Q4 2022 Denny's Corp Earnings Call
Yeah.
Speaker 1: Thanks for watching!
Speaker 2: Greetings and welcome to the Dennings Corporation Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, the conference is being recorded.
Speaker 2: It is now my pleasure to introduce your host, Kurt Nichols, Vice President, Investor Relations and Financial Planning. Thank you, Kurt. You may begin. Good afternoon. Thank you for joining us for Denny's fourth quarter 2022 earnings conference call.
Speaker 2: With me today for management are Kelly Belaid, Denny's Chief Executive Officer, and Robert Verosteg, Denny's Executive Vice President and Chief Financial Officer.
Speaker 2: Please refer to our website at investor.denys.com to find our fourth quarter earnings press release along with the reconciliation of any non-GAAP financial measures mentioned on the call today.
Speaker 2: This call is being webcast and an archive of the webcast will be available on our website later today.
Speaker 2: Kelly will begin today's call with the Business Update. Then Robert will provide a development update and recap of our fourth quarter financial results before commenting on guidance.
Speaker 2: After that, we will open it up for questions.
Speaker 2: Before we begin, let me remind you that in accordance with the safe harbor provisions of the private securities litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements.
Speaker 2: Management urges caution in considering its current trends and any outlook on earnings provided during this call.
Speaker 2: 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.
Speaker 2: So, risk and factors are set forth in the company's most recent annual report on Form 10K for the year ended December 29, 2021, and in any subsequent forms, 8K and quarterly reports on Form 10K. With that, I will now turn the call over to Kelly Velade, Denny's chief executive officer.
Speaker 3: Thank you, Kurt, and good afternoon, everyone. 2022 marked a year of many positive changes in our business, and I'm excited to reflect on that today before turning to this quarter's results. For starters, our board of directors oversaw a very thoughtful and significant leadership transition. We thanked both John Miller and Mark Wolfinger for their many years of service and impact, and congratulated them on their retirement.
Speaker 3: and we now benefit from their experience and wisdom as continuing board members. I was thrilled to join as CEO , and I could not be more energized by the opportunity to build upon the great foundation already in place.
Speaker 3: We also completed the acquisition of Kiki's Breakfast Cafe, which transformed our business into a portfolio company, operating two complementary concepts now.
Speaker 3: To ensure each brand maintains its unique identity and differentiated position in the market, we evolved our organizational structure with the appointments of John Dillon to serve as President of Denny's and David Schmidt to serve as President of Kiki's. Denny's and Kiki's now operate with independent leadership teams, each driving their own strategies, products, marketing, operations, and development initiatives.
Speaker 3: with support from our Shared Services teams. Importantly, we'll maintain our ongoing collaboration and best practices on all major initiatives with our franchise partners in both brands to ensure we're set up for success.
Speaker 3: And finally, our seasoned and talented senior leadership team leveraged the perspectives of our franchise partners, operators, and leaders from both brands along with insightful data about our guests and teams to refine and refocus our strategic priorities.
Speaker 3: I'll now spend a moment on each of these.
Speaker 3: Our first strategic priority is to develop best-in-class people and teams through culture, tools, and systems. I believe a positive, enduring culture characterized by shared values leads to winning teams. The restaurant general manager is clearly the most critical position for any restaurant. We want to ensure we have the best programs in place to attract, retain, and develop these important leaders.
Speaker 3: In a broad sense, this involves offering transformative experiences and benefits that foster a sense of inclusion, wellness, and belonging. And we've been recognized for our efforts here. Most recently, being recognized by Newsweek as one of America's greatest workplaces for diversity in 2023. We also understand our guests and our employees increasingly expect to be more than a year old.
Speaker 3: businesses to deliver quality goods and services while also serving a higher calling. We are a company grounded in strong values at our core and we're a purpose-driven culture as well. We're proud of the $12.5 million we've donated to No Kid Hungry over the last 12 years, the over $1 million donated to St. Jude Children's Research Hospital since 2020.
Speaker 3: and the over $1.3 million award in scholarships through our Hungry for Education program, including awards to students attending historically black colleges and universities.
Speaker 3: Giving is clearly a part of our heritage and fuels us every day.
Speaker 3: Finally, we continue to evaluate, develop, and offer programs to assist our employees mental and financial health so they can be their best selves at work and at home.
Speaker 3: Our second strategic priority is to drive profitable traffic through relevant and outstanding guest experiences.
Speaker 3: Our net sentiment scores have been trending up over the last year, and most recently, we experienced a dramatic 600 basis point net sentiment increase just this last month, with improvements noted across all major metrics. We're thrilled our franchisees continue to take such great care of our guests, and that the guests are giving us credit.
Speaker 3: To make further games, we're learning more about our core guests to ensure we provide that outstanding experience they seek every day.
Speaker 3: In fact, you may be surprised to learn that Denny's is skewing towards younger generations, with Millennials and Gen Z currently representing about 45% of our customer base.
Speaker 3: Over half of our total guest space is also ethnically diverse, and our breakfast and late night parts skew younger and more diverse all the time.
