Q1 2022 Denny's Corp Earnings Call
Sure.
Please standby we're about to begin.
Good day, everyone and welcome to the Denny's Corporation first quarter 2022 earnings call. As a reminder, today's conference is being recorded at this time I would like to turn the conference over to Curt Nichols, Vice President Investor Relations and financial planning and analysis. Please go ahead Sir.
Thank you Melinda and good afternoon, everyone. Thank you for joining us for Denny's first quarter 2022 earnings conference call.
With me today from management are John Miller, Denny's, Chief Executive Officer, and Robert for rustic Denny's Executive Vice President and Chief Financial Officer.
Please refer to our website at Investor Dot Denny's Dot com to find our first quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on the call today.
This call is being webcast and an archive of the webcast will be available on our website later today.
So I will begin today's call with a business update Robert will then provide a development update and recap of our first quarter financial results before commenting on our guidance after that we will open it up for questions.
Before we begin let me remind you that in accordance with the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Company knows that certain matters to be discussed by members of management. During this call may constitute forward looking statements.
Management urges caution in considering its current trends and any outlook on earnings provided during this call such statements are subject to risk uncertainties and other factors that may cause the actual performance of denny's to be materially different from the performance indicated or implied by such statements.
Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 29, 2021, and and any subsequent forms 8-K and quarterly reports on Form 10-Q with that I will now turn the call over to John Miller, Denny's Chief Executive Officer.
Thank you Curt and good afternoon, everyone. The future of our business. Indeed is very bright we made two exciting announcements today that I am confident we will accelerate our momentum I will cover each of those in a moment, but first let me discuss our sales trends followed by an update on our previously announced transformative investments, which are being skillfully guided by our.
<unk> management team and dedicated franchisees.
Viking Omicron cases weighed on our same store sales in early January followed by improving trends in February as a case counts declined we anticipated moderating trends in March as we completed a rollover of both the soft start to 2021 in the third round of fiscal stimulus payments. However, global events in March.
<unk> contributed to additional inflation concerns driving record high gas prices and additional supply chain disruptions, which ultimately weighed on our consumer sentiment and sales trends in March. Despite these challenges Denise delivered system wide same store sales of positive 23, 3% in Q1 compared to 2021 is <unk>.
Gas prices started retreating from mid March highs consumer sentiment began to improve and we've experienced a corresponding improvement in sales trends in April we believe the improving labor market has enabled the consumer to exhibit considerable resilience to date in face of broad inflation and while we continue to offer value products guests remain.
Willing to pay for the full service dining experience they have missed over the last two years and our check growth has helped address the inflationary headwinds, which Robert will cover in more detail in a moment approximately half of our same store sales growth in Q1 came from higher guest check average comprised of approximately 6% carryover pricing.
One 5% of additional effective pricing taken in February and nearly 4% of product mix benefits, mostly from higher beverage sales with increased dine in transactions and reduced value product incidents.
<unk> sales remained strong at nearly double 2019 levels driven by robust third party channels and are two new virtual brands and we continue to make steady progress expanding our hours of operation with approximately 51% of our domestic system currently operating $24 seven approximately 80% of our domestic.
Once we're operating at least 18 hours per day at the end of March which represents an eight percentage point improvement from the end of the fourth quarter.
Hourly and management turnover at our company restaurants remains consistently below industry benchmarks and we believe this is largely due to our comprehensive training programs and competitive wages. In fact on average. When you include chips are servicing company restaurants make 165% of the full state minimum wage across the states.
Where we operate company restaurants with 100% of our company restaurants, now staffed with a general manager we believe other levels of staffing in key metrics will continue to improve as we focus on our retention efforts. This allows us to shift our focus to reminding both new and tenured employees. How we were voted by Newsweek as one of America's most.
Loved workplaces, we estimate that domestic franchise restaurants 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 had pre pandemic.
We are encouraged to see applicant flow across the domestic system continued to run higher than our historical average and believe staffing levels will continue to prove improve in due course and turning to our other recently announced strategic initiatives. We are in the rollout stage of our new equipment package that will deliver quality improvements to our current breakfast protein.
