Q3 2022 Denny's Corp Earnings Call
President Investor Relations and financial planning and analysis. Please go ahead.
Thank you Rachel and good afternoon, everyone. We appreciate you joining us for Denny's third quarter 2022 earnings conference call.
With me today from management are Kelley Blue and as Chief Executive Officer, and Robert <unk>, Executive Vice President and Chief Financial Officer.
Please refer to our website at Investor Day, Denny's Dot com to find our third quarter earnings press release, along with a reconciliation of any non-GAAP financial measures mentioned on the call. Today. This call is being webcast an archive of the webcast will be available on our website later today.
Kevin will begin today's call with a business update.
Robert will provide the development update and a recap of our third quarter financial results before commenting on 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.
The 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 risks uncertainties and other factors that may cause the actual performance of denny's to be materially different from the performance in.
<unk> 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 in any subsequent forms 8-K and quarterly reports on Form 10-Q with that I will now turn the call over to Kelly delayed Denny's Chief Executive Officer.
Thank you Curt and good afternoon, everyone before I discuss our most recent quarter I'd like to first take a brief moment and touch on recent organizational changes we've made in our Denny's Franchisee Association convention, including our recent messaging to the franchise community.
During the quarter, we appointed John Dillon as President of the Denny's brand and welcome welcome David Schmidt as President of Teekay Breakfast Cafe, John has been a dedicated leader in the Denny system for 15 years and most recently served as our Chief brand officer prior to that John spent many years in marketing and leadership roles at Yum brands David.
It brings 30 years of proven restaurant experience to our newly acquired Kiki's brand. Most recently, serving as Chief financial officer of Red Lobster and have lumen brands as president of Bonefish Grill Vocab Distinguished track records within the restaurant industry and have demonstrated unwavering commitment to delivering exceptional team and guest experiences.
These leadership appointments enabled John and David to focus their teams on delivering and executing brand specific initiatives to deliver compelling products and innovation unique marketing messages improved execution and guest experiences and unique unit expansion with support from our shared services teams importantly will make.
Attain our ongoing collaboration and best practices with our franchise partners in both brands to ensure they are set up for success, putting our model franchise or experience to work.
Beyond excited for what the future holds for our respective brands through their leadership.
Also recently had the pleasure of attending my first Denny's Franchisee Association Convention last month, which included the opportunity to meet many of our franchisees and operators face to face for the first time.
While on stage I shared my belief that we are already benefiting from a solid foundation of strategies centered around developing world class people capabilities, achieving operational excellence driving profitable traffic growing growing our global footprint and optimizing our business model for margin growth as.
<unk> sure that when I joined the organization and that members of the Denny's community I asked two important questions. The first question was what should I know the answer has highlighted the great and strong relationships and partnerships franchise or to franchisee, but they also highlighted the persistent staffing challenges challenges and supply chain and commodity headwinds.
Which both just led the general the general theme of current business constraints that we all know exists.
Second question I asked was what do you expect the answers included providing focus traffic and sales driving initiatives support for staffing and the right strategies for today and tomorrow.
I took that feedback to heart and as a team we developed an appropriate and timely game plan to help us continue to strengthen our business in the short term, while continuing to invest in our long term strategies to revitalize and update the brand.
The investments, we will continue to make in improving our food updating our restaurants with heritage to point out kitchen modernization at technology transformation are still relevant and urgent for US. We also needed a short term bold game plan to solve for today's environment. As a result at the convention, we launched what we're calling our big three.
Which is a maniacal focus on staffing returning to $20 seven as a brand and driving profitable traffic with our new value platform I'll break each of these down for for you a bit next to give color to these programs and share the progress to date.
First, though staffing and turnover still remains a challenge we've seen significant progress at denny's and in the industry, which gives us promise and reasonably optimistic our staffing levels at company restaurants are now comparable to pre pandemic levels and we're seeing strong results from recent hires as well as reductions in turnover. This is a testament to our strong company.
Operations team, which is providing evidence for what's possible and for what our franchisees can also achieve.
We also continue to share best practices around recruiting and Onboarding and providing access to our world class training programs. In addition, we recently established a platform for virtual hiring events. That's also driving encouraging participation.
Furthermore, foreign are fostering an inclusive cared for and cared about culture is critical to long term retention and Dennis continues to demonstrate a strong foundation here as well in.