Speaker 3: So Denny's is a place that is enjoyed by different generations and different backgrounds for a variety of dining occasions across all day parks.
Speaker 3: We are diverse in every sense, in our guest base, in our supplier network, in our franchise network, and in our workforce. We truly are America's diner for today's America. And that diner positioning has been and will continue to be a unique competitive advantage for us.
Speaker 3: Denny's is 70 years young this year and will soon launch an exciting campaign highlighting our diner equity in a way that only we can.
Speaker 3: With our Kitchen Modernization Initiative also currently nearing completion, we have less than 25 to go, we're at 98%, we'll feature some amazing new craveable products prepared with the new equipment starting with our upcoming core menu rollout just next month. And while some have noted declines in off-premise, our off-premise business and our virtual brands remain consistently strong at approximately 21% of total sales.
Speaker 3: improvement opportunities, including opportunities to drive profitable traffic growth.
Speaker 3: As we increasingly focus on our core guests, we will thoughtfully consider ways to reach those guests with key marketing messages, optimize existing pricing strategies, and address key customer pain points.
Speaker 3: Our fourth strategic priority is to lead with technology and innovation. With kitchen equipment installations functionally complete, we'll begin rolling restaurant technology updates to the system soon, including a new cloud-based POS system.
Speaker 3: We anticipate this technology deployment will enable an improved overall guest experience, greater operational excellence, anticipated labor efficiencies, and improved payment experience and serve as a platform for future innovation.
Speaker 3: Our fifth strategic priority is to grow new restaurants as a franchisor of choice.
Speaker 3: Based on some recent consumer research, we're taking a close look at our restaurant re-image and our remodel elements to ensure we are delivering an environment that meets guest expectations for the modern American diner at a compelling return on investment for our franchise partners.
Speaker 3: Our current Denny's development pipeline remains strong with over 200 global commitments and we believe successful execution against these other strategies will yield greater franchisee interest going forward.
Speaker 3: We're also excited about the opportunity to support and acceleration in the long-term development opportunity for Kiki.
Speaker 3: Turning now to our fourth quarter results, Denny's domestic system-wide same restaurant sales grew 2% in the fourth quarter and 6.3% for full year 2022 compared to 2021. Our 24-7 restaurants continue to outperform the Black Box Intelligence Family Dining Index by approximately 550 basis points during the quarter compared to 2019.
Speaker 3: dining index by approximately 750 basis points.
Speaker 3: We continue to support our franchisees with virtual hiring events, and over 1400 interviews have been conducted through this platform to date.
Speaker 3: We're also making headway in our return to 24-7 operations.
Speaker 3: I'm pleased to say the modest incentive we offer to motivate our franchisees to accelerate their path back to 24-7 is indeed working. Currently, approximately 67% of the domestic system is open 24-7, which represents a 14% improvement since mid-year 2022. This also includes approximately 4 percentage points, or roughly 12-15 in restaurants per
Speaker 3: over 14% which was comparable to the mix we saw in the third quarter.
Speaker 3: We will continue to evolve this platform, including our upcoming menu refresh next month, reaffirming our everyday value promise for our guests.
Speaker 3: Our barbell strategy is working as guest check average has remained strong. We believe those looking for a deal with Denny's can find it on our all-day diner deals menu, but most choose our more premium LTO and core menu products.
Speaker 3: Moving now to an update on KIKI. I'm pleased to report that we have completed technical system integration so far. In doing so, we've uncovered some opportunities for future optimization in areas like technology, supply chain, facility management, and site selection for development opportunities. We look forward to bringing those opportunities to fruition in due course. We anticipate 2023 will be a foundational year at KIKI as we continue to continue to change the way we control specific needs for research Lanka.
Speaker 3: with the cult-like following this brand enjoys in that state where Kiki's was just voted Florida's best pancake house.
Speaker 3: We're currently conducting Brandt ethos work to ensure we appropriately capture the secret sauce that has made Kiki so special as we develop plans to expand into other states.
Speaker 3: We anticipate the first step out of Florida will be with a small number of company restaurants to demonstrate the brand's potential.
Speaker 3: With an updated disclosure document in the spring, we'll have the ability to begin signing development agreements in other states for openings that will likely occur in 2024. At the same time, we'll continue to support development within Florida with both Peakeys and Denny's franchisees.
Speaker 3: In closing, the positive changes we've experienced in 2022, including the acquisition of Kiki's, provide momentum for continued success for many years to come. We have the right leadership structure at Denny's and Kiki's, each supported by our shared services teams. We have focused and refined strategic priorities. We are leveraging an even greater understanding of our evolving customer base and their expectations to veterans.
Speaker 3: Denny's Chief Financial Officer.
Speaker 4: Thank you, Kelly, and good afternoon, everyone.
Speaker 4: Not only was 2022 a year of positive change for our organization, it was also another year of resiliency during which our dedicated franchisees, operators, and support teams have been focused on serving our guests in a persistently challenging environment.