<unk> and breads, making bacon crispy or sausage more evenly browned and allowing for freshly baked bread. Currently we have installed new kitchen equipment at over 300 locations across the domestic system and the balance of installations are expected to be completed later this year and our new cloud based restaurant technology platform will soon be entering.
The beta testing phase and is still on schedule to be rolled out to all domestic locations by the end of 2023 and <unk>.
Both the kitchen equipment and the technology platforms are expected to enhance the guest experience and drive operational efficiencies. While the former also provides the ability to further upgrade our menu across all day parts building on these initiatives today, we announced the exciting addition to the Denny's family as we have entered into an agreement to acquire <unk> breakfast <unk>.
<unk> a privately held AAM eatery concept, consisting of 52 restaurants in Florida, including eight company locations. This is an exciting opportunity to participate in the fast growing AAM eatery segment through a complementary brand that we believe our experienced team can develop across multiple states with the goal of becoming the AAM eatery franchise or.
Of choice the current boundaries have done a great job, establishing our brand in a category frequency frequently used by millennials and Gen Z families with kids, whose household income levels skew above $75000 and kiki's entre prices are approximately 20% higher than denny's and their locations are in different trade areas, resulting in.
Very low risk of guest cannibalization from Denny's with strong <unk> and unit level margins Kiki's made it through the pandemic without closing a single restaurant in 2021. The brand delivered same store sales of positive 18% versus 2019 and same store sales in 2022 are up approximately 12% year to date versus.
2021, we are excited to welcome the <unk> management team to our family and we look forward to supporting their efforts to accelerate unit growth <unk> will operate with independent leadership teams each driving their own strategies products marketing operations and development initiatives with both reporting into the Chief Executive Officer.
Robert will provide some specific details related to the transaction and brand specific metrics. Shortly so let me now address another piece of the exciting news we are delighted to announce that Kelly delayed will become our next chief Executive Officer, and President. She has 30 years of restaurant industry experience and multiple executive leadership.
Positions and brings a proven history of developing and executing bold strategies. He is absolutely the right person for the job with the energy to not only drive our business forward, but to accelerate our growth Kelly. We begin work on June 13th and I will remain involved through August 3rd to ensure a seamless leadership transition.
At the same time, we will be saying goodbye to Mark Wolfinger, who has decided to retire effective June one after.
After faithfully serving giddings for 17 years, as our Chief Financial Officer, Chief administrative officer, and most recently as our president.
So I joined our board employees and franchisees in expressing our sincere appreciation for his many contributions and congratulate him on his well deserved retirement and as I said earlier and we will reiterate again the future of this organization is indeed bright we have a steadfast and thoughtful board of directors and new energetic and <unk>.
<unk> CEO and president joining shortly an exceptionally talented and tenured management team and a new complementary brand that will accelerate our growth.
That is on top of a fantastic group of franchisees ready to invest and Denise future through development commitments, new kitchen equipment, New restaurant technology platforms, and Remodels, which will collectively transformed the denny's guest experience through continued enhancements to our food service and atmosphere.
I'm proud of our teams and franchisees for their commitment and dedication to this brand and I'm. So thankful to be a part of such a dynamic innovative and agile organization, whose best days are yet to come with that I'll turn the call over to Robert rustic Denny's Chief Financial Officer Robert.
John and good afternoon, everyone I.
I will provide a development update and a review of our first quarter financial results before sharing a few details around the <unk> acquisition and guidance comments.
Starting with our development highlights.
Compelling heritage two <unk> remodel return led franchisees complete six remodels during the quarter and we completed three company Remodels.
Franchisees opened five new restaurants during the quarter, including one international locations in Canada, and two ghost kitchen locations in Baltimore through our new partnership with Reef technology.
Ghost kitchen locations will serve as a testing ground for new consumer reach and underrepresented metropolitan markets.
Details for our new upfront cash development incentive program are coming together and we expect formal sign ups to begin later this year in connection with an upcoming franchisee lender summit, enabling domestic franchisees to capitalize on market rationalization opportunities.
Now turning to our financial results for the quarter.
John mentioned, we delivered domestic system wide same store sales of positive 23, 3% during the first quarter versus 2021.
Franchise and license revenue increased 25, 8% to $59 $1 million, primarily due to pandemic related dining restrictions and limited operating hours in the prior year quarter.
