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Denny's Is a Diner Doing It Right

By Michael Lewis – Jan 14, 2014 at 3:06PM

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Though it's in a dated category, Denny's is finding ways to stay competitive in the increasingly difficult casual-dining sector.

Family-style restaurant chain Denny's (DENN 0.97%) delivered earnings early this week, and the numbers weren't so shabby, but they also weren't much to rally behind. Denny's as a concept has long been considered dated, and many of its peers are finding it difficult to attract new customers. But the largely franchised chain is actually seeing more customers coming through the doors and higher transactions, if only slightly. Of course, there is much more data to digest and analyze beyond one period's store-level sales growth, but investors should keep in mind that this is a chain that's looking toward 2,000 locations -- making it one of the largest of its kind. Here's what investors need to know.

Prelim
Full results won't be available for about a month, but Denny's delivered plenty of information regarding its most recent quarter and holiday season.

As mentioned above, total same-store sales crept up marginally, just 0.9%, but it looks much better when compared to many other family-style QSRs such as Olive Garden or Red Lobster. At franchised locations (the vast majority of the company's 1,700-plus restaurants), sales grew 0.8%. At the company-owned stores, of which there are fewer than 200, things looked better, with 1.5% sales growth.

For investors, the bigger takeaway on this sales data is that Denny's has now seen positive growth in 10 of the last 11 quarters. Again, considering the relative performance of its peers, this is something to pay attention to. The company has posted positive full-year same-store sales for the past three years.

Throughout 2013, Denny's opened 46 new stores -- five of them outside the U.S. This also marks the fifth year of net new store growth.

State of flux?
The task for Denny's is to stay sharp in the age of fast-casual restaurants. Chipotle, Noodles & Co., and its peers are the ones getting the most buzz these days, not to mention sales growth.

Denny's trying to compete in this hot space would be fighting a losing battle. Take Olive Garden's foray into the craft burger world as an example of what not to do. Luckily for investors, that's not management's strategy. Denny's is doubling down on its core market -- diner eaters. The company is broadcasting the message that it is not only a breakfast place but a classic American diner.

With interstate exit locations, 10 locations on college campuses, and an ever-growing international presence, Denny's isn't quite the archaic institution many think it is. The company may just be doing the right thing with its diner concept and keeping relevant in today's casual-dining environment.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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