Speaker 4: We were therefore pleased to close out the year delivering fourth quarter results in line with, or better than, the guidance we provided on our previous earnings call.
Speaker 4: Today, I will provide a development update and review of our fourth quarter results before sharing our guidance for fiscal 2023.
Speaker 4: Starting with our development highlights, Denny's franchisees continue to grow, opening 12 new restaurants during the quarter, including 5 international locations.
Speaker 4: This resulted in 28 Denny's restaurant openings for the full year, consistent with pre-pandemic opening rates.
Speaker 4: A Kiki's franchisee opened one location during the quarter, resulting in three new Kiki's franchise restaurants for the full year, including one opening prior to the acquisition.
Speaker 4: However, the persistent inflationary environment has continued to weigh on lower volume restaurants
Speaker 4: and we experienced a higher than average number of Denny's franchise closures in the back half of the year.
Speaker 4: As inflationary headwinds continue to moderate, we anticipate returning to our longer-term historical trend of consistently opening 2% or more of the system annually, while closing 2% or less of the system through normal attrition.
Speaker 4: Denny's franchisees completed six Heritage 2.0 remodels and we completed one company remodeled during the court.
Speaker 4: This brought the brand total to 49 remodels for the year, including 38 at franchise restaurants.
Speaker 4: Our successful Heritage Remodel program has consistently delivered a warm and welcoming environment for our guests and mid-single digit sales list for our franchise partners.
Speaker 4: We want to ensure our remodels deliver the same compelling returns we have come to expect, while also meeting the expectations for a modern diner among a growing base of younger multicultural guests.
Speaker 4: Therefore, considering the higher cost of remodels due to inflationary pressures,
Speaker 4: We are taking an opportunity to make certain we have the most appropriate remodel elements.
Speaker 4: With this consideration in mind, we plan to execute lower scope restaurant upgrades at targeted restaurants in 2023 before returning to a full remodel cycle in 2024.
Speaker 4: Moving to our fourth quarter results, as Kelly mentioned, Denny's domestic system-wide same restaurant sales grew 2% in the fourth quarter compared to 2021, or 3.3% compared to 2019.
Speaker 4: Off-premise sales have remained strong at approximately 21% of total sales compared to the pre-pandemic trend of 12%.
Speaker 4: This 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.
Speaker 4: Additionally, the performance of our virtual brands has remained remarkably consistent and highly incremental, representing about 3% of domestic average weekly sales.
Speaker 4: Denny's domestic system-wide same restaurant sales growth came from an approximately 8.5% increase in guest check average, which was comprised of approximately 7.5% pricing and approximately 1% of product mix benefits.
Speaker 4: As highlighted in our Q4 earnings investor presentation, domestic average weekly sales for Q4 were nearly $37,000 compared to $34,000 in the pre-pandemic fourth quarter of 2019.
Speaker 4: This represents a 7.1% increase in average weekly sales compared to 2019, whereas same restaurant sales increased 3.3% relative to 2019.
Speaker 4: The variance between these two metrics demonstrates that while our system portfolio is smaller than it was three years ago, it is healthier and generating higher average weekly sales as lower volume restaurants exit the system.
Speaker 4: Franchise and licensed revenue was $66.5 million compared to $60.2 million in the prior year quarter. This increase was primarily driven by $5.6 million related to the kitchen modernization rollout and $1.5 million of Kiki's Breakfast Cafe franchise revenue in the current quarter. The revenue related to the sale of kitchen equipment has an equal...
Speaker 4: note that while franchise margin dollars were not impacted by the kitchen equipment rollout, the franchise margin rate was impacted by approximately 450 basis points through this accounting requirement.
Speaker 4: With the kitchen equipment rollout 98% complete, the margin rate impact will lessen while still having no impact on franchise margin dollars.
Speaker 4: More information can be found in our recent 10Q and forthcoming 10K.
Speaker 4: Company restaurant sales of $54.4 million were up 14.8%. This increase is primarily due to strong same restaurant sales growth of 6% and $3.5 million of Kiki's Breakfast Cafe company restaurant sales in the current quarter.
Speaker 4: Company restaurant operating margin was $6.8 million, or 12.6%, compared to $7 million, or 14.8%, in the prior year quarter. This margin rate change was primarily due to commodity and labor inflation, partially offset by the improvement in sales performance at company restaurants.
Speaker 4: Commodity inflation moderated sequentially from 18% in Q3 to 13% in Q4, and we anticipate continued moderation.
Speaker 4: Additionally, labor inflation continues to moderate as we experience 5% inflation during the fourth quarter. G&A expenses for Q4 totaled $17 million compared to $17.7 million in the prior year quarter. This change was primarily due to decreases in share-based compensation expense.
Speaker 4: and performance-based incentive compensation partially offset by an increase in corporate administration expenses compared to the prior year quarter. These results collectively contributed to a just an EBITDA of $23.4 million, which was above the high end of our previous guidance.
