Business Overview A Storied Brand Adapting to a Changing Landscape

Denny's Corporation has a rich history dating back to 1953 when it was founded as Danny's Donuts in Lakewood, California. Over the decades, the company experienced steady growth, with its first franchise location opening in 1963. By the 1970s, Denny's had established itself as a leading family dining brand, renowned for its 24/7 operations and classic diner fare, including the iconic Grand Slam breakfast.

The 1980s and 1990s brought challenges for Denny's, including discrimination lawsuits and labor disputes. However, the company demonstrated resilience by working through these issues and continuing its expansion. A significant turning point came in 1997 when Denny's emerged from Chapter 11 bankruptcy after a major restructuring, which ultimately strengthened the brand.

In the early 2000s, Denny's embarked on a major remodeling program to update its restaurants and appeal to a younger demographic. This initiative, coupled with a focus on value offerings and menu innovation, helped drive sales growth in subsequent years. Throughout its history, Denny's has navigated various economic cycles and changing consumer preferences, maintaining its commitment to providing high-quality, affordable food in a welcoming diner atmosphere.

Today, Denny's Corporation operates as one of America's largest franchised full-service restaurant chains, with over 1,500 locations across the United States and internationally. The company's flagship brand, Denny's, continues to be known for its all-day breakfast offerings and classic American fare. In 2022, the company expanded its portfolio with the acquisition of Keke's Breakfast Cafe, a growing daytime eatery concept, further diversifying its brand presence and solidifying its position in the family dining segment.

Denny's Corporation operates through two main segments: Denny's and Keke's. The Denny's segment includes all Denny's company-owned and franchised/licensed restaurants, while the Keke's segment comprises the Keke's company-owned and franchised restaurants acquired in July 2022.

As of December 25, 2024, the Denny's brand consisted of 1,500 restaurants, with 1,440 being franchised or licensed and 61 being company-owned. Denny's restaurants are primarily concentrated in California (24% of total), Texas (13%), and Florida (8%). The company also has 165 international restaurant locations. The Denny's brand generates revenue through company restaurant sales as well as royalties, advertising revenue, initial and other fees, and occupancy revenue from the franchised restaurants.

The Keke's brand, as of December 25, 2024, consisted of 69 restaurants, with 55 being franchised and 14 being company-owned. Keke's restaurants are primarily concentrated in Florida (88% of total). Like the Denny's brand, Keke's generates revenue through company restaurant sales and various fees from franchised locations.

The restaurant industry is highly competitive, with Denny's facing competition from national and regional chains as well as independent operators. The company believes it has competitive strengths in the value, variety, and quality of its food products, as well as in the quality and training of its employees. Denny's growth strategy depends on the ability of the company and its franchisees to open new restaurants, with a particular focus on expanding the Keke's brand.

The company is subject to various federal, state, and local laws and regulations governing aspects of the restaurant business, such as compliance with minimum wage, health, safety, and environmental regulations.

Financial Performance Weathering the Storm

Financials

Denny's financial performance in recent years has been marked by both successes and challenges. In the fiscal year 2024, the company reported total operating revenue of $452.33 million, a slight decrease from the previous year's $463.92 million. This decline was primarily driven by the strategic closure of underperforming franchise locations, a move aimed at strengthening the overall portfolio.

Breaking down the revenue by segment, the Denny's brand continues to be the primary driver of the company's financial performance, accounting for over 90% of total operating revenue in 2024. Company restaurant sales for the Denny's segment were $193.57 million, while franchise and license revenue was $233.42 million. The Keke's segment contributed $18.21 million in company restaurant sales and $7.13 million in franchise and license revenue.

Despite the revenue dip, Denny's was able to maintain a healthy adjusted EBITDA margin of 15.5% in 2024, showcasing the company's ability to manage costs and optimize operations. The net income for the year stood at $21.57 million, representing a year-over-year increase of 8.1%. The company also reported annual operating cash flow of $29.49 million and annual free cash flow of $0.92 million.

In the most recent quarter, Denny's reported revenue of $114.67 million and net income of $6.80 million. The company achieved positive same-restaurant sales growth, with the Denny's brand reporting a 1.1% increase and the Keke's brand posting a 3% increase. This performance outpaced the BBI Family Dining Index for the fourth consecutive quarter for Denny's and the second consecutive quarter for Keke's in Florida.

One area of strength for Denny's has been its focus on off-premise sales, which accounted for 21% of total sales in the fourth quarter of 2024. The company's investment in virtual brands, such as The Burger Den and Banda Burrito, has helped drive incremental revenue and expand its customer reach, particularly during periods of reduced dine-in traffic.

