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Heard on the call: Denny's

Denny's: Value offerings driving positive traffic, lower checks

Executives at Denny's Corp. told analysts Tuesday that value offerings like the family-dining chain's $2 $4 $6 $8 menu have resulted in positive guest traffic but smaller average checks.

The conference call came after Denny's reported flat earnings for the Sept. 29-ended third quarter of $9.9 million, or 10 cents per share, compared with year-earlier net income of $10 million, or 10 cents per share.

Revenue fell 4.2 percent to $139.9 million from $146.1 million a year earlier, reflecting in large part the sale of 27 corporate restaurants to franchisees.

Same-store sales in the quarter decreased 0.7 percent at corporate locations and 1.2 percent at franchised restaurants. During the quarter, same-store guest counts rose 2.3 percent, the company’s strongest performance in that metric since 2005, though executives said during the call with investors that value promotions pushed the average check down 2.4 percent.

“Across the company we’ve all been committed to driving sales and guest count growth,” said interim chief executive Debra Smithart-Oglesby. “We launched the $2 $4 $6 $8 Value Menu with limited-time offers at attractive price points, and under this everyday-affordability platform, guest counts improved sequentially April through September, from negative 5.6 percent up to positive 2.3 percent. Importantly, we continue to see positive progress in key markets, including California, Texas and Florida.”

The company reported other actions during the third quarter, including the hiring of restaurant industry veterans for two key executive roles — Frances Allen as chief marketing officer and Robert Rodriguez as chief operating officer — the refinancing of a $300 million credit facility, and 61 unit openings, including nine traditional locations, four units on college campuses, and the conversion of 48 Flying J travel centers.

The first two test locations of Denny’s fast-casual café concept will debut in California in the fourth quarter, including one in the next few days, officials said.

“We believe the strength of the brand can be leveraged into a fast-casual format,” Smithart-Oglesby said. “We plan to open a handful of test locations over the next several months, and once they’re up and running, we expect franchisees to open the majority of those future units. The cafes will offer our core products, but in more urban settings in footprints that are about 25 percent smaller.”

Denny’s increased the expected number of conversions from Flying J travel centers to Denny’s restaurants to 91 units by the end of the year, with the remaining 49 Flying J locations to be converted early next year. In the third quarter, the brand rebranded 48 sites into 42 franchised Denny’s locations and six corporate units.

Demand among Denny’s franchisees for rebranding the travel centers has been healthy, said chief financial officer Mark Wolfinger, adding that financing for the conversions has been robust.

“We’ve seen a strong market for financing out there,” he said. “We put together a specific pool for this transaction, and [franchisees] have used it but also gone to third parties. This is a compelling investment opportunity.”

Smithart-Oglesby said Denny’s remodeling program would yield about 50 refurbished corporate units by the end of 2010. “Our expectation is that the franchise community will follow in 2011,” she added.

The executives said that Denny’s anticipates food cost inflation next year somewhere between 2 percent and 3 percent, the same figure projected by executives at Texas Roadhouse during their third-quarter earnings call this week. Denny’s currently has about one-third of its basket of goods under contract next year.

Spartanburg, S.C.-based Denny’s operates 232 locations and franchises another 1,380 restaurants.

Contact Mark Brandau at [email protected].

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