Speaker 4: The provision for income taxes was $3.3 million, reflecting an effective income tax rate of 20.7% for the quarter, compared to an annual effective tax rate of 24.9%.
Speaker 4: Adjusted net income per share was 18 cents. We generated adjusted free cash flow of $14.6 million.
Speaker 4: Our quarter and total debt to adjusted EBITDA leverage ratio was 3.4 times.
Speaker 4: within our target leverage range of between 2.5x and 3.5x of adjusted EBITDA.
Speaker 4: We have approximately $273 million of total debt outstanding, including $262 million borrowed under our credit facility.
Speaker 4: As a reminder, we utilize swaps to mitigate interest rate risk associated with our revolving credit facility, essentially pegging our interest at a favorable rate of approximately 5%.
Speaker 4: During the quarter, we allocated $7.8 million to share repurchases, continuing our commitment of returning capital to our shareholders.
Speaker 4: For the full year, we allocated $64.9 million to repurchase approximately 6.3 million shares at an average share price of $10.33.
Speaker 4: As a result, at the end of the quarter we had approximately 153 million remaining under our existing repurchase authorization.
Speaker 4: 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 year 2023.
Speaker 4: We anticipate Denny's domestic system-wide same restaurant sales will be between 3% and 6% compared to 2022.
Speaker 4: As we start 2023, we are rolling over the impact of the Omicron variant, which will magnify our sales comparisons, particularly in the first quarter.
Speaker 4: Consistent with our existing reporting policy, we will begin sharing same restaurant sales results for Kiki's in the third quarter, once we have a full year of comparable sales activity following the acquisition.
Speaker 4: We anticipate opening 35 to 45 restaurants on a consolidated basis, inclusive of 8 to 12 Kiki's openings.
Speaker 4: with a consolidated net decline of 15 to 25 restaurants.
Speaker 4: as the residual impacts of inflationary pressures persist throughout 2023 before achieving a more anticipated steady state in 2024.
Speaker 4: We are projecting commodity inflation for 2023 to be between 4% and 6% with roughly 50% of our market basket currently locked.
Speaker 4: We expect labor inflation of approximately 5% for the year.
Speaker 4: We took approximately 2% of pricing at the start of 2023, and we will remain thoughtful about our pricing strategies within our customary 2-3 annual pricing windows.
Speaker 4: Our expectations for consolidated total general and administrative expenses are between $79 and $82 million, including approximately $14 million related to share-based compensation expense, which does not impact adjusted EBITDA.
Speaker 4: This consolidated range contemplates a full year of Kiki's DNA and assumes fully reloaded incentive plans.
Speaker 4: As a result, we anticipate consolidated adjusted EBITDA of between $86 and $90 million.
Speaker 4: In closing, I am very excited about our strategies and where our dedicated franchise partners, restaurant operators, and support teams will take both the Denny's and Kiki's brands in the many years to come.
Speaker 4: 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.
Speaker 2: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Speaker 2: One moment please while we poll for questions. Thank you. Our first question is from Nick Staton with Webbush Securities. Please proceed with your question....
Speaker 5: Thank you and congrats on a great quarter. Just given that Q1 is still more or less an impacted quarter and the run rate numbers, Q2 to Q4 may be very different from Q1, any way to Didn't quite touch Q.
Speaker 5: Maybe bracket, the comp, the inflation, commodity inflation in Q1, comp in Q1, and also pricing, the pricing in Q1.
Speaker 4: Hey, Nick, this is Robert. Good to hear your voice. Let me see if I can parse that apart a little bit for you. So we're trying to figure out how Q1 will be impacted with regard to the kind of top line sales and in the inflationary pressures. If I, if I think I'm hearing you correctly. So.
Speaker 4: I think the way to look at it is you are correct. It will be an impacted quarter. And I think we were calling out in prior year likely a double digit impact from Omicron at the heart of it. So when you look at our three to six sales range, it's about...
Speaker 4: that midpoint's about four and a half. So if you factor in rolling over that decline, I think you can see that we're thinking about Q1 is a pretty robust quarter, frankly, in the terms of the cadence of the year. I'd hazard to put out a specific number, but it is by a...
Speaker 4: midpoint of that four to six would be five percentage points. I think if you look at the trending of the way we came down from 18 to 13, if you kind of draw a line to get to the to an average of a 5% on the year you can still see that Q1 will be highly impacted also.
Speaker 4: and kind of give you a guide to get there also without giving a specific number. So you're right to call out the fact that Q1 will look a little different than the balance of the quarters in the year. There was, just to reiterate what I said in my script, there was...
Speaker 4: 2% pricing in January that we will benefit from that will also benefit that that Omicron rollover. The next the two to three windows beyond that the next one, I think, is in March and then about six months later.
Speaker 5: That's very helpful. Thank you. And then in terms of GNA, what portion of GNA is related to the GNA guidance? What portion of that is related to Pikes?
Speaker 4: We really have not parsed that out. It is one of the reconciling items. If you look at where our G&A came in this year to the guidance range, the 79 to 82, there's a couple of buildbacks there. One is the differential in the stock-based compensation. We gave that as a whole number. You can see what it was in the current year.
