Denny’s Corp. has seen a positive impact from California’s fast-food wage law, which went into effect April 1, executives said Tuesday.
The Spartanburg, S.C.-based family-dining company, which reported earnings Tuesday for the first quarter ended March 27, provided insights on the impact of AB 1228 on its 22 California company restaurants.
Robert Verostek, Denny’s chief financial officer, said, “Since AB 1228 was signed in September 2023, while there were industry fears of full-service employees rushing to secure fast-food jobs, we have been very pleased to actually see improvements in both management and crew turnover in our company restaurants.”
Verostek said employees stayed partially because of the company’s GAIN program investments, which allowed employees to obtain high school equivalency diplomas, college credits, life skills, and career pathways.
“Additionally, we have not experienced a material increase in team wages thus far in April, which is in part due to our servers earning well above the AB 1228 minimum wage when factoring in tip income,” Verostek told analysts.
Kelli Valade, Denny’s CEO and president, said the brand saw dine-in business show progress in the quarter. “For those guests seeking alternative dining experiences, our digital and off-premises strategies are strong and deliver for many guests who want convenience,” she said.
The company’s initiatives in the last half of the year include expanding the third virtual brand, Banda Burrito (joining The Meltdown and The Burger Den), launching a test with Franklin Junction, restarting the Denny’s remodel program, and deploying the local co-op advertising for the first time since the pandemic began in March 2020.
“While off-premises sales as a percentage of total sales had been at 19% or greater since Q1 2020, this first quarter we delivered 21%, stealing share from others that have scaled down in off-premises channels,” she said.
“Denny's off-premises guests skew younger than dine-in,” Valade said. “Approximately 70% of our Gen Z and Millennial guests utilize our off-premises channels compared to the same groups utilizing dine-in at approximately 40%. This simply means that this part of our business, though yes, lower margin, is highly incremental and delighting a different guest.”
Denny’s is keeping an eye on value, she added, with about 70% of customers at household income levels at or below $75,000.
“This quarter, we responded to that by offering our original Grand sSam at the incredible starting out price of $5.99,” Valade said. “Guests responded favorably with traffic and sales coming out strong into the New Year. Total value mix in the first quarter was approximately 19%, up from the 17% mix we saw last quarter.”
Valade said Denny’s plans to expand Banda Burrito, which it began testing last fall, to an additional 200 or more locations “in the next couple of months.”
“These will be in California because it has the unique potential of offsetting the impact of AB 1228,” she said. “When we offered this option, our California franchisees were quick to sign up, given the perfect timing and the fit of the band offerings. Once we expand fully into the California market, we'll likely roll nationally, most likely starting in early Q4.”
Denny’s has opened its first Keke’s Breakfast Café outside of Florida in Hendersonville, Tenn., near Nashville. Valade said sales volumes were about $2 million on an annualized basis, which “validates our optimism” for the brand.
“Following the opening in the Nashville market, two additional Keke's opened in Jacksonville, Fla., with a new design, and another cafe is expected to open in the Nashville market in the next couple of weeks,” she said.
Keke's plans to roll out alcoholic beverages systemwide during Q2, “which deliver incidents of approximately 4% in test, most of which was incremental,” Verostek said.
Verostek said Denny’s took a price increase of about 3% in mid-April with the launch of its spring core menu.
“April's pricing included approximately 5% in California to offset the anticipated impact of AB 1228,” he said. “This was more heavily weighted toward franchise restaurants, with company restaurants averaging approximately 4%.”
For the first quarter ended March 27, Denny’s net income was $4.7 million, or nine cents per share, compared to $600,000, or one cent share, in the prior-year period. Revenues were $110 million, down from $117.5 million in the same quarter a year ago.
Denny's U.S. systemwide same-store sales were down 1.3% compared to the same period of 2023, including a decline at domestic franchised restaurants of 1.2% and a decline of 3% at company units.
Denny’s opened eight restaurants in the quarter, including three international Denny's locations and three Keke's company locations.
As of March 27, Danny’s had 1,614 restaurants, 1,539 of which were franchised and licensed and 75 of which were company-operated. The Denny's brand’s 1,553 global restaurants included 1,489 franchised and licensed units and 64 company-operated. The Keke's brand had 61 restaurants, 50 of which were franchised and 11 of which were company-operated.
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