Executive Summary / Key Takeaways

• Strategic Transformation Underway: Denny's is executing a multi-faceted strategy centered on digital innovation, value leadership, and portfolio optimization for its flagship brand, while aggressively expanding Keke's Breakfast Cafe as a high-growth segment.
• Digital and Value Driving Traffic: Investments in a new cloud-based POS system, enhanced digital platforms, and a forthcoming loyalty CRM program, coupled with compelling value offers like the "buy-one-get-one Slam for $1" and "4 Slams under $10," are driving traffic and improving guest engagement.
• Keke's Breakfast Cafe as a Growth Engine: Keke's continues its strong performance, with Q2 2025 system-wide same-restaurant sales up 4% and new market expansion demonstrating higher average weekly volumes, positioning it as a key driver for future consolidated growth.
• Financial Resilience Amidst Headwinds: Despite a "choppy consumer environment" and commodity inflation, Denny's maintains a path to the low end of its 2025 guidance, supported by margin improvement initiatives targeting up to 200 basis points in savings and disciplined G&A control.
• Competitive Outperformance: Denny's consistently outperforms the BBI Family Dining Index in key markets and leverages its technological advantages and value proposition to gain market share in an intensely competitive restaurant landscape.

America's Diner in a Dynamic Era: A Strategic Reawakening

Denny's Corporation, established in 1953 as "America's diner," has long been a cornerstone of casual dining, known for its accessible, value-driven meals served 24/7. In recent years, the company has embarked on a significant strategic transformation, moving beyond its legacy to embrace digital innovation, optimize its core franchise system, and aggressively scale its burgeoning Keke's Breakfast Cafe brand. This strategic pivot is unfolding against a backdrop of intense competition and a "choppy consumer environment," where household incomes remain pressured and consumer sentiment is volatile, leading to a pullback in discretionary spending across the restaurant industry.

The company's history, marked by its evolution from Advantica Restaurant Group to Denny's Corporation in 2002, has instilled a deep understanding of its core customer base and the enduring appeal of its brand. This foundation now underpins a forward-looking strategy designed to drive profitable traffic and enhance shareholder value. Denny's aims to solidify its position as a value leader, expand its off-premise capabilities, and leverage technology to create a more engaging and efficient guest experience. The acquisition and subsequent growth of Keke's Breakfast Cafe, an emerging brand founded around 2005, represents a critical diversification into the rapidly expanding daytime eatery segment, complementing Denny's established multi-daypart strength.

Technological Edge: Fueling Efficiency and Engagement

At the heart of Denny's strategic transformation is a robust investment in technological differentiation, designed to enhance both operational efficiency and guest engagement. The company has rolled out a new cloud-based POS system across all company restaurants and is extending this to franchise locations, with approximately 130 restaurants already on the new platform. This core technology is "opening the door to provide future labor savings, smart upsell opportunities, server handhelds and payment at the table." For franchisees, the new equipment package includes an upgraded Kitchen Visualization System (KVS), which offers "meaningful waste-saving opportunities."

Beyond the POS, Denny's has made "smart investments in digital" to bolster its off-premise business, resulting in "increased traffic to our website" and "improved conversion rates by over 16%." This digital prowess is further amplified by its suite of virtual brands—The Burger Den, The Meltdown, and Banda Burrito—which leverage existing labor structures and over-index at dinner and late-night, demonstrating minimal overlap with dine-in guests. A new virtual brand, featuring Nathan's Famous (NATH) hot dogs, has been tested and rolled out to over 70% of company restaurants, improving company same-restaurant sales by approximately 50 basis points in Q2 2025. These virtual brands are "highly incremental... with minimal SKUs being added, driving traffic during dayparts where we have capacity."

A significant technological leap is the new points-based loyalty CRM platform, slated for launch in the second half of 2025. This "best-in-class one-to-one marketing program" is designed to leverage Denny's "already strong database of loyal guests" to personalize offers, drive frequency, and ultimately "deliver between 50 to 100 basis points in traffic over time." Digital guests, on average, visit "2x more often than other guests," highlighting the "so what" for investors: these technological advancements directly contribute to a stronger competitive moat, improved financial performance through higher sales and lower costs, and a more resilient market positioning in a digitally evolving industry. The company is also investing approximately $4.0 million towards a new cloud-based restaurant technology platform in domestic franchise restaurants, with rollout continuing through 2026, aiming to "lay the foundation for future technology initiatives to further enhance the guest experience."