Speaker 4: year for us, one of the key strategies clearly is to grow that brand much more quickly. You can see already that in the current year with 8 to 12, that midpoint of 10 is about double any other year prior to us acquiring it. And we know that we have to go well beyond that in the 24 and out year. So it does represent a lot of the new
Speaker 4: We do we do pay we did pay out to the RSU portions of the couple of plans that were in place. I would suggest is probably in that three to four range is where I would peg that Nick.
Speaker 5: Thank you very much. Thanks Nick.
Speaker 2: Thank you. Our next question is from Eric Gonzalez with KeyBank Capital Markets. Please proceed with your question.
Speaker 4: Hey, thanks for taking the question. Maybe the first one, just on the 24-7 locations, can you confirm that there's still that mid-team comp gap between those 24-7 and non-24-7? And if so, that still translates into the five to six point comp opportunity, depending on the timing. Can you talk about how much you expect to capture this year of that opportunity?
Speaker 4: Yeah, that's an excellent question, Eric. Thank you for that. So, we can confirm that we are seeing that mid-teens gap between the 24-7 and the non-24-7 units. So, yes, we can absolutely confirm that. With regard to that 5-6 percentage point, we can confirm that we are seeing that mid-teens gap between the 24-7 and the non-24-7 units.
Speaker 4: I think as I was speaking to that through the back half of last year, I think we captured some of that. As you can see, we moved from 53 mid-year to 67 at this point with four points in the last four weeks here. So I think we captured some of that five to six points already. So I would bring that down. I would temper that probably to four to five now.
Speaker 4: And if you look at the case, right, we're adding about a point a year, that would translate to probably somewhere in that three percentage points range when you, yeah, that four to five percentage points annualized. So when you look at it, the effect to the current year, it's probably in that two to three points when you consider that we're...
Speaker 4: better at dennings than the industry. And then he'll, he had, do you think this channel, particularly delivery, is more or less vulnerable to a pullback in spending?
Speaker 3: Yeah, I think that's a great question. This is Kelly. I think why it's held up for us, I think we, that the guests that are using us in that day part, so I think we are uniquely positioned by the way to continue to grow this. I think as others start to think about why or why it does not make sense or if it hasn't been as sticky, you can see and you've already mentioned.
Speaker 3: We uniquely have that capacity at late night where others may just say it's not necessarily worth it for the long term. We're seeing others get out of the market. I think it's still an area of opportunity going forward. We know it's incremental. We've said that. We love our two virtual brands. It's younger guests coming in. So we know, again, it's a different gift.
Speaker 4: using us in that late night occasion. So it just positions us, given who we are as a brand, to continue to focus on it and continue to watch it grow, hopefully. And then just the last one for me, directionally speaking, from a franchisee profitability perspective, as you think about your guidance of 3 to 6 percent comps and the
Speaker 4: where you see commodity inflation, labor inflation. Do you see this as a year where restaurant margins or franchisee margins expand materially? Do they stay relatively flat? What can you tell us about how much you think that they can either expand or contract this year?
Speaker 4: Yeah, Eric, another excellent question. So a couple of things to try to parse apart that question. First off, in our three to six guidance range, we would put the franchisees closer to the top end of that range and the company closer to the bottom end of that range. And then we would put the franchisees closer to the top end of that range.
Speaker 4: focused upon franchise profitability and franchise margins. In fact, kind of the internal talking points around here would be this concept of no stone unturned. In this post-pandemic world, we're really focused upon ensuring that our franchisees are profitable. we can't expect it to go down anytime soon.
Speaker 4: And we do see that with this the inflationary pressures some somewhat subsiding still from a historic perspective somewhat Elevated but compared to what we've seen over the last 12 to 24 months that 4 to 6 percent Commodity and 5% inflation is on the lower side. We do believe that we will make head
Speaker 2: Bartlett with Truist Securities. Please proceed with your question.
Speaker 2: Great, thanks for taking a question. My first is just the trajectory of sales. I understand that lapping the OMECON is going to be a benefit. But I'm wondering whether you can say that maybe it's comparing versus pre-COVID or...
Speaker 2: You know, whatever way you want to kind of frame it, but are you seeing your sales momentum, you know increase here? We've heard some pretty good things just from industry-wide sales I know Omicron is driving the year over year, but it seems like things are improving versus 19 as well And I'm just wondering whether you're seeing that that same trend
Speaker 4: Yeah, Jake, again, good to hear you. I would tell you that the years started off pretty strongly, right? We do have that Omicron rollover effect. We still are continuing to build back with the 24-7 units. So December to January was clearly a build period for us. The quarter will be...
Speaker 4: a very strong quarter for us, as I mentioned to Nick's question. I would tell you that we are going to lean hard on value. We are back on air with regard to value. When we were on air last year with value, we clearly could see that it was working. So that again is a.
Speaker 4: are really kind of dovetailing nicely together.