In fact, our give that culture was recently on full display when we deployed our denny's mobile relief diner to Florida after hurricane in our teams and our executives were on hand to show support engage the community and as a result served over 12000 hot free meals to those in need the stories images and impacts of this were amazing and I couldnt be more proud of the way.
Our company showed up well.
<unk> just launched into our 11th year supporting no Kid hungry, where our guests franchisees and company restaurants have collectively donated over $11 million and counting to this great cause finally, I'm also thrilled that for the second year in a row Denny's has been recognized as one of the top 100, most loved workplaces for 2022 by Newsweek and <unk>.
Best practice Institute in fact, we were again, the only family dining brands of scale in the top 100.
Moving to our second area of immediate focus I'll talk a bit about our latest progress on returning to 2047.
As we emphasized on our last earnings call. We are a 24 hour brands and we have a significant tailwind opportunity as demand for the late night dining occasion is ever present, that's handling continues with recent industry data, indicating that approximately 30% to 40% of full service outlets that were opened late night prior to the pandemic has not yet returned.
Pre pandemic operating hours. Another recent data essential study confirm that full service restaurants are open almost seven full hours less than they were before the pandemic. We know guests want to return to normal behavior and have options for dining out late night and that's good news for us and a desk. In addition, denny's.
$4 seven restaurants continue to consistently outperform the limited our restaurants by mid teens digit sales comps relative to 2019, finally restaurants operating $24 seven outperform the BVI family dining index in the third quarter by over 400 basis points relative to 2019 all of this.
<unk>, great discussions in collaboration with our franchisees, which inform the development of our plan to support our commitment to getting to $24 seven the results and what we launched as a modest financial incentives to motivate franchisees to accelerate their path to be followed by an enhanced measure of accountability. This is gaining momentum everyday and our progress is evident.
And material for.
Furthermore, approximately 5% of our domestic system was not 27 prior to the pandemic for various reasons and we've agreed to review late night profitability on a case by case basis to determine if there are additional restaurants that may not return to 24 seven operations fully we believe through this process, we could have an additional 5%.
Ultimately will not return to 24 seven operations, but we still believe we will be able to capitalize on the strength of the Denny's brand.
As of today, we have nearly 870 domestic restaurants opened 24, seven but really were more encouraged by the conversations with franchisees around getting there returning to this work historical position as America's 24 hour diner, we look forward to providing an update on our next call to this.
Turning now to our third area of focus driving profitable sales and traffic growth through our value platform. Our current barbell strategy balances, our LTM messaging with profitable traffic driving value products and are remain top of mind for our consumers facing these inflationary pressures, we doubled down on our commitment to value with the launch of our all day dining.
Deals in early September .
This new value menu features 10 delicious meal options perfect to enjoy anytime day or night with wallet friendly prices ranging from 599% to $10 59.
<unk> total value preference, including the new value menu and Super Slam was 14% for the quarter an improvement of four percentage points from the prior quarter were also encouraged by a positive change in traffic trends. Following the launch of this new menu and we also maintained a healthy guest check average as in store merchandising provided upsell.
Opportunities. We've also been we've always been known for our strong value positioning and we're excited about this new value platform that we know we can continue to massage and leverage as guests look for compelling compelling value offerings now shifting to our third quarter results Denny's domestic system wide same store sales increased one 5% compared to <unk>.
21, and increased one 7% compared to 2019, the softer guest traffic experienced towards the end of the second quarter extended into July as inflationary pressures continue to weigh on the consumer however, with the improvement in both consumer confidence and consumer sentiment in August along with our new compelling value platform.
<unk> and related messaging, we experienced a positive shift in our traffic trends off premise sales also have remained strong at approximately 20% of total sales compared to the pre pandemic trend of 12%. This far surpasses the family dining benchmark and reflects both our speed to market as the first family dining brand to launch online ordering.
And the strength of our off premise technology and infrastructure.
Additionally, the performance of our virtual brands has remained very consistent and highly incremental representing about 3% of domestic average weekly sales and.
In closing I'd like to express my gratitude for the warm welcome I received from so many franchisees operators and support teams at both <unk> and <unk> the conversations collaboration and commitment from our franchisees have been incredibly positive and I'm, especially grateful for their enduring resolve and consistent focus on delivering a positive guest experience every day.
In the midst of a persistently choppy pandemic recovery I'm also confident in John and David's leadership, and the rest of our exceptionally talented and tenured management team.
