Denny’s Latest Earnings Show that Full-Service Chains Are Struggling to Compete Against the Likes of Chipotle Mexican Grill

While Denny's same-store sales were higher, both its revenue and net income declined on a year-over-year basis in the first quarter.

Apr 28, 2014 at 5:50PM

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By at least one measure, things appear to be on the up and up at Denny's Corp. (NASDAQ:DENN). On Monday, America's self-proclaimed favorite diner reported that first-quarter same-store sales grew by 1.8% at domestic locations compared to the year-ago period.

"We are pleased to start the year with another quarter of systemwide same-store sales growth highlighted by our strongest quarter of same-store sales at company restaurants in over seven years," said president and CEO John Miller. "We continue to strengthen our position as a leader in our segment, as we make improvements in our food, service and atmosphere to evolve the business to meet the expectations of our guests."

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This success aside, a deeper examination of Denny's earnings reveals multiple issues. Compared to the same quarter last year, total sales fell by $2.6 million while expenses decreased only $391,000. The net result was a 9.9% decline in net income. The saving grace for shareholders was Denny's share repurchase program, which kept diluted earnings per share roughly even on a year-over-year basis.

These issues offer a clear illustration of the reality facing full-service restaurant operators like Denny's. According to research from The NPD Group, a consulting company that caters to the industry, the only restaurant group to experience traffic growth in 2013 was the fast-casual segment, made up of companies like Chipotle Mexican Grill and Panera Bread. Meanwhile, there was no growth whatsoever for the restaurant industry as a whole; the implication being that traffic declined at full-service operators like Denny's.

It's for this reason that the diner-themed chain has doubled-down over the last few years to revitalize its brand and strengthen its balance sheet. It's increasing the proportion of franchised locations, is updating the appearance and atmosphere at existing locations, and continues to constantly adjust its menu. Most recently, it introduced a new "adventure menu" for children, which includes a "selection of customizable dishes and National Geographic kids content."

Will Denny's strategies enable it to compete with fast-casual upstarts like Chipotle Mexican Grill and Panera Bread going forward? That ultimately remains to be seen. In the meantime, at least according to its same-store sales, it certainly appears as if Denny's is headed in the right direction.

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