Franchise operating margin was $28 5 million or <unk> 48, 1% of franchise and license revenue compared to $23 2 million or <unk> 49, 5% in the prior year quarter.
This margin dollar increase was primarily due to the improvement in sales performance at franchised restaurants.
I would like to note that while the franchise margin dollars was not significantly impacted due to the kitchen equipment rollout. The franchise margin rate was impacted by approximately two percentage points due to revenue recognition accounting related to the kitchen equipment rollout during the quarter.
More information can be found in our 10-Q. However, we expect this margin rate impact to both increase and persist through the remaining rollout of the kitchen equipment, while still having no impact to franchise margin dollars.
Company restaurant sales of $44 $1 million were up 31.0%, primarily due to the improvement in sales from reduced dine in restrictions and limited operating hours in the prior year quarter.
Company restaurant operating margin was $5 4 million or 12, 2% compared to $3 4 million or 10, 1% in the prior year quarter, primarily due to the improvement in sales performance at company restaurants.
We experienced commodity inflation of approximately 15% for the quarter and labor inflation of approximately 10%.
These inflationary pressures were partially offset by the improving transaction counts pricing and product mix benefits, which John described earlier.
We will continue to monitor this inflationary environment in collaboration with our franchisees to execute effective pricing strategies, and we have additional opportunities to make adjustments throughout 2022 as needed.
Total general and administrative expenses were $17 zero $1 million compared to $60 9 million in the prior year quarter.
Benefit from deferred compensation valuation adjustments was offset by increases in share based compensation expense and general administrative expenses.
As a reminder share based compensation expense and market valuation changes are noncash items and do not impact adjusted EBITDA.
These results collectively contributed to adjusted EBITDA of $17 7 million, an increase of $5 $9 million compared to the prior year quarter.
The provision for income taxes was $8 1 million, reflecting an effective income tax rate of 27, 1%.
Net adjusted net income per share was <unk> 11.
Compared to an adjusted net loss per share of <unk> in the prior year quarter.
During the first quarter, we generated adjusted free cash flow of $10 7 million compared to $5 2 million in the prior year quarter, primarily due to improvements in sales performance at both company and franchise restaurants.
As previously announced we had expected to inquire acquire an additional parcel of real estate during the first quarter of 2022 through a like kind exchange, however that transaction did not materialize.
Our quarter end total debt to adjusted EBITDA leverage ratio was 2.0 times and we had approximately $184 million of total outstanding debt, including $17 5 million borrowed under our credit facility.
During the quarter, we allocated $11 $9 million to share repurchases prior to suspending repurchases as we considered our key geese transaction.
Accordingly, we had approximately $206 million remaining under our existing repurchase authorization at the end of the quarter.
Since beginning our share repurchase program in late 2010, we have allocated over $596 million to repurchase approximately 57 million shares at an average purchase price of $10 51 per share, reducing our total net share count by approximately 38%.
Now I would like to provide some additional comments around the Kiki's breakfast Cafe acquisition.
As we have mentioned in previous earnings calls our financial flexibility provides the opportunity to continue our long standing practice of returning capital to shareholders. While also investing in the business.
This has included previously announced brand investments to optimize our real estate portfolio transformed the technology in our restaurants.
Modern is our kitchen equipment as well as the new cash development incentive program.
Our asset light business model convert approximately 50% of adjusted EBITDA into adjusted free cash flow.
And our financial flexibility has now allowed us to enter into an agreement to acquire 100% of the assets of Kiki's breakfast cafe at a purchase price of $82 $5 million.
Utilizing both cash on hand, and our revolving credit facility. This purchase price represents a multiple of approximately 12 times <unk> EBITDA.
The expected adjusted EBITDA contribution of between $6 $5 million and $7 million is driven by average unit volumes of approximately $1 9 million across the 44 franchise and eight company restaurants with company margins in the high teens to low 20% range.
The transaction will be settled in cash and finance through additional borrowing under our revolving credit facility.
Accordingly, we are adjusting our target leverage range to be between two five times and three five times, our adjusted EBITDA.
Let me now take a few minutes to expand on the business outlook section of our earnings release.
Given the volatility around commodity inflation and labor availability, we cannot reasonably provide our business outlook for full fiscal year 2022 at this time.