Working collaboratively with our franchisees, we are poised for a bright future at both <unk> and <unk> and with that I'll turn the call over to Robert for the Arctic Our chief financial officers at Denny's.
Thank you Kelly and good afternoon, everyone. Despite a persistent challenging environment. We were pleased to deliver third quarter results in line with or better than the guidance. We provided on our previous earnings call I am excited about the way in which our leadership team is coming together the launch of our new value.
Platform that is resonating with denny's guests.
The completion of our acquisition of <unk> and our path toward extended operating hours, all culminating in accelerated adjusted EBITDA expectations for our fourth quarter.
I will now provide the development update and a review of our third quarter results before sharing more on our guidance in a moment.
Starting with development highlights Denny's franchisees completed 16 heritage two <unk> Remodels and we completed three company remodels during the quarter.
The elongated hyper inflationary environment weighed on lower volume restaurants, resulting in a higher than average number of franchise closures during the quarter. However confidence in the Denny's model remains strong as Denny's franchisees opened seven new restaurants during the quarter, including one international local.
<unk> in Canada.
Turning to keep development I am pleased to report that it keeps franchisees opened one location in the last month of the quarter year.
Year to date through September the brand has opened two new franchise units, including one opening prior to the acquisition.
In addition, certain franchise unit was opened in the last week of fiscal October .
I am also excited to announce that we have finalized the <unk> franchise agreement documents laying the foundation to officially expand our business into the fast growing daytime <unk> segment.
Moving to our third quarter results as Kelly mentioned, our Denny's domestic system wide same store sales growth in Q3 was one 5%.
This growth came from an approximately 9% increase in guest check average, which was comprised of approximately 2% carryover pricing from the prior year.
<unk>, 5% pricing taken in the current year and approximately 2% of product mix benefits.
As highlighted in our Q3 earnings Investor presentation domestic average weekly sales for Q3 were approximately $35000 compared to $34000 in the pre pandemic third quarter of 2019.
This represents a four 5% increase in average weekly sales compared to 2019, whereas same store sales only increased one 7% relative to 2019.
The variance between these two metrics demonstrates that while our system portfolio smaller than it was three years ago. It is also generating higher average weekly sales as lower volume restaurants exit the system.
Franchise and license revenue was $65 2 million compared to $57 3 million in the prior year quarter.
This increase was primarily driven by $5 $6 million related to the kitchen modernization rollout and $1 $1 million of Kiki's breakfast Cafe franchise revenue in the quarter.
The revenue recorded related to the sale of kitchen equipment has an equal and offsetting expense recorded in other direct costs.
Franchise operating margin was $37 million or 47% of franchise and license revenue compared to $29 9 million or 52, 1% in the prior year quarter.
I would like to note that while franchise margin dollars were not impacted by the kitchen equipment rollout. The franchise margin rate was reduced by approximately 440 basis points through this accounting requirement.
More information can be found in our 10-Q. However, we expect this margin rate impact to persist throughout the remaining rollout of kitchen equipment, while still having no impact of franchise margin dollars.
Company restaurant sales of $52 $2 million were up 12, 4%.
This increase is primarily due to our strong same store sales growth of seven 1% and $2 $7 million of Tiki Breakfast Cafe company restaurant sales in the current quarter.
Company restaurant operating margin was $3 8 million or seven 2% compared to $7 9 million or $17 zero percent in the prior year quarter.
This margin change was primarily due to commodity and labor inflation and a $1 6 million in legal settlement costs.
Partially offset by the improvement in sales performance at company restaurants.
Legal settlement costs impacted the company margin rate by approximately 300 basis points.
While commodity inflation was approximately 18% during the quarter, we saw improvement throughout with September at approximately 16%.
Additionally, labor inflation continues to moderate as we experienced 7% inflation during the quarter.
We continue to monitor this inflationary environment in collaboration with our franchisees, while remaining thoughtful with regards to pricing strategies and decisions.
Therefore, we did take approximately 1% of additional pricing with the launch of our fall core menu last week, and we expect fourth quarter total pricing to be similar to the third quarter.
These results collectively contributed to adjusted EBITDA of $19 $2 million.
The provision for income taxes was $5 $5 million.
Reflecting an effective income tax rate of 24, 3%.
Adjusted net income per share was <unk> 12.
And we generated adjusted free cash flow of $8 7 million.
Our quarter end total debt to adjusted EBITDA leverage ratio was three three times and we had approximately $278 million of total debt outstanding including $266 $5 million.
