New Value Menu And Tech Upgrades Will Attract Future Customers

Key Takeaways

• Denny's menu innovations and value leadership strategies aim to drive customer traffic and increase revenue through a mix of premium and value offerings.
  
• Implementation of new technology in operations and advertising investments are designed to improve efficiency, target marketing efforts more effectively, and enhance overall profitability.
  
• Denny's faces competitive, macroeconomic, and operational challenges that may affect margins, revenue, and investor confidence despite new strategies and investments.

Catalysts

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

• Denny's is rolling out the 2468 menu nationally, with an added $10 price point, based on extensive testing, consumer research, and positive feedback. This strategy is engineered to drive incremental traffic and new customer trial while protecting profitability, potentially impacting future revenue growth and customer acquisition.
  
• The company has completed the implementation of a new cloud-based POS system in all company-owned restaurants, aimed at labor savings, smart upsell opportunities, server handhelds, and payment at the table. This could lead to operational efficiencies, waste reduction, and margin improvement in both company and franchise restaurants.
  
• Denny’s has introduced its third virtual brand, Banda Burrito, to over 300 restaurants, with plans for a nationwide rollout. This initiative is designed to maximize labor productivity and expand revenue channels, particularly in competitive markets like California, potentially contributing to increased sales volumes and margins.
  
• The company is reviving its local co-op advertising investments, representing $12 million annually, with about half being incremental. This focus on local media is expected to more effectively target Denny's specific guests, boosting brand visibility and potentially driving increased traffic and sales.
  
• Denny’s focus on value leadership through highly successful promotional strategies, like the repriced all-day Diner deals menu, aims to expand share of wallet and drive traffic with a combination of value and premium offerings. The effectiveness of these strategies could enhance revenue performance and contribute positively to net margins through increased customer patronage and higher average checks.

Assumptions

• Analysts are assuming Denny's's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $44.1 million (and earnings per share of $0.9) by about December 2027, up from $17.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2027 earnings, down from 18.2x today. This future PE is lower than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.47%, as per the Simply Wall St company report.

Risks

• Denny's faces a challenging competitive environment with value wars among restaurants, potentially requiring more aggressive pricing strategies, which could erode margins.
  
• Continued macroeconomic volatility and consumer trade-down behaviors might suppress restaurant traffic and sales growth, impacting revenue.
  
• While Denny's is introducing new menu items and virtual brands to drive traffic, execution risk and the necessity for these initiatives to scale effectively could impact net margins if they do not meet projections.
  
• The company's emphasis on growth through the Keke's Breakfast Cafe brand and technology investments like the cloud-based POS system introduces risks around capital allocation and expected returns, which could affect earnings if these investments do not perform as anticipated.
  
• Denny's adjustments in guidance for domestic system-wide same-restaurant sales signal potential concerns about the company's ability to meet previous performance expectations, which could influence investor confidence and impact earnings.

Valuation

• The analysts have a consensus price target of $7.93 for Denny's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $495.7 million, earnings will come to $44.1 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 10.5%.
• Given the current share price of $6.26, the analyst's price target of $7.93 is 21.0% 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.