The following estimates for our fiscal second quarter 2022, ending June 2019, 2020 to reflect management's expectations that the current economic environment will not materially change.
Additionally, the following estimates do not include any material impact from the <unk> transaction, which is expected to close late in the second quarter.
With that said, we anticipate second quarter domestic system wide same store sales to be between 3% and 5%.
Our expectations for total general and administrative expenses are between $18 5 million and $19 5 million, including approximately $4.0 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 $4 million related to cash payments for share based compensation associated with awards granted in 2020, which will fully vest and be awarded to participants in may.
Our model generates a considerable amount of adjusted free cash flow, which will be enhanced by the acquisition of <unk> and I want to reiterate our commitment to return capital share capital to shareholders through our successful share repurchase program.
In closing, we are well on our way through the recovery curve and I am excited about the bright future with all of the opportunities in front of us to extend our operating hours with improved staffing to elevate the guest experience through heritage two <unk> remodels to grow the collective footprint of Denny's and Kiki's locations.
To upgrade products through updated kitchen equipment and to create a more seamless digital experience to restaurant technology upgrades.
I want to thank our dedicated franchisees and Dennis team members, who have remained focused on serving our guests while progressing on our exciting revitalization initiatives.
Finally, I want to welcome the Kiki's breakfast cafe franchisees and Denny and team members to the Denny's family.
I want to reiterate John's appreciation from Mark's consistent leadership and wise counsel over the last 17 years and.
And I want to express how thrilled we are that Kelly delayed will become our next CEO and president.
That wraps up our prepared remarks, I will now turn the call over to the operator to begin the Q&A portion of our call.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad. We ask that you do limit yourself to one question and one follow up to allow everyone an opportunity to ask a question. If you are using a speaker phone. Please ensure your mute function is turned off to allow your signal to reach our.
Once again that is star one to ask a question.
And we'll take our first question from Michael <unk> with Oppenheimer.
Hi, Thanks, Good afternoon, so first congratulations to John and Mark on their retirements and Kelly when she joined.
Just regarding the Kiki's breakfast Cathay acquisition I mean first can you just sort of walk through the thought process on why you are looking to acquire something like <unk>.
Specifically in the breakfast day, part, which you obviously already compete them pretty well.
And then you mentioned using your capabilities as the franchise focused business to help <unk>. So can you expand on that is that youre going to tap into your existing franchisees.
Grow that brand.
Or are you just going to lend to all of your capabilities and expertise to their franchisees to let them grow.
Thank you great questions I appreciate that the thought process.
You look you look out there.
See what's going on in the landscape and the one of the hottest categories in full services. The AAM eatery category, we compete as an all day diner.
And and.
Which has its own benefits, we're scaled brand thats going to continue to grow and improve and modernize.
But at the same time.
50, plus of these brands out there and some size or another most scale being first watch them in smaller brands that are growing.
It is a hot category and so right now they tend to skew to higher end neighborhoods, where we're not.
So on the one hand, using sort of a lexus.
<unk>.
Analogy you see that our franchisees when they are close to home in certain markets. They they want to continue to expand in some trade areas that they are reluctant to go into with Denny's, where historically the higher incomes. They might have been looking for a different experience and we have value based products lower pricing with those neighborhoods bear different plate ware.
Finished detail different expectations and so so to have a brand b two things at the same time is a little more challenging and it made sense to have something that they can fill in those markets. So one real big benefit to our current franchise base is that they right now by the way.
Would be excluded from another.
Breakfast.
They would not be allowed to compete in their current franchise agreement. This would give them permission under their current franchise or to do so so you can see the benefits. So pivoting in Brooklyn is they don't have to go far from home or half as many other brands in their portfolio. If there are multiple brand franchisee to expand.
A trusted franchise or I think many of these both prefer doing business within these within these way. So there is benefit number two visit number three is in a deeply penetrated markets like La San Francisco and Las Vegas, San Diego Phoenix.
There is room for <unk> to continue to grow but we're deeply penetrated there so the challenges of growth.
It's a headwind to grow materially more in those markets, but some of our best franchisees operating they're looking for an opportunity to grow they can now do it inside the same family.
