Denny’s Corp. expects its recently completed acquisition of Keke’s Breakfast Café to accelerate unit growth over the next several years and a return of more Denny’s restaurant to 24/7 openings to increase sales in the short term, executives said Tuesday.
The Spartanburg, S.C.-based family-dining chain completed the $82.5 million Keke’s acquisition July 20 from Orlando, Fla.-based K2 Restaurants Inc. Keke’s has 52 units, with 44 of them franchised.
“This is an exciting opportunity to participate in the fast-growing A.M. eatery segment through a complimentary brand,” said Kelli Valade, who took over as Denny’s CEO and president this month.
“We believe our experienced team and track record as a model franchisor can develop Keke's across multiple states with the goal of becoming the A.M. eatery franchisor of choice,” Valade said in an earnings call Tuesday for the second quarter ended June 29.
Robert Verostek, Denny’s chief financial officer, said Keke’s units clock a $1.9 million average unit volume and carry a higher royalty rate than Denny’s franchised units. Denny’s systemwide AUV is about $1.6 million.
“The royalty rate with regard to the existing units that are in place, the 44 franchise units, is a 6% royalty rate,” he said, “so it's a higher royalty rate than what you would get from a 4.5% at Denny’s.” Keke’s also has a check average about 20% higher than at a typical Denny’s unit, the company said.
Verostek said Keke’s doubled its number of units from 26 in 2016 to 52 currently, or four to six additional units a year. He expects Denny’s assistance to boost that growth rate.
“If we don't accelerate that rate into the future,” he added, “this is not going to work for us.”
Denny’s team will assist Keke’s with development while the brand operates independently, Verostek added. “We'll put in place the right training resources. We'll put in the right development resources. And we'll move that beyond the four to six [new units] historical,” he said.
Valade said Denny’s second-quarter systemwide same-store sales increased 2.5% when compared to the 2021 period and were up 1.8% from the pre-pandemic 2019 quarter.
“In terms of the monthly cadence, April started off strong as gas prices began to moderate from their initial peak in mid-March,” she explained. “But in mid-May the industry and Denny’s experienced softer guest traffic as multiple inflationary pressures converged and weighed on both consumer confidence and consumer sentiment.”
Denny’s restaurants operating 24/7 outperformed the Blackbox Intelligence family-dining index by over 700 basis points, she added.
“We have a 24-hour brand and this remains a significant tailwind as demand for the late-night dining occasion is every present, and 24/7 restaurants are consistently outperforming limited-hour restaurants by mid-teen-digit sales comps relative to 2019,” Valade said.
Denny’s is working with the Denny’s Franchise Association to accelerate the return to 24-hour operations over the coming quarters. Between 80% and 85% of the system is fully staffed for all-day service, Verostek said.
“Staffing still remains a primary barrier to accelerating this progress,” Valade noted. “However, both turnover and wage rate growth have begun moderating recently within the industry and at Denny's. This is definitely encouraging. We also recently launched a unique and differentiated hiring campaign called, ‘Bring Your Bestie to Work.’”
That campaign increased applications, she said, “and most importantly, improved staffing in both company and franchise restaurants.”
Off-premises sales have remained strong, tallying about 21% of total sales compared to the pre-pandemic trend of 12%, Valade noted. Denny’s launched the Burger Den and the Melt Down virtual brands in early 2021.
Melt Down, formerly available on the DoorDash third-party platform exclusively, is expanding to other marketplaces, she said. “This expansion provides greater upside potential for sales from our already strong virtual business,” she said.
Verostek said check averages increased about 10% in quarter, including 3.5% in carryover pricing from the prior year, 3% pricing in the current year and 3% in product mix benefits. The company took 1% pricing in June, he added.
Commodity inflation in the quarter was about 18% and labor inflation was about 8%, he said.
Verostek said Denny’s was prepared with value-oriented marketing should the economy enter a prolonged downturn. The $2-$4-$6-$8 value menu was introduced in 2010 after the Great Recession, he noted.
Denny’s introduced the Summer Slamcation Value Promotion in July, he said. “We're not searching for that platform like we were during the great recession,” Verostek added.
For the second quarter ended June 29, Denny’s swung to a profit of $23 million, or 37 cents a share, from a loss of $828,000, or one cent a share, in the same period last year. Revenues increased 8.3% to $115 million from $106.2 million in the same quarter last year.
As of June 29, Denny's had 1,631 franchised, licensed and company restaurants around the world including 154 restaurants outside the United States.
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