Denny's: Looking Back, In Order to Look Ahead

Includes: DENN, DINE, IHP
by: John Gordon
With multiple volleys back and forth recently between Denny’s Corporate (NASDAQ:DENN) and dissident shareholder group, the Committee to Improve Denny’s, the Denny’s Franchisee Association weighed in on the issue last week, refuting the dissidents' point that franchisee input has been ignored and that they welcomed recent brand and marketing changes.
As this battle builds toward the May 19th shareholders meeting, it’s valuable to understand where Denny’s has been, in order to forecast where it might go.
Denny’s lost a tremendous amount of momentum in the late 1980s and 1990s. It went through conglomerate and restaurant M&A hell with TW Services (successor to TWA Airlines), Coniston, Flagstar, then Advantica entities, before finally being publicly traded again as DENN in 2003. Along the way the company dealt with heavy debt, multiple other troubled restaurant brands entering and leaving the portfolio, one securities class action loss, two takeover battles, one Chapter 11 filing, one botched corporate relocation to South Carolina from its core CA market, years of shaky marketing and a epidemic of racial discrimination problems in the 1990s.
At decade end in 1999 (December 29, 1999), proforma EBITDA (gross of one time charges) of Denny’s was $160M, but improved to $172M in 2000, $136M in 2001, and $140M in 2002. There were 1784 Denny’s units in 1999.
Ten years later, (December 30, 2009 10K), there were 1551 Denny’s units, and EBITDA of $106M.
What to do going forward? DINE (DINE) and IHOP (IHP) didn’t lose the same decade that Denny’s did. It has done low prices before: remember the $1.99 Grand Slam? Refranchising is not a panacea, there are only 220 company units left, and it’s debatable if franchisees can grow faster.
It’s unfortunate that refranchising (Denny's FGI initiative) seems Denny’s main strategic alternative presently. What makes us think the franchisees can do any better?
In our opinion, the affordability issue needs to be addressed smartly (a multi tiered value menu was implemented in March) as does the store age, size and location mix of units. CEO Marchioli noted that a large segment of DENN’s customer base were lower income, under $35K. That can only be solved via a selective real estate strategy over time. Also, we recall DENN was testing smaller size units, and wonder where that test wound up.
More than 50% of Denny’s sales comes from 2am to 12 noon, exactly when other most other restaurants are dark or gearing up. Late night party folks, overnight shift workers and daytime customers, and the factors that affect them, are very important. When will employment pickup?
It seems to us that DENN has more fundamental restructuring work to do, and will take additional years to do so. While we are always concerned about high cost PE debt, perhaps the ultra high pressure Wall Street environment isn’t the place e to be for this transition.
Disclosure: No stock positions