Rising Cost Rivalry Will Curb Demand But Efficiency Will Emerge

Key Takeaways

• Heavy reliance on lower-income consumers and legacy roadside locations increases vulnerability to shifting demographics, job displacement, and evolving urbanization trends.
  
• Growth initiatives in digital, loyalty, and new brands face intense competition and ongoing margin pressures from labor and commodity cost volatility.
  
• Heavy reliance on discounts, regional concentration, and rising costs threaten margins and growth, while ongoing underperforming store closures risk reducing overall scale and revenue potential.

Catalysts

Through its subsidiaries, owns and operates franchised full-service restaurant chains under the Denny's and Keke’s Breakfast Cafe brand names in the United States and internationally.

• While Denny's benefits from an aging U.S. population and the ongoing shift toward remote work, which both favor demand for affordable, familiar, all-day dining options and align with its established 24/7 model, the company remains heavily exposed to lower-income consumers whose disposable income may be eroded further by continued automation and job displacement, placing long-term pressure on dine-in traffic and revenue growth.
  
• Although ongoing investments in digital ordering, delivery, and a new one-to-one loyalty platform are well positioned to capture growing consumer preference for convenience and drive improved customer frequency, Denny's faces growing competition from fast-casual and delivery-centric brands that can better adapt to evolving consumer needs, potentially limiting sustained net margin expansion.
  
• While proactive closure of underperforming stores and a focus on franchise health have driven recent increases in average unit volumes and provided a buffer for short-term earnings, the company's legacy focus on suburban and roadside locations could reduce relevance as urbanization accelerates and car culture declines, dampening future sales and undermining long-term same-store sales growth.
  
• Even as margin improvement initiatives, supplier negotiations and operational efficiencies are expected to yield up to 200 basis points of savings in the near term, persistent labor cost inflation and volatility in food commodity prices threaten to absorb these gains, which may cap sustained EBITDA or net margin improvements over time.
  
• While the Keke's Breakfast Cafe brand is showing promising growth with stronger same-store sales and operational execution, Denny's limited international presence and over-reliance on franchising for expansion makes it vulnerable to competitive headwinds in the maturing U.S. casual dining market, adding to potential earnings volatility and constraining the company's ability to capitalize fully on favorable long-term demographic trends.

Denny's Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Denny's compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Denny's's revenue will grow by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 4.8% in 3 years time.
• The bearish analysts expect earnings to reach $25.0 million (and earnings per share of $0.55) by about August 2028, up from $16.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 13.7x today. This future PE is lower than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Denny's Future Earnings Per Share Growth

Risks

• Denny's faces persistent consumer volatility and choppy demand, particularly among its core $50,000 to $75,000 household income demographic, which could place downward pressure on same-store sales and overall top-line revenue if economic uncertainty endures.
  
• The company has a high concentration of sales in key states such as Los Angeles, San Francisco, Houston, and Phoenix (nearly 30% of comp sales base), exposing it to regional macroeconomic headwinds and reducing geographic diversification, making its earnings and revenue vulnerable in the event of prolonged local downturns.
  
• There is an over-reliance on episodic limited-time offers and deep value promotions (such as BOGO deals and Slams under $10) to drive traffic, which while currently positive for margins, could train customers to expect discounts, put pressure on menu pricing power, and compress net margins over the long term if value expectations escalate.
  
• The company continues to close underperforming restaurants at a faster pace than openings (expecting 70–90 closures versus 25–40 openings in 2025), which may result in shrinking store count and reduced system-wide scale, thereby limiting revenue growth and future earnings potential.
  
• Rising costs from labor inflation, commodity volatility, and new restaurant ramp-up inefficiencies are weighing on company restaurant margins and could persist, particularly if inflation persists or aggressive cost-saving measures reach their practical limits, negatively impacting net margins and bottom line profitability.

Valuation

• The assumed bearish price target for Denny's is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Denny's's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $516.0 million, earnings will come to $25.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 12.3%.
• Given the current share price of $4.28, the bearish analyst price target of $4.0 is 7.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.