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Why Denny's is Giving Away Burgers From Beyond Meat

By Jon Quast - Jan 29, 2020 at 7:28AM

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It seems the restaurant's management isn't sure how much you really want a Beyond Burger.

Stock market darling Beyond Meat (BYND -4.43%) can add a new nationwide menu rollout to its list of accomplishments. On January 30, Denny's (DENN -1.33%) will launch its Beyond Burger at all 1,700 Denny's locations. To celebrate, the company is advertising a free burger with the purchase of a drink while supplies last.

Beyond Meat has enjoyed several new restaurant partnership over the past year, so this rollout may not seem that newsworthy. But there's something worth highlighting here.

Beyond Burger from Denny's.

Image source: Denny's.

Fad or forever?

When Denny's reported third-quarter 2019 earnings, it highlighted year-over-year comparable-restaurant sales growth of 1.1% and EPS growth of 4.7%. But in the question-and-answer session, analysts asked about Beyond Meat, which was excluded from management's prepared remarks. In October 2019, Denny's launched the Beyond Burger in the Los Angeles market, and was preparing to bring it to all locations this year.

In response to the questioning, Beyond Meat, Denny's CEO John Miller said, "I'm usually pretty good at predicting fads and trends. But this one we'll wait and see." Despite years of experience in the restaurant industry, Miller still seems unsure how to gauge long-term prospects of plant-based meats. 

When Denny's gives away its Beyond Burgers, the offer is for dine-in only. Perhaps Denny's will be observing and engaging diners, to better answer the fad question and know whether this is a menu item worth keeping. For Denny's, understanding consumer demand is crucial to continuing its comps growth streak. The company has grown comps for eight consecutive years, including the first three quarters of 2019.

Healthy skepticism and optimism

Plant-based meats are still a novel concept for many consumers. So it's not a bad idea to take a skeptically optimistic approach to the category (and to Beyond Meat), like Denny's CEO has. 

There's at least some evidence that plant-based meats are a little faddish at the moment. Carrols Restaurant Group, a Burger King franchisee, already reported preliminary fourth-quarter 2019 results, in which Burger King comps growth slowed as the Impossible Whopper's novelty wore off. The Impossible Whopper is a plant-based burger made by Beyond Meat competitor Impossible Foods.

The same thing happened with the Beyond Meat menu items at Del Taco. As Del Taco stopped promoting those items, sales declined accordingly. Ideally, demand would increase with time, not decline.

hamburger made with Beyond Meat.

A Beyond Meat plant-based burger. Image source: Beyond Meat.

That said, Beyond Meat has added many new restaurant partners over the past year. Denny's joins Del Taco, Dunkin' Brands, and Carl's Jr./Hardee's, which have all added Beyond Meat menu items in the last 12 months. Each of these partners started with a small initial test, but saw enough to warrant a company-wide launch. As long as Beyond Meat keeps converting temporary tests into permanent menu items, there's reason for optimism.

For now...

Both Denny's and Beyond Meat have yet to report fourth-quarter and full-year 2019 earnings, but both should do so in coming weeks. For Denny's, look for a report on the completion of its refranchising strategy. This is taking the company from 90% franchised to up to 97% franchised, demanding a lot of attention in 2019. Now complete, it can turn its attention to other ways to grow shareholder value. Management mentioned it's considering a dividend, and I think it should. But if it doesn't offer one, listen to why management feels that cash is better used elsewhere.

In my opinion, Beyond Meat shareholders need to watch more than just the company's results. Since it records revenue at the moment it ships its products to restaurant and grocery partners, revenue growth in isolation isn't a great measuring stick for the company. It records a huge one-time revenue gain when it supplies the product for these nationwide menu rollouts. Therefore, monitoring how the product is selling through at restaurants like Denny's and Dunkin' will paint a clearer picture of Beyond Meat's revenue as it moves from one-time initial supply to the recurring restocking of these restaurant partners.

When Beyond Meat reports earnings, rather than fixate on revenue growth, I would watch the company's profit margin. If it's becoming more profitable with scale, that would be a great sign for investors. Conversely, if it's not, investors would need to dig deeper to find out why.

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Stocks Mentioned

Denny's Corporation Stock Quote
Denny's Corporation
DENN
$9.64 (-1.33%) $0.13
Beyond Meat Stock Quote
Beyond Meat
BYND
$24.37 (-4.43%) $-1.13

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