Strategic Pillars: Value, Off-Premise, and Portfolio Optimization

Denny's has adeptly responded to the current economic climate by leaning into its historical strength as a value leader. The "2/$4/$6/$8 Value play," relaunched nationally in the second half of 2024 with an added $10 category, serves as a core brand differentiator. In Q2 2025, the company introduced a "buy-one-get-one Slam for $1 deal," which proved "compelling and competitive," driving traffic from new and lapsed users, with over 15% of these customers returning. This was followed by "4 Slams under $10" in June 2025, featuring fan favorites like the Super Slam, which peaked at a record high incidence of nearly 10%. These promotions are carefully engineered to be "profit neutral or marginally above" while generating crucial traffic.

The off-premise business remains a significant strength, representing 21% of total sales in Q2 2025 and contributing a 1.5% improvement in same-restaurant sales. This channel's resilience, even as dine-in transactions see volatility, is attributed to the company's digital investments and strategic promotions on third-party platforms.

Concurrently, Denny's is undertaking a "surgical and methodical approach" to optimize its restaurant portfolio. This involves closing underperforming Denny's restaurants, a process that began in 2023 and is expected to conclude by the end of 2025. In 2024, 88 lower-volume Denny's restaurants were closed, followed by 14 in Q1 2025 and 10 in Q2 2025. This strategy has already yielded positive results, with a "franchise AUV increase of approximately 5% or nearly $100,000" and the remaining Quintile 5 restaurants "now outperforming franchise same-restaurant sales by approximately 120 basis points during quarter 2." The goal is to return to "net flat to positive growth by 2026" for the Denny's brand. The Diner 2.0 remodel program, which delivered a "6.5% lift in traffic" in test restaurants, is also being reignited, with 23 remodels completed in 2024 and the company fleet now nearly 55% remodeled.

Keke's Breakfast Cafe: The Growth Engine

Keke's Breakfast Cafe, Denny's emerging growth brand, continues to impress, recently named to Nation's Restaurant News' "100 Under 100" list. Keke's delivered strong Q2 2025 system-wide same-restaurant sales of positive 4% and significantly outperformed the BBI Family Dining Index in Florida by over 220 basis points. This growth stemmed from both dine-in and off-premise transactions, supported by "industry-leading guest satisfaction scores" (4.85 Google rating) and strategic initiatives like alcohol offerings and its first-ever system-wide promotion ($5 kids meals with adult entree).

Development is a key focus, with 8 new cafes opened in Q2 2025, bringing the year-to-date total to 13 by July 2025. Keke's is expanding beyond its Florida base into new markets like Nashville and Dallas. Nashville, with 6 company cafes, is generating "roughly 15% higher average weekly volumes than the system-wide average," with margins "on track to meet the upper teens targets." Dallas, also with 6 company cafes, is showing similar optimism. The "brighter, more vibrant new image" has been incorporated into all new cafes, with over 70% of the company fleet converted and a broader franchise remodel program planned for 2026. To maintain an asset-light model, Denny's refranchised 3 company cafes in Northern Florida in Q2 2025, streamlining operations to Orlando while expanding into new markets.

Financial Performance: Resilience Amidst Headwinds

Denny's Q2 2025 financial results reflect a company executing its strategy in a challenging environment. Total operating revenue for Q2 2025 increased to $117.66 million from $115.93 million in Q2 2024, primarily driven by Keke's expansion. However, net income for the quarter decreased to $2.47 million from $3.57 million in the prior year. Year-to-date Q2 2025, total operating revenue was $229.29 million, up from $225.90 million, but net income was $2.80 million, down from $8.26 million in the comparable period.

Company restaurant sales increased 7.4% in Q2 2025, largely due to Keke's growth, while franchise and license revenue decreased 3.8% due to fewer Denny's equivalent units and a 1.4% decline in Denny's domestic franchise same-store sales. Adjusted company restaurant operating margin was 11.5% of company sales, impacted by approximately 115 basis points from legal and medical reserve adjustments and 100 basis points from new Keke's cafe opening inefficiencies. Product costs, particularly from higher egg prices, also pressured margins, though this is expected to ease. Despite these pressures, corporate administrative expenses saw a 3.5% reduction due to position eliminations, contributing to overall G&A control.

The company's liquidity remains sound, with a $400 million senior secured revolver maturing in August 2026. As of June 25, 2025, Denny's was in compliance with its debt covenants, with a consolidated leverage ratio of 3.98 times (against a maximum of 4.0 times) and a fixed charge coverage ratio of 2.05 times (against a minimum of 1.5 times). A refinancing process is underway, expected to be completed before the Q3 earnings call.

The working capital deficit of $55.7 million is managed effectively due to the cash-based nature of restaurant operations and rapid inventory turnover.