And then finally, they just don't compete we've pressure tested this where other AAM eateries have opened in and around the denny's that have a higher average household income we see very little impact and then we've seen that theres just no impact on the Kiki's overlay with with the with the Denny's customer I guess and then finally.
The the higher.
The higher household average household income tends to hold onto employment longer I wouldn't say recession proof per se that's much more recession resistant.
Having those both in the Denny's portfolio, we felt like made a lot of sense.
Sure.
I think that pretty much gets to the answer to the other question about managing it obviously the idea here is to keep them very independent so when it comes to product development.
Marketing merchandising training learning and development structures.
<unk> leadership, all will be completely isolated and independent but support services. There are some synergies and benefits to having a very expert development and franchising group that we have here at denny's to having a world class technology support group.
Tax and Treasury.
HR compliance and so there are a number of areas, where we have expertise and scale.
And top industry talent that can support the small and emerging brands.
Procurement will be independent at launch.
Thank you Sir.
Next we'll hear from Nick <unk> with Wedbush Securities.
Thanks.
Donlin molecule.
I mean, just I mean anything to you.
And contribution gains.
Good luck.
On the one rig that you are going are going to pursue next.
Do want to focus on the Q2.
In our margin guidance or the EBITDA guidance.
Can you, maybe just dig that gap from the comp that its a huge exercise to.
So that EBITDA guidance.
If possible can change that maybe the unit level margin that we should expect in Q2 the franchise margin.
Hey, Nick this is Robert yes, Thanks for that question and I reiterate all of those sentiments about John and Mark <unk>.
<unk> Express I am sure. They appreciate that so when you when you look at the guidance right. So let's break it down a little bit to make sure we understand that that 17% to $19 million is being impacted by that $4 million of share based compensation is it's pretty technical but the the shares that are utilized for withholding perp.
This is our cash hit in our adjusted EBITDA calculations and when you add that back to the midpoint you get to about $22 million number.
Roughly so just just to rightsize that piece of the conversation with before we get started that in that if you recall that share based compensation was a function of a pandemic grant that was happened in may of 2020, So a kind of off cycle for us. We didn't have one in January of that year and it matured on a two year cycle.
As opposed to three year cycle, we'll get back to the <unk>.
This year in January of this year was back on a normal three year cycle as with that.
The one in 'twenty, one so just to rightsize all of that first.
With regard to the margin improvements, we still will be impacted right. It's choppy out there you can't.
Estimate that impact of the labor inflation.
I quoted in my script, it to 10% in the commodity inflation of about 15% that all went into the.
The expectation that setting of that expectation of that $17 million to $19 million range within there. We do expect that that likely will continue into Q2, but we don't believe that that is ultimately persistent long term. We just don't know when that begins to abate. We do have a sense commodities will abate in the back half.
The year, but.
With more like.
More want to under promise and over deliver there then to get a full guide there we haven't given the exact percentage.
With regard to the company margin, we actually did improve year over year with that way of two percentage points.
And do you believe that we will continue making progress there we have effectively priced we do have two pricing cycles that get opportunities again in June and October to address any.
Any additional inflation that we may not be seeing so we continue to drive beyond the 12% in this quarter, although we have not.
Hit within a specific number there, but do you really see a bright future ahead, we consider these.
Roadblocks and temporary challenges that we're experiencing but really.
Really believe in that bright future that we hit upon multiple times in our scripts.
Okay.
Thank you Sir next we'll hear from Jake Bartlett with <unk> Securities.
Great. Thanks for taking my question and again, my congrats to John and Mark.
My question is on the <unk> guidance as well.
The sales guidance.
Looking looking back Theres been a pretty large divergence between average weekly sales growth and same store sales growth, which is how we model it and kind of look at the the difference there and it makes it a little tough to understand exactly how the same store sales is impacting average weekly sales for instance in the <unk>.
First quarter average weekly sales grew faster than same store sales and so in the context of the 3% to 5% same store sales I'm, hoping you can maybe give us a little closer to what you expect for revenue maybe if you could frame it and you can see them in average weekly sales or expected unit volumes, but just.
There's two things.
Going on here and you gave US one piece is going to make sure. We're on the same page.
As to kind of what Youre really expecting for the top line.
Yes, Hey, Jake this is Robert again happy to try to address that one too.
