Rising Input Costs And Tech Lags Will Spur Limited Recovery

Key Takeaways

• Shifting consumer preferences and intense discounting threaten traffic, pricing power, and long-term profitability despite value promotions and menu innovation.
  
• Technological lag and commodity cost volatility risk margin compression, while multi-brand expansion faces challenges from macro uncertainty and operational inefficiencies.
  
• Weak guest traffic, margin pressures, and execution risks in expansion efforts threaten Denny's profitability and ability to recover earnings amid an uncertain consumer environment.

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.

• Although Denny's benefits from an aging U.S. population that favors full-service, value-driven dining, more health-conscious younger consumers may continue to turn away from traditional diner offerings toward fast casual or delivery-focused competitors, potentially resulting in persistent pressure on guest traffic and same-restaurant sales.
  
• While digital and off-premise investments are boosting sales-off-premise channels now represent over 22% of revenue and continue to grow-Denny's risks falling behind industry leaders in technology adoption if it cannot move quickly or efficiently enough, which could limit its ability to offset rising labor costs and compress net margins over the longer term.
  
• Even as value promotions like the Buy One Slam Get One for $1 have successfully brought back lapsed guests and are at or slightly above profit neutral, the competitive landscape's escalating discounting wars could erode pricing power and push Denny's into a cycle of margin-diluting promotions, weighing down both profitability and earnings growth.
  
• Expansion of virtual brands and menu innovation-including new offerings and partnerships-have shown potential to expand the customer base and check size, but persistent volatility in commodity prices, particularly eggs, beef, and dairy, may make it difficult to sustain improved company restaurant operating margins, as experienced recently with egg cost shocks.
  
• The growth of Keke's Breakfast Cafe and opening of new locations support multi-brand revenue streams and exposure to growing daytime segments, yet ongoing macro uncertainty and efficiency challenges with new store ramp-up could delay realization of targeted mid-teen margins and predictable earnings contributions, particularly if underperforming restaurants or slower refranchising stretch resources longer than anticipated.

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 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.8% today to 4.9% in 3 years time.
• The bearish analysts expect earnings to reach $26.2 million (and earnings per share of $0.55) by about July 2028, up from $17.2 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 15.2x on those 2028 earnings, up from 13.8x today. This future PE is lower than the current PE for the US Hospitality industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Denny's Future Earnings Per Share Growth

Risks

• Denny's continues to experience negative same-restaurant sales growth, with Q1 2025 system-wide sales down by three percent, and guidance indicating results will remain at the lower end of its range; this ongoing weakness in guest traffic and demand could pressure revenue and earnings over the longer term.
  
• Persistent macroeconomic headwinds, including negative consumer sentiment, inflationary pressures, and heightened price sensitivity among lower-income consumers, risk undermining Denny's core value-seeking customer base and limiting pricing power, which may lead to unpredictable revenue and compressed net margins.
  
• Promotional value strategies such as aggressive discounting (e.g., buy one, get one for one dollar) have succeeded in attracting traffic but are described as being only marginally profitable, raising concerns that maintaining or expanding such offers may erode profitability and put downward pressure on company earnings if not offset by strong check growth.
  
• Volatility in commodity prices, especially for staple items like eggs, has materially impacted Denny's input costs and company restaurant operating margins; while prices may moderate, the threat of recurring spikes or sustained inflation could continue to impact net margins and operational cash flow.
  
• The company faces execution risk as it expands Keke's and attempts to refranchise locations; inefficiencies from new cafe openings and an uncertain pace of refranchising can drag on near-term margins, while delays or underperformance in expansion efforts could jeopardize projected revenue growth and earnings recovery.

Valuation

• The assumed bearish price target for Denny's is $5.75, 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 $8.0, and the most bearish reporting a price target of just $5.75.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $530.2 million, earnings will come to $26.2 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 11.6%.
• Given the current share price of $4.64, the bearish analyst price target of $5.75 is 19.3% higher.
• 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.