<unk> under our credit facility.
As a reminder, we adjusted our target leverage range to be between two five times and three five times of our adjusted EBITDA with the closing of the <unk> acquisition.
During the quarter, we allocated $7 9 million to share repurchases supporting our commitment to continue returning capital to our shareholders.
On a year to date basis, we have allocated $57 million to repurchase approximately five 5 million shares.
As a result at the end of the quarter, we had approximately $160 million remaining under our existing repurchase authorization.
Let me now take a few minutes to expand on the business outlook section of our earnings release, where we are providing the following estimates for our fiscal fourth quarter ending December 28 2022.
We anticipate denny's fourth quarter domestic system wide same store sales to be between 1% and 3% compared to 2021, taking denny seasonal patterns into account.
Our expectations for consolidated total general and administrative expenses are between 17 and $18 million, including approximately $2 million related to share based compensation expense, which does not impact adjusted EBITDA.
As I mentioned, we are seeing early signs that that commodities are starting to moderate and we believe we'll continue to see wage inflation moderate.
As Kelly detailed in her comments are focused on helping our franchisees extend their operating hours with improved staffing levels and leverage value messaging to drive transactions.
Has yielded our guidance for fourth quarter consolidated adjusted EBITDA of between 21 and $23 million.
In closing I want to thank our extraordinary group of franchisees and our dedicated restaurant teams for their consistent focus on serving our guests.
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 if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question.
Pause for just a moment to allow everyone an opportunity to signal for questions.
Okay.
Our first question comes from Michael Tamas with Oppenheimer.
Hi, Thanks, good afternoon.
Kelly, Hey, Michael Louise Hi, guys how are you.
Kelly in the press release, you mentioned that the all day diner deals, which was driving new customer trials. So can you expand on that a little bit maybe loop in what youre seeing overall with consumer behavior are those new customers that you're attracting to the denny's brand that you were referring to was it greater frequency among your existing customer base, that's trying that new.
Thanks.
Yes. Thank you Michael Great question, Yes, I think look we're pleased with and I think we think it's probably a little bit of both it's probably increased frequency, we probably brought a few more guests and we know that that value offer is compelling for us given the change in preference.
We saw that change.
Pretty quickly.
And we're pleased with that as we've also mentioned we were able to balance guest check average by merchandising in restaurant will hire menu higher margin plays so we're pretty pretty happy with it given the price conscious consumer that we know still exists and we feel like it's definitely resonating with them.
Okay got it thanks for that and then you mentioned a more focused strategy to get the system open for late night.
Thank you you mentioned something about a small financial incentive and then moving onto more accountability. After that so can you walk through maybe like what does that financial incentive look like how is it different from the last time you tried this how long do you plan to leave it in place and when you are talking about accountability.
I'm on vacation if somebody doesn't get open for late night or what are the overall impact that you expect from the strategy sure sure. Yeah Fair question and you know what just because there is a historical bent to that slant to that question I'm going to ask Robert to kind of emphasize what we're doing differently than last time and why we feel strongly about our progress here.
Hey, Michael Yes that is a really good question if you are referring.
Referring too late I think it was Q4 2020, we try that incentive the reality is we were really bullish on it back then but the timing was not right. If you can recall what was happening back then is stay.
Stay tuned even owned by a California didn't even get open fully to on Prem business until it really April of 2021, so the timing of that while it was not.
Ill concept the timing wasn't ideal to really get there. The reality is as you fast forward two years.
And you.
And you get to the point that everybody is open.
Thankfully in a way Covid is really left the common everyday vernacular in large part to really transition to the type of inflation. So all of the limitations that we were experiencing two years ago are really are not in place right. Now. So we have put a financial incentive in place it really looks too.
<unk>.
Accelerate so the incentive is tiered it gives a little bit more if you get out sooner a little bit less if you if you wait a little bit longer really all culminating in early 2023 before we turn in pivot to the accountability within our brand standards it in French.
<unk> agreements it is a requirement.
To be open 24, 7%.
Except for the cases that Kelly described in her comments, which were security or.
The local ordinances.
A handful of cases, where it may not make sense to be 24 seven.
And we've offered similar things such as a 24, 3% or 24, four so we will push on that.
And really kind of.
Really an act the brand standards that we have in place to drive that forward. So a little bit of a looking if you use the analogy we are in the carrot.