So when you look at <unk> added and I think it's in our.
The our investor deck that we put out we do have the the average weekly sales per restaurant and it will go in there and talk about the $33 1 million.
33.
$1000 per restaurant per week that is comprised of that split between on Prem and off Prem that doubling of the effect that we've held onto during the pandemic timeframe, but what you'll also note within there.
Is the cadence.
The average weekly volumes right. So if you look at it Q2, and Q3 tend to be somewhat higher volumes.
Or is Q1 tends to be the lowest volume. So when you look at that.
3% to 5% I E you would need to be applying it to the right quarter I would imagine you are but again, they're much higher Q2, and Q3 quarters are much higher the other thing to take into account with regard to that and I imagine you're completely getting this is the $23 three that we delivered in.
Q1 was still benefiting from the rollover of highly impacted COVID-19.
<unk> in the like California, Washington that were much more slowly to evolve out of the COVID-19 restrictions. So that we are actually now entering into what will be considered more normalized same store sales as we move into Q2.
And the guys will look more normalized I don't know if I can add much more than that at the moment.
Thank you Sir next we'll hear from Todd Brooks with Debenture Mark Company.
Hey, I also want to share my congratulations John and Mark.
Trump all done so congrats.
Thank you question Youre welcome John .
Just wondering if we could talk about franchisee health I mean, the beauty of the <unk> model highly franchise as you are.
Impact are protected from a large amount of this inflationary pressure, obviously corporate store margins.
Highly franchise, if you look at the.
The franchisee level I guess what.
What are we seeing as far as the inflation that theyre, having having to absorb.
You have any compare kind of on the <unk>.
Benchmark on franchisee pricing versus what you are running in the corporate store right now and any any kind of.
View that you can give us into the health of the franchisees just given this kind of historic intra quarter inflation that we're seeing currently.
Right so.
These are great questions of course, we've got the pulse of our franchisees.
There is considerable access and the Denny's brand and this is a tradition. This carried on per year. So I can't say we are.
We give ourselves a pat on the back for expert yet, but we are I would say pretty good listeners.
Ear to the ground to the pulse of the franchisees. We just completed a meeting in San Diego, which we call our annual Allied partners partner Summit, which we conduct once a year with vendors.
And the mood was really high there is a lot of excitement about investments. There is a lot of conversation about margin and pricing value strategies, and new menu introductions and getting everything just right for each day part.
But the but I'd say, there's general confidence.
On the on the slider into the equation.
We had a few more closings.
In the quarter and so you see sort of that purge.
Much like we had during the pandemic we saw in this quarter a little bit more of an acceleration of what might have happened over a longer period of time.
But other than that franchisee has taken the opportunity to sort of take a hard look at their portfolio, you'll see a lot of confidence.
In the brand so I don't know if that gets to the heart.
The question there.
The larger franchisees did not get the same PPP benefits smaller ones did some smaller ones tend to be.
Going into the year in really good shape balance sheet and are confident about their investments many paying cash for their new ovens and then the larger franchisees I'd say are a little bit more.
Tempered they want to get through the winter.
And they are looking forward to the spring.
Thank you Mr. Brooks next we'll hear from Eric Gonzalez with Keybanc capital markets.
Hey, Thanks for the question John Mark Congrats and best of luck on your future endeavors.
You could talk about the health of the consumer given your demographic skew exchange shifts in consumer behavior. I know you mentioned the gas prices wondering.
Why the consumer might react to gasoline and not the higher food prices in terms of their willingness to dine out.
And then secondarily there was some improvement in average hours this quarter, but maybe you could talk about what it's going to take before we see a much bigger inflection in the number of 24 hour units. Thanks.
Great Great questions and this is one that it's a big circular reference this thing between real disposable income consumer confidence and then the pace at which the market. It can be disrupted all ones for our brands and I can't speak for everybody that as sort of the footprint, we have but sort of a middle income Middle America consume.
<unk>.
<unk>.
I would say many of which are working class not all but.
Our customers represent America in there and so when they.
When their confidence is a little lower than they say they go to grocery store a little more brown bag at a little bit more often so with omicron with delta with high gas price, peaking all at once any of these things we tend to have a reactive consumer that sort of pulls back. So you heard us say in the script look we were counting on March continue.