Speaker 2: Got it. Maybe just digging into that last comment a little bit more. I'm wondering what you can say about just the behavior of the consumer so far. I know you're leaning into value. Is that really necessary right now because the consumer is kind of demanding it? So one question is just on the lower end.
Speaker 6: consumer, how are they behaving right now? Is value kind of the only thing that gets them in the door? Or maybe are they being stronger than that? And then are you experiencing trade down from other higher end demographics at this point?
Speaker 3: Yeah, I think, hi Jake, this is Kelly. I think there has been, there's certainly a lot of conversation about the potential for trade down. I think we are, again, well positioned that if there is a trade down coming from other segments to family dining, we benefit from that. I think to your question, the consumer, so because we're still seeing the check hold, we could make a Gabrielutra.
Speaker 3: I think your question about is the consumer only coming in for that, you know, we've got we've got we're on air So, you know given our weights right now and given what we're doing we're seeing movement But we're and we are seeing the incidents or the mix go up a little To a place where we feel really good about but we're also given that the check so I mean we're still seeing people all order And excited about the more premium LTO and core offerings. So that gives us, you know encouragement about
Speaker 3: the health of our barbell strategy, and the fact that we've got that mix all year long. You'll see us, we'll have new innovation, we'll have LTOs that usually work very strongly for us, and then we will continue to enhance our all-day diner deal so people do know that need it, and do know that they can count on us for the great value.
Speaker 6: And then last question, on the new menu that you are rolling out –
Speaker 6: the dinner menu that's enabled by the new ovens. I believe that you've been testing that. Anything you can share in terms of how it's been testing, how much of a sales driver you think that new menu can be.
Speaker 3: Yeah, what I can tell you is, I mean, in the test markets, in the test restaurants, really well received by operators, craveability, all things that we want to see and look for. I'll hesitate to kind of talk about what we expect to see from that, just for kind of obvious reasons that you will start seeing it soon. But these are items we can only offer because of kind of launching and finishing the launch of the kitchens.
Speaker 3: There's ease of execution that comes with it, but yeah, just the opportunity to have some exciting, really craveable items that you couldn't have before at a Denny's. So we'll have to probably just kind of leave it at that for now. And really excited to bet that we do think it'll drive tri-vul-bility and that these are really craveable, exciting items for us.
Speaker 7: of guidance for three to six percent comms is pretty strong and just wonder if you can unpack your assumptions maybe touch on a couple things like how much pricing or average check gains have you built into that are you also including any assumptions for the future price gain future price increases that you're thinking about taking over those next two windows
Speaker 7: And then how much of that benefit from late night? Are you baking in? Are you giving yourself the full credit for that 2% to 3% lift? Just trying to understand the thought process there. Thanks. Hey Mike, yeah, thank you. Let's try to unpack that. I hope you're doing well also. I think the 2% pricing in January .
Speaker 4: was fundamentally across the board. So that'll live through in that three to six guidance. Then you were trying to reconcile, I think it was for Eric a little bit, trying to reconcile the impact to 24 seven, particularly into the franchise based.
Speaker 4: Again, building upon that, adding about 1% of the units a week at this point, I believe that would probably add in that two to three percentage points range to the franchise side particularly. And then we have additional pricing windows, right? So in March and September ...
Speaker 4: all be based upon inflation, right? It's not a foregone conclusion. We'll read and understand that better because we don't want to out price this market. Clearly there's been some consequential pricing over the last 18 months, so we're looking to mirror that against what we're seeing.
Speaker 7: It's kind of a build back and kind of a philosophical add point there at the end. Okay, thanks for that. And then if I use the presentation and the disclosure about your average weekly sales, it looks like in the fourth quarter the average weekly sales were down maybe 4% or so relative to 2019 levels for the on-premise business is that.
Speaker 7: purely just a late night component or there are other parts of the business that you think you still have a big opportunity to recapture in addition to the late night? Yeah, I think that is clearly still an opportunity to recapture with regard to that late night day part there, Mike. So again, we're really pleased.
Speaker 4: that 19 in totality, 19 versus 22 in totality was up to 7% on a free comp. And we still believe that there's room to capture more of that as 24-7 comes back online.
Speaker 4: 19 versus 22 in totality was up to 7% on a three comp and we still believe there is room to capture more of that as 24-7 comes back online.
Speaker 2: Thank you. Thank you. Our next question is from Todd Brooks with the Benchmark Company. Please proceed with your question.
Speaker 8: Hey, good evening, everyone.
Speaker 8: Hey, good evening everyone.
Speaker 8: I'm well, how you doing Robert?
Speaker 2: So, first question, if I could. So the incremental 2% pricing.
Speaker 2: that you took at the start of the quarter here. Can you walk through the waterfall of what rolls off in March and September that you'd be deciding about taking further pricing against from what will be at wind?
Speaker 4: Yeah, I'm looking over at Kurt to pull that out. So we were seven points coming through this quarter. I was trying to figure out exactly how to frame that for you. If they, do you want to grab your second question and as we give them a chance to look and I'll come back and answer that one for you.