Timeframe of our incentive with a potential stick our accountability to use a better word in 2023 and the only thing I'd love to add to that is really just the shift in the conversations as of late I noted in my script that it's really important because we are seeing is just obviously the evidence is there.
Mounting evidence it continues to be there in terms of the demand we've highlighted that over and over again, but the conversation truly have shifted given the evidence that we've done it at company restaurants, some best practices, we've already shared with our virtual hiring event in our recent campaigns. So the more we demonstrated that the more of the conversations have shifted to okay. How do we get there and in fact, we.
So segmented our operators have been amazing they are segmented the whole population of restaurants, and really captured them into kind of ways to help triage and then just really understanding the possibilities that exist and we have very few now that we think will continue to struggle, we really see positive response overall.
Perfect. Thanks, so much.
Thank you.
Okay.
Our next question comes from Nick <unk> with Wedbush Securities. Please go ahead.
Thank you.
Just given the inflation commentary.
Sounds like 7% country lower labor inflation in Q4.
And given the level of pricing can we see some labor leverage year over year in Q4.
Okay.
Hey, Nick this is Robert.
If you kind of look.
At the margin I still think that we are working towards getting back to that kind of that mid teens that we've talked about but it'll be a ramp.
I think the reality is is when you look at our look at our guidance I think the more important piece to takeaway from that is that $21 million to $23 million represents the highest level of EBITDA that we've seen at any point. This year. So despite these continuing pressures we do.
What we've done moderate rate. So you saw the 16, we've referenced in the in the in the commentary that those will come down with the seven.
Will is.
You look at the cadence of that.
I believe it was 10 eight seven Q1 Q2 Q3. So you can continue to trend that down.
So we believe that the margins will be higher than what we delivered in Q2 Q3 I.
If you see the 7% pricing is not unreasonable to suggest there are seven that you could leverage the labor line with 7% pricing against 7% inflation, but the but the reality is if you go back and focus on that EBITDA guidance again midpoint of 22 and <unk>.
<unk> higher than in any point this year and then again assumes continuing moderation with commodities also.
And.
In the past, you've given sort of the.
Summary of all the one time.
We've seen two EBITDA in 'twenty two can.
Can you maybe.
Go over that again, so we can have a pretty good starting point from 2000 to think about 2023.
Yes.
Nick you and I have talked about this frequently so there is some pretty big pieces. When you look at <unk>.
'twenty two the impacts of 'twenty, two and where we will be in 2023, so let's let's talk about several of those so the first one it impacted it that they were in my comments.
So.
Kind of a recurring theme from 'twenty two to 'twenty three that with the legal those were they were related.
Was related to a series of related cases, so we still believe while we incurred in both quarters. It really is.
More of that non recurring type of events, that's about $4 million for that legal piece.
If you would be other piece that you want to look at is the cash stock based compensation rate because we think that is a component and how we define adjusted EBITDA and we have two plans that actually vested in the current year right. Because the 2020 plan was a two year.
One time only from Covid all of our plans prior to that and posts that are three year plans, but because it was a two year plan you had two of those.
That matured in the current year, thus that we were overstated, there by $2 million to $3 million with regard to that.
You have the 20 <unk>, we will be successful you've heard Kelly and I just talk about that we will make progress towards that theres likely.
<unk>, 5% to 6% more with regard to same store sales that we will capture each points about $1 million that youre going to pick up.
There so.
And then the final piece that I will mention is that we will have <unk> on board for the full year. So that we will likely invest in because we really want to grow that thing pretty quickly. So.
So.
So there likely will be an investment in there, but it will go beyond.
What the what it is adding in the current year because they have right now.
If you've made with July four July 'twenty was the actual date you had some onetime costs I did think of that between probably one 2 million it will be beyond that but we will likely be investing into that into in 2023. So those are four big pieces that you can build back from.
From 'twenty two to 'twenty three all of those were contemplated in the guidance that 'twenty one to 'twenty three that is again materially beyond any other quarter. This year.
Great. Thank you very much.
Thanks, Nick.
Yes.
Our next question comes from Todd Brooks with Benchmark Company. Please go ahead.
Hey, Thanks for taking my questions appreciate it Robert you pointed to the.
$21 million to $23 million EBITDA guidance for the fourth quarter and kind of using that as a lever for maybe the pace of the.
