Digital Investments And Loyalty Programs Will Increase Guest Traffic

Key Takeaways

• New digital investments, loyalty program, and value-oriented promotions are positioned to increase customer engagement and drive topline and margin growth despite economic pressures.
  
• Portfolio streamlining and margin initiatives aim to boost franchise profitability, reduce risk, and create a more resilient earnings base amid cost inflation.
  
• Heavy reliance on value promotions, regional market concentration, and franchise model challenges limit sustainable growth, margin expansion, and effective execution of new initiatives.

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.

• The launch of a new one-to-one, points-based loyalty program in the back half of the year is expected to meaningfully increase guest frequency and average spend by leveraging first-party customer data and targeted offers; over time, this initiative should support same-restaurant sales growth and incremental margin expansion.
  
• Sustained investment in digital platforms and off-premise channels-already driving 1.5% same-restaurant sales improvement-will further broaden market reach, tap into evolving consumer habits of digital ordering, and help offset dine-in volatility, supporting future revenue growth.
  
• Continued emphasis on strong value-oriented promotions and menu innovation is drawing new and lapsed users into the brand-especially amid economic pressure and rising demand for affordable dining-positioning Denny's to benefit from long-term shifts in consumer behavior during downturns and supporting topline recovery.
  
• Strategic portfolio rationalization (closure of underperforming units, targeted rehabilitation, and refranchising) has improved franchise average unit volumes by around 5% and will likely enhance system profitability, limit downside risk, and provide a cleaner base for earnings growth going forward.
  
• Active margin improvement plans-including supplier negotiations, recipe changes, packaging optimizations, and additional cost savings-are expected to deliver up to 200 basis points of expense reduction in the next 12–18 months, helping to protect net margins from ongoing cost inflation.

Denny's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Denny's's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $26.8 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 analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from 11.4x today. This future PE is lower than the current PE for the US Hospitality industry at 21.6x.
• Analysts expect the number of shares outstanding to grow 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 12.32%, as per the Simply Wall St company report.

Denny's Future Earnings Per Share Growth

Risks

• Denny's significant concentration in key markets like Los Angeles, San Francisco, Houston, and Phoenix exposes it disproportionately to regional macroeconomic volatility; persistent weakness or economic headwinds in these areas could drive ongoing traffic declines and limit comparable sales recovery, impacting long-term revenue and earnings growth.
  
• The company's reliance on aggressive value promotions (e.g., BOGO offers, slams under $10, $2-$4-$6-$8 menu) to drive traffic during a tough consumer environment is margin-accretive now, but sustained dependence on discounting and LTOs can train guests to expect persistent deals, eroding pricing power and threatening future margin expansion and top-line growth.
  
• Denny's is in a period of net restaurant closures to rationalize underperforming units, and while AUVs are improving, this also signals limited organic unit growth in core markets; market saturation and modest new unit development constrain future revenue and EBITDA expansion, particularly as international presence remains nascent.
  
• Long-term cost pressures are ongoing: management anticipates commodity inflation of 3-5% and labor inflation of 2.5-3.5%. While some commodity costs (e.g., eggs) are declining, any sustained wage inflation or supply chain disruptions could outpace incremental savings from operational initiatives, resulting in compressed net margins and lower long-term earnings power.
  
• The extensive franchise-oriented business model, while asset-light, reduces Denny's direct control over operational execution and guest experience, especially as it begins broad-scale digital and loyalty initiatives. Any disconnect between franchisor-driven strategies and franchisee adoption could limit the effectiveness of traffic-driving programs and slow top-line recovery.

Valuation

• The analysts have a consensus price target of $5.95 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 $8.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $516.6 million, earnings will come to $26.8 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $3.56, the analyst price target of $5.95 is 40.2% 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.