To accelerate with momentum coming through the quarter, and then and then decelerated and missed our.
Our internal expectations for sure and then April .
People go okay, well, that's the price of gas.
It came down a little.
But it didn't come down to where it was in.
And people go Okay, I got over the shock vector normal, but we do tend to have a little bit of a competency and a reaction.
As the sort of leading edge on the other hand as people.
Have real disposable income growth at or beyond the level of inflation.
So I'd say wage growth has been solid to give some sense of confidence to the future of savings rates and money to spend on the other hand some things.
Interest rates and what will happen to my adjustable rate mortgage and when will gas come back down. It has it has or our customer a little nervous and so but that's improving in April and we expect it will continue to improve.
Kind of way, we look at it and forgive the long answer here, but you're sort of front and you look at all of these different buckets as food inflation might drive some quick serve or value warranty station, but we're not staffed so again all these so as we staff more fully we're willing to go back to our playbook of more value promotions to drive more transactions.
We've not done that in a while we've actually us and our category I Wouldnt say fully abandon it but we really left that to quick serve in the grocery. So so all these things in our playbook that are yet to operationalize are just now coming back into consideration. So our confidence that we know what to do with just arent there yet so we did come back with a value.
With an endless breakfast and modest media, we floated out there we didnt merchandize it as strongly as we had 2468 in the past it's got a real strong barbell that proteins at the other end of it to give our franchisees confidence, but but we'll work back into those as we become more fully staff will add hours will add.
Confidence in our consumers or we're going to continue to come back as a result.
On the.
But yes they.
It kind of took a hit and then now and now Theyre coming back I would say nothing to worry about but enough for us to say theres too many pieces in the soup here, let's let's guide next quarter rather than this one on the on the hours. We do believe there's momentum both in staffing and training and retention, even though you hear about a great resignation that is true we will have.
A higher number of people to start and then decide.
What.
I'll go back on unemployment.
But but we do have but that seems to get it improving so the momentum is building and it sort of has a doubling right out there another quarter or so down the road is slower than we had originally hoped but.
But we think we think that pace will continue to quick and to add hours and.
<unk>.
Quality staffing and good training programs before we add those hours so that we come back with some confidence so it's all coming in the right direction is just is just a bit delayed.
Yeah.
Thank you Sir and as a reminder, that is star one if you would like to ask a question. At this time also if you've previously asked the question and have more please press star one to re queue next.
Next we'll hear from Brett Levy with MK M partners.
Mr. Lee Your line is open. Please go ahead.
Hearing no response, we'll move on to Jake Bartlett with <unk> Securities.
Great. Thanks for taking the follow up.
Robert I'm wondering maybe just to help me I'm going back to the question I had asked before.
Wanted to better understand when I look at a three year geometric stacks for same store sales.
Calculate geometrically.
The 4% implies a pretty sharp deceleration from the first quarter. So just remind me why why that might be having is what is there a nuance as to how you calculate same store sales just just so I can understand how that might be happening.
<unk>.
Maybe if you could also confirm I guess in that answer but confirm that that April sales levels like average weekly sales have improved.
Already from the first quarter.
Okay.
A J this is Robert again.
Great.
All looking a little little critical in the room.
Because our Q T. R Q2, 3% to 5% would not necessary from our perspective here in the room would not necessarily represent a deceleration.
In comps.
Looking back at an anchor point I don't know, if youre looking at 19% or 20% or how that stack looks in your world, but we don't see that deceleration that you are referencing there I can confirm that as John mentioned in his script that we did accelerate from March into April .
In a meaningful way. So we were pleased with that so again, we're not seeing what youre seeing so I don't know exactly how to answer that question.
Okay got it and can I ask a follow up here.
They may still there could I get the company up before so I just want to make sure about that but.
Another question on <unk>.
On the the impact of the cash stock comp, obviously, a big impact on your guidance for adjust.
Adjusted EBITDA can.
Can you just remind us help us that's having a big impact I haven't had a big impact in the first quarter as well just versus expectations. So can you just make sure. We're on the same page about when are there any other grants that we should be aware of as we're making our estimates going out or and typically these hit in the first quarter.
Should it be about the same I mean anything kind of that we should be aware of as we as we project forward beyond the second quarter, yes.