Company owned restaurant level margin recovery should start to unfold how about sure franchise operating margin do you expect it to kind of maintain this 47% range in the fourth quarter and I know, it's impacted substantially by the kitchen revitalization efforts.
Yes, you are spot on top of that.
That really that accounting machination that we're dealing with there.
It has really impacted that and we are trying to to be ultra clear with regard to the fact that it will persist until the rollout is done we believe the rollout of the kitchen equipment.
It will it goes through the end of the year, we think we should be materially done by the end of the year. So it will impact Q4, Theres no doubt about it.
It will impact that rate, but that rate will bounce back once that flushes through and that will come back to us in 2023.
Once the accounting machinations related to this subside because we'll be done quote unquote air quotes in the air selling equipment to franchisees. It was just a way if you think about it.
Little bit of history that a little story.
When it wasn't that long ago that the supply chain and just getting kitchen equipment and still isn't large aspect with a very difficult thing to do so we bought all of the kitchen equipment that we would have it for all of our units put this on our balance sheet.
Thus the requirement to actually call. It a sale of equipment and again. It is four to 500 basis points. It will impact Q3, Q4 from a rate perspective, but not from a dollar perspective.
Okay, Great and just a follow up on that I guess right.
We've made progress hoping to have it done by the end of Q4 when should we start seeing at the restaurant level some of the menu initiatives from having the new equipment footprint in place as far as.
New items I know you thought that the <unk> benefit.
Kind of throughput in Brent at breakfast, but also some menu enhancement and the later in the day to day parts when should or we came that the restaurant and the early reads on matter when should we expect to be able to find Bob. Thanks.
Yes, Todd so thats the exciting part right.
And I get the I have the pleasure the benefit I said bid with Kelly and the many others on the leadership team and get the test out all of these.
Amazing products I wish I could share them in the moment with you because I would get your mouthwatering with regard to that.
And you will likely see the.
Probably late Q1 into the early part of Q2 that you'll really see some of the major terms now major product introductions with regard to <unk>, we are using them right now as they are rolled out.
I've routinely and I don't want to be it sounds like a broken record but.
Oven cooked bacon better we have a holding equipment for that it helps the efficiencies.
Were released grill space and helps the efficiency of the kitchen.
So we are in the restaurants that have them I don't want to say that we're not utilizing with.
We're probably is six months away at this point from from seeing some material.
Product introductions.
Great. Thanks, Robert.
Thanks Todd.
Okay.
Our next question comes from Eric <unk> with Keybanc capital markets. Please go ahead.
Hey, Thanks, and good evening.
Real quick just my first question is on the company same store sales versus the franchise same store sales is it's really about staffing and is there something we should know about comparisons that maybe arent part of the one year trend or maybe maybe this is a window into the future should you get the staffing better more franchise stores.
Well with that thank you for the question, Eric I Love that because we actually do think it is that we think it's a few things right. It's a few things going the right direction based on primarily having the right people in the restaurants. So staffing our company operators are doing a fantastic job with that again, it's proving evidence is playing out and we are also.
Seeing really strong.
Sentiment scores. So we're seeing we track that we've launched through the system. So our franchisees also are measuring it but we have we see strength.
Even above and beyond other restaurants, just based on being stopped being opened 24, seven and then having a better guest experience. We know all of that is the formula to just growing sales and traffic in the future.
Got it and then maybe if I could just ask about interest rates for a second a lot of your revolver. It's floating off of LIBOR. So can you maybe guide us on interest rates for the fourth quarter into next year, and then maybe touch on some of the indirect impacts such as new unit returns for your franchisees their ability to build new stores remodel existing stores with Facebook.
Some higher borrowing costs.
Yes, thanks for that question Eric. So so here is one of the benefits that we have sitting within our capital structure, we are 100% swapped against that revolver. So the interest rates moving right now for US right from a corporate perspective really have no.
No meaningful impact with regard to interest expense or cash interest.
And it's right around fully swapped slightly under 5% I believe so that we for all intensive purposes were fixed at right about 5% threat for us. So that's a that's a benefit that we have sitting within our balance sheet.
I'll tell you with regard to our franchisees and what that might mean to two things I think you want to take away.
The next two comments that I'm about ready to make I was on a call last week with the franchisee.
And it was.
Kind of a mid tier to adopt to upper end in terms of unit count.
<unk>.
Make no mistake they were also.
One of our better operators, but we were having a conversation with this individual and they were looking for opportunities to grow.
They referenced their banks, they said that they can get money. They don't have any problem getting money.