Liquidity

Denny's has been managing its financial resources carefully, as evidenced by its ability to maintain a healthy EBITDA margin and increase net income. As of December 25, 2024, the company had $261.30 million in long-term debt outstanding under its $400 million senior secured revolving credit facility, which matures in August 2026. The company also had $16.1 million in outstanding letters of credit, resulting in $122.6 million of unused commitments under the credit facility.

The company's debt-to-equity ratio stands at -11.997, while its current ratio is 0.418 and quick ratio is 0.400. These metrics suggest that Denny's may face some challenges in meeting its short-term obligations, but the company's ability to generate positive cash flow and its available credit facility provide some financial flexibility.

Navigating Inflationary Pressures and Evolving Consumer Demands

Like many businesses in the restaurant industry, Denny's has grappled with the impact of rising inflation, particularly in the areas of labor and commodity costs. In 2024, the company experienced commodity inflation of approximately 3% and team labor inflation of 3%, squeezing its profit margins.

To combat these inflationary headwinds, Denny's has implemented strategic pricing adjustments, including the introduction of a temporary egg surcharge at select locations to offset the soaring costs of this key ingredient. Additionally, the company has remained agile in its menu engineering, striking a balance between maintaining its value proposition and preserving profitability.

In the fourth quarter of 2024, Denny's reported an increase in average guest check of approximately 6.5%. This increase was largely due to shifting the $2 and $4 categories on the $2 $4 $6 $8 Value Menu from guest entrees to add-ons, which increases check but is simply a categorization change and not an actual price increase.

Recognizing the shifting consumer preferences, Denny's has also doubled down on its digital transformation and off-premise strategies. The company's investments in improving the online ordering experience, enhancing its mobile app, and expanding its virtual brand offerings have been crucial in catering to the growing demand for convenience and flexibility among its customers.

Streamlining the Portfolio Accelerating Closures and Remodeling Initiatives

As part of its turnaround efforts, Denny's has taken decisive action to optimize its restaurant portfolio. In 2024, the company closed 88 underperforming locations, and it plans to shutter an additional 70 to 90 restaurants in 2025. This strategic move is aimed at improving franchisee cash flow and enabling them to reinvest in initiatives that drive traffic and enhance the guest experience.

Alongside the closure of lower-volume restaurants, Denny's has reignited its Diner 2.0 remodel program, a key component of its long-term growth strategy. In 2024, the company completed 23 remodels, including 7 at company-owned locations, representing over 11% of its company-operated fleet. These remodels have demonstrated a promising 6.5% lift in sales, underscoring the value of investing in the physical appearance and functionality of Denny's restaurants.

Expanding the Keke's Breakfast Cafe Brand Unlocking Growth Potential

The acquisition of Keke's Breakfast Cafe in 2022 has been a strategic move for Denny's, diversifying its brand portfolio and tapping into the growing demand for daytime eateries. In 2024, Keke's delivered system-wide same-restaurant sales growth of 3%, outperforming the broader family dining segment.

Denny's has ambitious plans for the Keke's brand, with a goal of becoming one of the largest competitors in the fast-growing daytime eatery segment. The company opened 12 new Keke's locations in 2024, expanding the brand's footprint from solely in Florida to six different states by the end of the year. Denny's also unveiled a new Keke's design that has received positive guest feedback, and it is targeting a 6% to 8% sales lift from this updated concept.

Outlook and Conclusion

As Denny's navigates the evolving landscape of the restaurant industry, the company has provided a cautiously optimistic outlook for 2025. The company expects domestic system-wide same-restaurant sales to range between -2% and +1%, reflecting the near-term uncertainty caused by macroeconomic factors and shifting consumer sentiment.

For 2025, Denny's anticipates opening 25 to 40 new restaurants, with half from Denny's and half from Keke's. Keke's openings are expected to be 60% company-owned and 40% franchised. The company also plans to accelerate the closure of 70 to 90 lower-volume Denny's restaurants.

On the cost side, Denny's expects 2025 commodity inflation of 2% to 4% and labor inflation of 2.5% to 3.5% at company restaurants. The company projects consolidated total G&A expenses between $80 million to $85 million and expects consolidated adjusted EBITDA between $80 million to $85 million, inclusive of $2 million related to the 53rd week.

Denny's remains committed to returning value to shareholders, with plans to deploy $15 million to $25 million towards share repurchases in 2025.

As Denny's navigates the challenges of the present, the company's storied history, adaptability, and focus on operational excellence provide a solid foundation for its future growth. With a diversified brand portfolio, a commitment to value, and a relentless pursuit of enhancing the guest experience, Denny's is poised to write the next chapter of its success story in the ever-evolving restaurant landscape.