DENN Q1 Earnings Call: Value Promotions and Cost Pressures Shape Modest Quarter

Diner restaurant chain Denny’s (NASDAQ:DENN) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 1.5% year on year to $111.6 million. Its non-GAAP profit of $0.08 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Denny’s Q1 results reflected a challenging consumer environment, with management attributing weak same-store sales to persistent inflation and cautious consumer sentiment. CEO Kelli Valade described the quarter as “one of the most aggressive value-driven environments we've seen in years,” citing the need for deeper promotional strategies to regain traffic. The introduction of limited-time offers, such as the Buy One Slam, Get One for $1, was highlighted as a critical move to attract lapsed and new customers, driving incremental visits and helping stabilize transaction trends by the end of the quarter.

Looking ahead, management’s forward guidance is shaped by ongoing macroeconomic uncertainty and the expectation that consumer sentiment may gradually improve throughout the year. CFO Robert Verostek maintained a cautious stance, stating that “any rhetoric in the macro environment can really crater” consumer confidence, but expressed confidence in upcoming digital enhancements, a new loyalty platform, and continued remodels as drivers for a potential back-half recovery. The company expects to remain disciplined on pricing and capital deployment, with a focus on value and operational efficiencies.

Key Insights from Management’s Remarks

Denny’s leadership emphasized the need for compelling value offers and operational agility in response to persistent consumer headwinds and industry-wide promotional pressures. The company’s performance was impacted by both external factors and strategic responses to shifting guest behavior.

• Aggressive Value Promotions: Management leaned heavily into limited-time value offers, notably the Buy One Slam, Get One for $1 deal, which brought in nearly 70% lapsed or new customers, helping to offset traffic declines and stabilize sales trends in April.
• Off-Premise Channel Growth: Denny’s continued to invest in off-premise sales (takeout and delivery), which contributed a 1% improvement in same-store sales and now account for 22% of total sales, supported by digital investments and a new virtual brand, Banda Burrito.
• Cost Pressures from Commodities: The sharp increase in egg prices—at times 3 to 4 times higher than usual—negatively affected margins, leading some locations to implement temporary surcharges. Management expects these costs to moderate as supply normalizes.
• Keke’s Expansion and Performance: The Keke’s Breakfast Cafe concept saw positive same-store sales, expansion beyond Florida, and strong customer sentiment, though new unit inefficiencies weighed on margins. Development pace remains robust, with new markets being entered.
• Operational Initiatives: Ongoing remodels and digital enhancements, including a planned loyalty CRM rollout in the back half of the year, were cited as important levers for improving guest experience and driving incremental sales.

Drivers of Future Performance

Management’s outlook for the year is shaped by the expectation of a gradually recovering consumer, ongoing cost pressures, and a continued focus on value-driven traffic initiatives.

• Consumer Sentiment and Value Focus: The company expects the need for strong value offers to persist as consumers remain price sensitive. Management will adjust promotional strategies as needed, balancing transaction gains with profitability.
• Margin Recovery Initiatives: Efforts to mitigate margin pressure include moderating commodity costs (especially eggs), implementing menu simplification, and enhancing supply chain efficiency. New store inefficiencies at Keke’s are expected to decline as units mature.
• Digital and Loyalty Rollouts: The launch of a new digital guest experience and loyalty CRM platform in the second half of the year is projected to increase guest engagement and frequency, supporting gradual sales recovery despite ongoing macro risks.

Top Analyst Questions

• Michael Tamas (Oppenheimer & Company): Asked whether deeper discounting and value offers would be necessary to sustain traffic. CEO Kelli Valade responded that Denny’s will continue refining its everyday value strategy, with the flexibility to introduce promotional offers as the environment dictates.
• Jake Bartlett (Truist Securities): Questioned if guidance assumes improvement in consumer sentiment and how the company views the recent pullback. CFO Robert Verostek said the outlook is cautious, with some signs of stabilization but ongoing risk from macroeconomic volatility.
• Todd Brooks (Benchmark Company): Sought clarity on menu pricing trends and mix impact from current promotions. Verostek explained that pricing actions will be modest and responsive to market conditions, with limited impact from the current BOGO promotion on overall mix.
• Jon Tower (Citi): Inquired about actions to mitigate margin pressures from aggressive value offers. Management highlighted merchandise strategy, off-premise growth, and in-store upsell initiatives as ways to offset check dilution.
• Eric Gonzalez (KeyBanc Capital Markets): Asked about the recurring nature of inefficiencies from new Keke’s openings. Verostek explained that these inefficiencies are expected to diminish as new units mature, typically over the first 12 months.

Catalysts in Upcoming Quarters

In future quarters, the StockStory team will monitor (1) the effectiveness of ongoing value promotions in sustaining traffic growth, (2) the trajectory of commodity cost relief, particularly for eggs, and (3) the rollout and impact of Denny’s new digital loyalty platform and continued restaurant remodels. Additionally, the pace of Keke’s expansion and the ability to improve profitability at new locations will be important signposts for tracking execution on growth and margin targets.

Denny's currently trades at a forward P/E ratio of 7.8×. Is the company at an inflection point that warrants a buy or sell? Find out in our free research report.

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