And they were looking to grow so we so that's the first point.
While there are.
Franchisees that are that that had rework their capital structures over COVID-19. We have many that are still in a position to grow. That's the first point that you should take away the second point and I think.
It is equally compelling.
The closures.
Earlier in my script, but the reality is is our openings in fiscal 2022, I think it's 16 year to date.
So this isn't an official guidance metric I'm going to be a little squishy with regard to the phraseology here, but our number of openings in 2022, we'll likely will likely approach. What we had opened in 2018 in 2019, so thats kind of that 2% level of openings. So yeah.
There is that interest rate risk in the environment.
But despite that we have.
Franchisees that have the right capital structure with the right bank support that are willing to grow. So I think that's two points you would need to take away, we still have with growing franchisees and it's evidenced by the number of units that we that are approaching pre pandemic levels of all things, which is that 2% level.
Just a quick follow up on the <unk>.
First comment about the swap does that are you swapped on the incremental.
Interests that you took out political borrowings from the <unk> transaction.
Yes, absolutely Eric if you actually look at our 10-Q or go back to the 10-K for even further we are actually.
Over swaps right now.
Functionally swapped against that entire facility, even though we are only borrowed against low $2 66, five I think is what I quoted so it's sitting if you look at the balance sheet is sitting as an asset on our balance sheet right now.
Got it alright, Thats really helpful. Thank you so much.
Yes. Thank you.
Okay.
The next question comes from Jake Bartlett with Trust Securities. Your line is open.
Great and thanks for taking my questions I had.
Couple of follow ups, a political issues.
Addressed your questions have been answered.
My first is on the $24 70 initiatives.
<unk> as well as the.
It sounds like a bit of a carrot with enforcement, but is should.
Should we expect it to a step function up in the number of stores offering 24, 7% is that something that you have kind of visibility.
<unk> into and we should see it.
At some point and when would be helpful. If thats. The case, you should see kind of a real discernible step up in number of stores offering.
Yeah I think thank you for that question Jake I appreciate that and yes, we absolutely. So since we started this kind of new messaging launched at the convention conversations after segmenting the entire population having one on one discussions discussions with every franchisee we now have kind of doubled.
The number of units that were saying get back open and the monthly rate of adoption.
Is definitely moving in the right direction. So we expect to almost triple the numbers, we were seeing before this launch and it's really just start to see that progress. Even further so when will you see it will probably talk we'll talk about it again. This is something that we're pretty relentless in our focus on this as you can tell I hope and we expect to continue.
To see good conversations happening I mentioned, the it might be important I guess to give more context. These virtual hiring events that we're doing we're just seeing incredible adoption of those hiring ramp events and the partnership there the best practices that we are sharing.
Again, taking their taken that to heart theyre, using those resources and tools and doing it on their own and it's just showing positive results. So we're truly encouraged by what we're seeing right now.
Great.
Other question was on your consumer and what Youre seeing from the consumer <unk> leaning in on value.
Well it seems to be having a positive effect on traffic but.
What are you are you seeing.
Lower income consumers being being generally pressure, but are they staying with you because of the values. One question are you getting trade down trying to just understand how I guess, how you might perform.
The macro gets a little more pressured here.
Yes, so that's that.
Excellent question, Jake with regard to that I think.
There is evidenced right. So we listen to a lot of different sources, we scrub and pay attention.
There is what we are hearing some evidence of trade down from from other higher priced brands into categories, such as ours, so that likely in the eventuality that this turns.
And it becomes more impactful to the economy.
And then.
We do have there is some evidence that they all trade down we were really really excited therefore to launch that all day diner menu and it is resonating and thankfully as Kelly I would go back to this point.
We have not really seen any compromise of our gcs that barbell strategy with the correct.
On the tables.
Coupled with the messaging outside of the unit has maintained GTA, while driving those traffic benefit and we plan to continue to lean into this thing it's part of our heritage.
And so we will continue to leverage the thing into into Q4 and throughout next year too.
2468 had a long a long life to it in this with this will also so we're really excited that we were able to get back to this this quickly and do believe it is a tool that we will definitely use in the eventuality that the economy.
Salaries at all.
Great and then the last question was on units.
Thank you just mentioned that you expect maybe you could open around 30 in 'twenty two if I heard that correctly. So I think that would be and I assume maybe that's including the <unk> franchise stores have opened but any clarity there because it looks like a pretty heavy lift for the fourth quarter. We also there was a pretty big spike in closures in the third quarter.