Speaker 2: Absolutely. Swishing to Kiki's, you talked about the FDD Hitting, hopefully the spring and starting to really ramp up some of that franchise and growth with new partners. But a bridge year maybe with some corporate stores, especially seeding new markets. If you look at the guidance for the 8 to 12 new Kiki's, what do we see if anything in there for corporate units? What's the mix of...
Speaker 4: really still bullish upon the Kiki's franchisees within Florida and we will begin to utilize the Denny's franchisees within Florida. That's really not the rush to file all of the FDDs in the other states because we didn't want to open it up to the balance of the Denny's frame.
Speaker 4: that and getting bits and pieces fed to us along the way. So we're really excited about what that will tell us and what optimizations that we will include in Kiki's as we move outside of Florida. But we're really excited to grow that, the age 12 as I mentioned with.
Speaker 4: If you midpoint that at 10, that's double what the Kiki's have been able to do on their own. And we won't stop there. We know that that pace even has to go well beyond that level. So Kurt's drafting some notes up for me. So in Q1 of 22, we took a...
Speaker 4: 4 percent or.4.4 percent pricing in Q1 of 23 it equals the base basically the 2 percent that we just took. So that if I'm looking at them and interpreting that correctly I think that's what they're telling me to say here.
Speaker 2: Okay, perfect. And then a final one, if I can slide it in. It sounds like Kelly when you were talking about heritage.
Speaker 2: Sounds like a bit of a pause here, and maybe as you are attracting a little bit different customer base, you want to reevaluate what is in Heritage 2.0 before getting back to maybe a greater cadence of remodels in 24. Just how big of a review is this? Let me know in the comments.
Speaker 3: Is part of the review maybe getting the ticket cost of Heritage down for franchisees to speed the role going forward? Thanks. Well, you got it. So great question. Thank you for the question. It is absolutely not. So as we look at these are really strong returns that we were able to show with the Heritage 2.0.
Speaker 3: remodel on the gate that has changed, right? So that has changed given the inflationary environment and the cost of supplies, labor, all that, right? So as we look at that and just try to be really good stewards of our business and great partners to our franchisees, it gave us a chance to just step back a bit, look at our research. We see an opportunity to lean even more those strong research, strong results.
Speaker 3: We will still do. We've got partners still investing in their business and light touches and making sure we continue to update our assets. So I don't think it's a long process, but we are gonna just pull back a hair to be smarter about the investment and getting as strong as returns as we were getting before the prices escalated to the pace that they did.
Speaker 2: Okay great thanks everybody. Mm-hmm thanks Todd. Thank you. Our next question is from John Tower with Citi. Please proceed with your question.
Speaker 6: Great, thanks. I guess maybe starting following up that last question and bringing it back to CapEx and you're thinking for fiscal 23, I don't think that was part of the guidance. Maybe I missed it there, but obviously, you know, remodels which are not really on the corporate side flowing, but you're also...
Speaker 6: You know, potentially going to be investing a little bit more. TKEs, can you help us think about the CAPEX spend for fiscal 23?
Speaker 4: Yeah, kind of a good reconciling question there, John . Good to hear you. So I think in the current year, we were between $12 and $13 million in our cap expense, so that we're kind of using that as a jumping off point. There wasn't a ton of remodel capital in those numbers either. So these Kiki's builds were...
Speaker 4: Specific number guidance I would suggest that the mid-teens kind of number that we would be at with regard to capex
Speaker 6: Got it. Thank you. And then just taking a step back on the net closures for the year. First, can you parse out whether or not that's all domestic or a mix of international and domestic? And then more importantly, can you help frame the health of the franchise base? Under the guidance, obviously, it calls for 15 to 25 net closures, but maybe you can provide some guardrails about how many more.
Speaker 6: stores in the system or franchisees out there, maybe near that, getting close to that brink of closure should say the economy softened or inflationary pressures back up again. I'm just, you know, I want to understand how, how, how, you know, are we coming back to this in six to nine months of saying 15 to 25 should have been more like 25 to 50.
Speaker 4: or maybe it's the other way, maybe you're being conservative. Yeah, that's a really good question. So let's piece that apart a little bit. So the guidance range for the openings was 35 to 45, so midpoints for each, that would suggest 30 Denny's and 10-K iki's, if you put that in.
Speaker 4: And really for 15 to 25 closures you would need somewhat of a similar closure rate in 2023. I think a couple of things to note. The reality is given the inflationary environment over particularly the last year but the last two years in aggregate.
Speaker 4: The volume at which a Denny's is really kind of profitable has risen. It used to be we would quote thumb in the air that you'd need about a million dollars to be a profitable Denny's. Now, again, that was all a function of your geography and your lease. There are a lot of other components in that. So that's a...
Speaker 4: to 24-7 like we know we will if the inflationary environment stays in that labor of 5% and commodities in the 4 to 6% range. I think we're very comfortable with that range that we provided and in fact if that settles more quickly.
