For years, restaurant chain Denny's has been a bit hard to classify.
The company, which calls itself "America's Diner," tends to offer better value than most sit-down chains, but it's more expensive (and slower) than grabbing a fast-food meal. In addition, because it offers waitress service, it isn't considered "fast-casual" even though service is pretty fast and vibe is certainly casual.
That vagueness of category left chains like Denny's and perhaps its closest comparable public rival Cracker Barrel somewhat out in the cold. Nothing about the value or service either offered had really changed, but consumer tastes were trending in other directions. And even though both were way ahead of the curve on the all-day breakfast front -- they've always had it -- they simply didn't fit the in-the-moment hot restaurant concept.
But things change. A multi-year effort to remodel Denny's locations in what it calls its "Heritage" layout has started to pay off for shareholders.
What is happening?
Denny's followed a strong end to 2015 with an impressive beginning to its 2016. The diner chain reported that domestic systemwide same-store sales grew 2.5%, including a 3.5% increase at company-owned restaurants and a 2.3% increase at domestic franchised restaurants. The company also saw its operating revenue grow 3.7% to $124.6 million "primarily resulting from an increase in company restaurant sales," according to its earnings release.
Sales at company-owned restaurants grew 5.1% to $90.4 million compared to the same period last year. Franchise and license revenue only grew by $100,000 to $34.3 million, "primarily due to higher royalty revenue offset by a decrease in occupancy revenue," the company wrote.
"Our start to the year was quite positive as we grew same-store sales on top of one of our strongest quarters of growth in the prior year," said CEO John Miller in the earnings release. "... We remain focused on executing our brand revitalization strategy to offer affordable and craveable products delivered with consistent service in an inviting environment."
Cracker Barrel has also seen stronger interest in its brand, even without having made any major changes. The company hasn't reported on its most-recent quarter yet, but in the period which closed Jan. 29, its overall revenue increased 1.1% to $764 million, and it said in its earnings release that those numbers would have been higher had it not been for "severe winter weather" in January negatively impacting sales in the quarter by 0.6%.
Denny's has made focusing on its traditional brand identity a key factor in its turnaround, and Cracker Barrel has always seemed to be frozen in an earlier era. For America's Diner, however, its recent impressive numbers may only be the tip of the iceberg, because the chain has only converted 36% of its stores to the Heritage image.
"We have an opportunity to further enhance our performance for the balance of 2016 and beyond," said Miller. "With ongoing same-store sales growth, an expanding global reach, and a highly franchised business model, the free cash flow we are generating enables us to make investments in our company restaurants and our brand support systems while returning excess cash to shareholders through our ongoing share repurchase program."
Denny's has reconnected with its brand at a time when Americans are perhaps less-enamored with fast-casual than they were a few years ago. That opens a door for the chain to reintroduce itself to people and make a case for repeat visits, a strategy which so far, it has been executing well.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
Daniel Kline has no position in any stocks mentioned.