one we don't want to lose sure. So we all pay close attention to what's going on the body language of the quick serve and fast casual environment has been saying there has been much less emphasis on discounting what you're seeing now post holiday.
Stomach on a little bit of a reversal in that you're starting to see some of the quicksilver players start to return to some dealing not deep maybe as in <unk>.
Aunt passed but.
But as staffing starts to stabilize and some of the quick serve brands are starting to see a little bit of a return to that so true to form you'll see that return to some degree and the casual and midscale players as well and again, it's too early for US to guide precisely what it is other than I will tell you as I mentioned, a moment ago, we were not ashamed to have.
And not an overweight or another heavyweight media by but to have some.
Your exposure in the first quarter with our Super Slant.
Thanks for the thoughts.
With no other questions holding I'll turn the conference back to Mister Miller for any additional are closing comments.
Okay.
Yeah.
Well thank you.
I would like to say thanks for joining us on the call. Today, we are very pleased with the progress we've made through the pandemic and as we continued navigating the recovery despite very very.
Interruptions.
And we are making steady progress addressing staffing challenges and extensive hiring and training efforts and we believe the situation will correct itself in due course.
As it does in operating hours are extended Lucy additional potential for our brand based on the performance of those restaurants already open 24 seven and.
And we are pleased with the consistent consistency of our elevated off in the sales volumes, which have been supported by the successful launch Archie virtual brands.
We were also encouraged by the level of adjusted EBITDA and adjusted free cash flow generated by our highly franchise business model during the fourth quarter, which enabled us to return 24 million to shareholders lower share repurchase program. We believe the meaningful investments, we are making kitchen equipment in restaurants technology platforms will propel the brand forward.
With exciting high quality product opportunities and enhanced guest experience. Finally, we are excited to relaunch are successful here remodel program, along with the opportunity to enhance our existing development pipeline through our partnership with reef and our new franchisee incentive program. So we do look forward to our next earnings conference call.
In early May we will discuss our first quarter 22 results at that time. Thank you again, everybody for joining and have a nice evening.
Ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect at this time and have a great day.
[music].