Speaker 4: then we may have an opportunity with that. We believe, and we fully expect that longer term, right, the 24 and beyond period, that we will get back to that kind of that normal kind of attrition rate. We will always have some level of closure within the brand, which is historically, if you look back over a long period of time, about 2%.
Speaker 4: We do believe that that's where we will get to, although we may be experiencing about one more year in that 4% range, given everything we see. I can tell you that these are primarily, at this point, domestic closures.
Speaker 6: Thank you for all that, Colin. And lastly for me, I know it's a little early in the year and perhaps you don't have this level of data, but I am curious if there's any way you've been able to see whether or not some of those...
Speaker 6: I guess older demographic have made their way back to stores given some of the shifts in Social Security payments And whether or not you've actually seen it early in 2023 In the form of greater frequency or perhaps higher check within that kind of older cohort of customers
Speaker 3: Yeah, it's a great question. It is early in the year. We actually can tell that we have had a steady increase in some of the promotional offerings like AARP that we uniquely offer to obviously that demographic. And so we do see that getting better since the depths of the pandemic. And then, you know, the...
Speaker 3: the flip side of that we also do, you know, we continue to skew younger all the time, not just in our virtual brands as we talked about earlier, or off-premise, but continue to skew younger. That's about the late night, that late night day park continuing to be more open all the time as well. That's a good thing.
Speaker 3: But we can see the baby boomer population starting to rebound a bit. Thanks for taking the questions.
Speaker 3: yeah we can see the baby boomer population starting to rebound a bit. thanks for taking the questions. of course. thank you.
Speaker 2: Thank you. Our next question is from Andrew Wolf with CLK. Please proceed with your question.
Speaker 6: All right, thank you. Regarding the franchisees getting to, you know, their stores open 24-7, is labor availability or sort of just their hiring practices and their ability to get people in and hire them, does that kind of fill the key reason that you're hearing from them that they're not yet open operating 24-7?
Speaker 3: Yeah, it's a great question. We continue to just, this is a collaboration, these are conversations daily, these are, we've mentioned in the past, we have literally segmented every single restaurant and have our operators talking to every single franchisee. It's an ongoing conversation. So while there's more optimism as of late that you see everywhere.
Speaker 3: as lower volume, but things like 80-20 and things like, you know, just differences in wage inflation or the wage treatment that really do impact profitability. So it's conversations about all of that is why we've also got a task force we've talked about, No Stone Unturned, it's why we're looking at every opportunity to help them with margins.
Speaker 3: as well as focus on how to profitably get them back to 24-7. And so we've said that before that we continue to look at every restaurant and assess their situation and that we may have less. And we definitely will have less than we did before the pandemic. And that remains to be the case. So it's a collaboration for sure and an ongoing conversation.
Speaker 6: Can you tell us a little about the sort of trade-off between training of new employees and them getting up the productivity curve?
Speaker 6: franchisees want to know about because obviously new hires are more expensive than seasoned folks are productive.
Speaker 3: Yeah, that's exactly what's happening. So you're right. So we've been staffed now and have mentioned it, yes, last quarter. And we can now see the stability, what that does for guest sentiment scores. We can see what that does for training dollars. We can see all that in our company restaurants, obviously. So yes, there's a natural learning curve that's going to happen for every franchise location that gets back up.
Speaker 3: We're helping them with that in any way possible, helping to kind of lessen that learning curve, but that's certainly at play for all of them. We see the traffic and the sales come back when they do that, but we're also trying to just help them to strengthen all aspects of the P&L, which does absolutely include the training costs that go with that. It levels off and it can level off fairly quickly.
Speaker 6: So if there's still –
Speaker 6: a double-digit gap to get to 90% of the franchisees operating 24-7.
Speaker 6: a double-digit gap to get to 90% of the franchisees operating 24-7.
Speaker 6: Are they still being incentivated right now at the same rate they were when things accelerated late in the fourth quarter or does that fade?
Speaker 7: And it's really going to get harder.
Speaker 7: Senator ? pardon Okay. Senator Barrison. Senator Chairman.
Speaker 3: Yeah, that's a great question. You broke up a little bit at the end. I think the nature of your question we do understand. It's really the window is definitely closing on the incentives, so it's a staggered incentive. We've had a lot of people participate in the incentive. We've had a lot of virtual hiring events. We've worked hand in hand with them to do that. So we see progress and we also have line of sight to a lot more restaurants.
Speaker 3: And again, at the same time, it's really about having those conversations and helping them get there at the right time and helping them to be profitable when they do so. But yes, you are correct that we're nearing the end of the incentive.
Speaker 7: Great, thank you.
Speaker 2: Thank you. There are no further questions at this time. I'd like to turn the floor back over to Kurt Nichols for any closing comments.
Speaker 4: Thank you. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early May during which we will discuss our first quarter 2023 results.
Speaker 4: Thank you, I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early May, during which we will discuss our first quarter of 2023 results. Thank you, and have a great evening.
Speaker 9: This concludes today's conference. You may disconnect your lines of this time. Thank you for your participation.