Everyone has that Denny's (NASDAQ:DENN) story. You know, the one about when you showed up at 3 a.m. with your punch-drunk buddies and wolfed down three Super Bird sandwiches before passing out. Maybe it's the one about digging into your Grand Slam breakfast as the elderly man in the booth beside you lost his dentures in his lemonade glass.
Nothing may top YouTube co-founder Chad Hurley's story. YouTube and Google (NASDAQ:GOOG) brokered their $1.65 billion buyout deal at a Denny's. Really. Personally, my stories are lame by comparison, though I recall having an unhealthy addiction to Mother Butler key lime pies, early in my college days.
So if Denny's has so many colorful stories of the past, why can't it find a way to matter in the present? The company posted lackluster results last night. Revenue fell by 4% to $236.8 million, as the casual-dining operator posted a small loss before realizing an asset-sale gain.
The picture's not pretty. Comps fell during the period, and Denny's has fewer company-owned and franchised locations today than it did a year ago. The slumping unit-level popularity contrasts a healthier showing from IHOP (NYSE:IHP) last week. Denny's rival pancake-stacker has been able to grow its comps for 17 consecutive quarters now.
Maybe Denny's is trying to price itself out of its economically minded market. Its company-owned locations suffered a 1.8% slide in quarterly comps, despite a 2.7% average check hike. Actual customer traffic dipped by a more damaging 4.3% for the quarter.
Denny's was also caught reaching deeper into patrons' pockets a year ago. Comps rose back then, but only because the 8% spike in guest check averages was enough to offset the 3.1% decline in guest count.
It's only natural for cheap brands to want to go upscale, but there are better ways to do so. Bob Evans (NASDAQ:BOBE) simply grew its Mimi's Cafe chain. OSI Partners (NYSE:OSI) went with Fleming's when it wanted a higher-end chophouse than its casual Outback Steakhouse concept.
Denny's solution may or may not be an upmarket chain. However, it has to be careful with its original concept. If it continues to price itself out of its bargain-minded market, we'll have fewer classic "you had to be there" Denny's stories to go around in the future.
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Longtime Fool contributor Rick Munarriz remembers way too many late-night treks to Denny's when he was young, but he hasn't eaten at one in more than two years. He does not own shares in any of the companies in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
