Since 1953, when it was referred to as Danny's Donuts, Denny's (NASDAQ:DENN) has been known for its breakfast and 24-hour service. Denny's is so synonymous with breakfast that, regardless of the time of day of my visits, I don't ever remember ordering anything that wasn't breakfast-related. I'm pretty sure the lunch and dinner menu has never passed before my eyes.
With that in mind, it came as some surprise that one of the topics of discussion in the first-quarter report was a new goal of building Denny's dinner business. The change seems to come on the heels of an 8% increase in the average guest check (AGC) in company-owned stores, due in part to a higher mix of sales from the dinner crowd.
The possibility of generating greater revenues without large capital expenditures is certainly enticing. But despite the increase in AGC, company-owned same-store sales increased just 4.6% because of a 3.1% decrease in traffic. In addition, the dinner space is already overflowing with choices, and it may be even more difficult for Denny's to penetrate because of its decades-long commitment to breakfast. The limited details of the strategy make it difficult to determine whether this should be elevated above pet-project status.
If management can remain focused on fixing the balance sheet, leveraging its assets, and increasing operational efficiencies, it should continue to enjoy profitability. But improvements to the core business will be even more important in light of the possible drop in discretionary spending, which an S&P Equity Research report indicated yesterday. Because of the demographics that Denny's and its roadside rivals Bob Evans (NASDAQ:BOBE) and CBRL Group's (NASDAQ:CBRL) Cracker Barrel appeal to, these adverse conditions typically affect them more than the rest of the industry.
Unfortunately, interest payments on Denny's debt will continue to be a burden on the company for some time. This debt is unlikely to be eliminated via new equity, since this would cause shares outstanding to balloon. What's more, expectations built into today's stock price seem to be based on higher growth and higher net margins. So it looks like dinner needs to become a bigger portion of the menu in order make its interest payments go away faster. And that's a tall order to fill.
Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.