So I guess in this environment uncertain environment.
Especially with.
Certainly about maybe labor costs, you should we expect.
Closures to checkup here into 'twenty three before they come back though.
Jake Let's let me go back to the first part of your question because.
I wanted to suggest that we were approaching 30 without specifically guiding I think it'll trend that direction.
Get as close as we've been since 2008, 2018 2019 without officially guiding on that metric. So yes, you've kind of heard me correct with what I was implying there with regard to closures.
Good.
Obviously, I don't I don't want to sugarcoat, the inflationary environment did impact some of our lower volume units.
And the closures did tick up that 25 in the quarter.
It was a pretty big number given the past quarters.
And to the extent that I think what you need to pay attention to is the environment with the moderation in commodities with the moderation of inflation it should help.
Focus that we have not had a fundamental change to our business model just the impact to the lower end of our system are feeling the effects of this inflation, so wouldnt couldnt run.
<unk> above average into Q4 and into 2003, yes, but ultimately it will moderate and we will get back on track with opening two plus percent and hopefully closing less than 2% in getting to this net positive denny's growth of flat to 1% and then really kind.
And that's a healthier situation right. These closures are at the lower end. It goes to the point that we've made specifically in my script that the average unit volumes are now higher <unk>, partly because the lower the lower end.
Yes.
The lower end, the lower volume and.
Is being called and strengthening the balance of the system.
And then what we will do on top of that right. So that's just the <unk> side of this we will accelerate <unk> growth they were on a.
Five per year, if you look at the last 15 years five per year that hadn't closed any we will accelerate that in 'twenty three and beyond as we put the right teams in place to really get that thing going so really kind of excited given everything that's transpired really kind of excited about how we're positioned right now.
Great. Thanks, a lot I appreciate it.
Thanks, Jacob zinc.
Once again, if you would like to ask a question. Please signify by pressing star one we'll take our next question from Todd Brooks with benchmark company.
Hey, Thanks for the quick follow up Kelly I'm, hoping you can help me.
Maybe unravel some thinking behind the return to 24, seven so I think in the comments.
5% of the units were never required 24, seven and then after evaluation maybe another 5%.
Won't be required so maybe 90% of the franchise based or about let's say two.
<unk> hundred units I think you said right now we stood at 870 units, so or a little north of <unk>.
60% reopened in 2004.
And I think you mentioned that the monthly opening rate has doubled since we convention so where are we at 2% per.
For months going into the convention now reopening it kind of a 4% among.
One month right just I'm trying to figure out kind of yeah. Yeah. Yeah. If you play if you pencil. This out it seems like we get back to $24 seven full operation Mig 23.
Okay.
Okay.
So I think I think you are correct I think your math is correct in terms of what we were seeing and what we are seeing now and I think the other thing to remember is yes. We now are looking at those viable restaurants right. So I think we're being smart diligent looking at the portfolio pre pandemic and now maybe have that additional 5%. So yes.
Percent potentially and we're doing that because we want to be we want to do the right thing.
As stewards of the brand to make sure they are profitable to make sure. It really does make sense to make sure traffic hasn't moved out of a trade area and just just overall looking at that so that 10% is correct I think your your percentage your numbers monthly are correct.
We also though have this is a sliding scale with greater incentives on the front end.
So and we have yet really to see a full and we had a full I don't even we're not even at a full months no we haven't.
The <unk>, we havent even trip the first trigger on that the modest incentives are a sliding scale greater on the front end so.
Yeah, I think your math implies that we could be there by then and I think thats were shooting for and obviously, we're shooting to be really strong strong in Hep C. Who is taking advantage of it now and a lots are talking to us about taking advantage of it early.
That's great and just successor implies kind of Denny's specific.
4% same store sales lift.
<unk> to 'twenty three if you do get there by the middle of the year.
Yes, that's probably I think youre thinking about the math right there yeah.
Okay perfect. Thanks for clarifying all that format.
Absolutely. Thank you.
Yeah.
Okay.
Concludes today's question and answer session. At this time I will turn the call back to Curt Nichols.
Thank you Rachel I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in February when we will discuss our fourth quarter 2022 results. Thank you all and have a great evening.
This concludes today's call. Thank you for your participation and you may now disconnect.
Yeah.
Sure.
Yes.
Yeah.
Okay.