Competitive Positioning: Outperforming in a Value War

Denny's operates in an intensely competitive casual dining landscape, facing direct rivals like Dine Brands Global (IHOP, Applebee's), Brinker International (EAT) (Chili's), Cracker Barrel Old Country Store (CBRL), and The Cheesecake Factory (CAKE), as well as indirect competition from fast-casual and quick-service restaurants. The industry is currently characterized by an "aggressive value-driven environment," with "every brand fighting for share by pushing harder on price and promotion."

Denny's distinguishes itself through its consistent value leadership and 24/7 accessibility, particularly in the breakfast daypart. While some competitors like Dine Brands (DIN) may exhibit higher operating (21% vs. DENN's 10% in 2024) and net profit margins (8% vs. DENN's 5% in 2024), Denny's demonstrates a strong gross profit margin (73% in 2024), outperforming DIN (46%), Brinker (TICKER:EAT, 14%), and Cracker Barrel (TICKER:CBRL, 32%), and competitive with The Cheesecake Factory (TICKER:CAKE, 77%). This suggests Denny's effectively manages its cost of goods sold but faces higher operating expenses relative to some peers.

Crucially, Denny's has consistently "outperformed the BBI Family Dining sales index" for six consecutive quarters in California and for Keke's in Florida, demonstrating its ability to "steal share from our peer set." Its off-premise strength, fueled by digital investments and virtual brands, provides a unique advantage, especially as "family dining... continues to struggle as consumers skip discretionary meals and competition intensifies from grocers and QSRs." The company's strategic closure of underperforming units and remodel program are designed to enhance franchisee unit-level economics, addressing a vulnerability highlighted by some analysts regarding low IRRs compared to peers. Denny's technological advancements, particularly in digital engagement and operational efficiency, provide a competitive edge in attracting and retaining customers in a market increasingly driven by convenience and personalized experiences.

Outlook and Risks: A Cautious Path Forward

Denny's management maintains an "intentionally conservative" outlook for 2025, reiterating guidance for domestic system-wide same-restaurant sales in the lower half of negative 2% to positive 1%. Adjusted EBITDA is projected at the low end of $80 million to $85 million. This guidance assumes a moderation in "volatile consumer sentiment" throughout the year, allowing strategic initiatives to gain traction.

Key drivers for the back half of 2025 include the continued evolution of value messaging, increased momentum from remodels (with 5-10 additional company remodels and up to 50 franchise remodels planned), and the launch of the new loyalty CRM program, expected to deliver 50-100 basis points in traffic. The company anticipates 25-40 consolidated restaurant openings, with Keke's accounting for approximately half, underscoring its role as a growth vehicle. Closures of 70-90 underperforming Denny's restaurants are also expected to optimize the portfolio.

Commodity inflation is projected at 3% to 5%, an increase from earlier guidance due to the Q1 2025 egg price spike, while labor inflation is expected to be 2.5% to 3.5%. To mitigate these costs, Denny's is pursuing margin improvement efforts, targeting up to 200 basis points of savings over the next 12-18 months through supplier negotiations, recipe changes, and operational modifications. General and administrative expenses are targeted for a 3.5% to 4.5% reduction in 2025, moving towards a long-term goal of 5% to 6%.

Despite this cautious optimism, several risks persist. The "choppy consumer environment" and "outsized macroeconomic pressures" in key DMAs (Los Angeles, San Francisco, Houston, Phoenix) could continue to impact sales. Commodity price volatility, particularly for eggs, remains a concern, as does the potential impact of new tax legislation like the "One Big Beautiful Bill Act (OBBBA)." Furthermore, the "uncertainty in the projected future cash flows used in the Company's impairment analysis" highlights a risk if actual performance deviates from estimates. The company's consolidated leverage ratio, while compliant, remains close to its maximum covenant, requiring careful financial management.

Conclusion

Denny's Corporation is undergoing a significant strategic evolution, leveraging its heritage as "America's diner" while aggressively adapting to modern consumer demands. The company's core investment thesis rests on its ability to drive profitable traffic through a renewed focus on value, a robust digital and off-premise strategy, and the high-growth potential of Keke's Breakfast Cafe. By optimizing its restaurant portfolio and implementing comprehensive margin improvement initiatives, Denny's is building a more resilient and efficient business.

While macroeconomic headwinds and competitive pressures present ongoing challenges, Denny's demonstrated outperformance against industry benchmarks and its clear technological roadmap for enhanced guest engagement and operational efficiency provide a compelling narrative. The successful execution of its loyalty program launch, continued Keke's expansion, and disciplined cost management will be critical indicators for investors, signaling the company's trajectory towards sustainable growth and improved profitability in the dynamic restaurant industry.