Yes, that's a really good question Jake So it was the grant in 2020 was was different than any other grants that we had done previously that that was a two year grant.
And it was delayed given the effects.
<unk>.
The Covid pandemic launching in there in March everything was delayed to get a sense of where we were so that was granted in may it was a two year grant historically for us there.
There are three year grants typically.
Late January early February runs on a three year cycle. So you see that three year impact. So we do know and this is all on the proxy a portion of this of the grants are now in restricted stock units. So in 2021 that was a one third of that grant in 2022 that was.
40% of that grant those mature.
Our issues are one year maturity they pay out the following January so youll see that piece trickle into January of 2023, although there will not be a significant payout because the grant.
2020 matured here in May and thus will not impact.
January of 2023, although you will see some the majority of the biggest component of that is sitting back here in may so kind of skipping a cycle and I know this is a long complicated answer but the bigger Pete the next bigger piece will now sit out into January of 2024.
And.
Again I know this is complicated this is all within the proxy so we'll be able to speak to this more clearly to get you the exact cadence of those payments.
Great. Thanks, a lot I appreciate it.
But one time only not to be repeated in the correct.
Pandemic two year grant with a one time <unk> grant we have gone back to our highly.
High performance based grants subsequent to that one.
Thank you Sir.
Ill take a follow up question from Todd Brooks with the benchmark company.
Hey, Thanks for the follow up I was just wondering can we talk to virtual brand performance what type of.
Sales layer. It was how sturdy of those businesses seem to be as dine ins reopening and just outlook for any further rollout across the base. Thanks.
Yes, yes, well, Robert John Roberts going to grab some numbers there Greg.
Great question all in all it's.
Modest momentum in both brands there is a really strong consumer reaction and our franchise base likes it because it's another storefront without brick and mortar to get some product credibility that we will have a long term.
Benefit to the denny's reputation for product quality.
The artisan bread the high quality ingredients in some of these are starting to work their way into the denny's menu under the same or similar name or.
Same in the merchandising. The fact that these are coming from <unk>.
Is out there as well so.
So we like what they have done these are products, we think deserve a spot as a hero on our menu and so.
End of the day when you when you blend the two efforts together, it's not an additional.
SKU there are a few right now but at the end of the day. This will be something we we think fits our diner positioning but it also has a Burger then meltdown second brand where people might discovers there.
They weren't shopping for Denny's Denny's is an all day breakfast.
Reputation we're building our diner all day day part reputation, but in the meantime, someone might find a burger or sandwich somewhere else in our franchisees that participate tend to like the exposure.
And Todd just to give you some sense of the numbers and this is in our investor presentation slide six, but it's representing about 3% between the Burger denim. The meltdown, it's been very consistent at that level and we're really quite excited about that any initiative that we can come up with that will drive 3% and sales.
We will launch those all day long so really excited about that and the fact that it's been very consistent since launch.
Great. Thanks, Robert.
And there are no further questions at this time I will turn the conference back over to you for any additional or closing remarks.
Alright, Thank you for joining us on today's call. We are pleased with the progress we have made navigating a noisy recovery and are encouraged by the level of adjusted EBITDA and adjusted free cash flow generated by our highly franchised business model during the first quarter. Despite the inflationary headwinds, we're making steady progress with staffing levels and extending operating hours.
Which will provide additional potential for our brands and off premise sales remained strong at nearly double the 2019 levels driven by robust third party channels and are two new virtual brands. We believe the meaningful investments, we're making in kitchen equipment in restaurant technology platforms will prepare our business forward with exciting high quality product opportunities and enhance.
Guest experience and we are excited to relaunch our successful heritage remodel program, along with the opportunity to enhance our existing development pipeline through our new franchise incentive program, our partnership with <unk> and a new complementary brand that we believe will accelerate our growth and finally, we have a new energetic and experienced CEO joining shortly rep.
Zane the culmination of a thoughtful succession plan by our board of directors and she will be supported by an exceptionally talented management teams. So I believe our future is indeed, very bright and we look forward to our next earnings conference call in early August when we will discuss our second quarter 2022 results. So thanks, everybody and have a great evening.
That does conclude today's conference. We thank you for your participation you may now disconnect.
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