Denny's Corp (DENN) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Denny's Corporation Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Curt Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Thank you, Kyle, and good afternoon, everyone. We appreciate you joining Denny's Second Quarter 2022 Earnings Conference Call. With me today are John Miller, Denny's retiring Chief Executive Officer; Kelli Valade, Denny's Chief Executive Officer and President; and Robert Verostek, Denny's Executive Vice President and Chief Financial Officer.

Please refer to our website at investor.dennys.com to find our second quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on the call today. This call is being webcast, and an archive of the webcast will be available on our website later today. John will begin with some opening remarks, followed by a business update from Kelli. Robert will then provide a development update and recap our second quarter financial results before commenting on our guidance. After that, we will open it up for questions.

Before we begin, let me remind you that in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10-K for the year ended December 29, 2021, and in any subsequent Forms 8-K and quarterly reports on Form 10-Q.

With that, I will now turn the call over to John Miller.

Thank you, Curt, and good afternoon, everyone. I want to thank you for joining our second quarter 2020 earnings conference call, which also happens to be my last before I officially retire and fully dedicate my time and energy as a Denny's Board member. And it has been a pleasure working with each of you, our analysts, and we appreciate your coverage of Denny's. And I've been blessed with the good fortune of serving alongside our restaurant teams, franchisees, corporate support functions, leadership team and Board of Directors during this summit, and I have literally cherished every moment.

Denny's is a very special place to me. It's led by a talented team with a solid foundation of enduring principles, unwavering determination and a relentless focus on serving our guests, our franchisees and our shareholders, and we truly love feeding people. I am confident this brand will continue to prosper for many years to come under the thoughtful leadership of Kelli Valade. And with 30 years of restaurant industry experience in multiple executive leadership positions, she is more than well prepared to not only drive this resilient brand forward, but also to accelerate our growth with the support of an amazing team behind her. It's now my pleasure to turn the call over to Kelli Valade, Denny's Chief Executive Officer and President. Kelli?

Thank you, John. I know I speak for the entire dining family when I wish you the absolute best in your well-deserved retirement. You'll be missed greatly, but we look forward to still benefiting from your wisdom and experience through your continued role on the Denny's Board of Directors. In my brief time so far at Denny's, I've been incredibly impressed as I've met so many passionate, caring and talented team members, operators and franchisees. It's obvious they're the reason this iconic brand has prospered for nearly 70 years. As I settle into my new role, let me express my confidence in the current strategies already in place as well as the benefits I believe will derive from the newly acquired Keke's Breakfast Cafe. Quite simply, I believe Denny's is poised for a bright and prosperous future and I'm thrilled to be working here alongside such an amazing team.

Turning to the second quarter, Denny's domestic system-wide store sales increased 2.5% compared to 2021 and increased 1.8% compared to 2019. In terms of the monthly cadence, April started off strong as gas prices began to moderate from their initial peak in mid-March, but in mid-May, the industry and Denny's experienced softer guest traffic as multiple inflationary pressures conversed and weighed on both consumer confidence and consumer sentiment. Once again, the resiliency of the Denny's brand persisted and our sales relative to 2019 outpaced the Black Box family dining index during the quarter by 40 basis points. Even more encouraging, our stores operating 24/7 outperformed the BBI family index by over 700 basis points.

I want to reiterate, we are a 24-hour brand, and this remains a significant tailwind as demand for the late-night dining occasion is ever present, and 24/7 restaurants are consistently outperforming limited hour restaurants by mid-teen-digit sales comps relative to 2019. Notably, during the quarter, we continued making steady progress on this initiative, and we're actively working with our Denny's Franchise Association. Our new approach is to accelerate our return to 24-hour operations over the coming quarters.

Staffing still remains a primary barrier to accelerating this progress. However, both turnover and wage rate growth have begun moderating recently within the industry and at Denny's, this is definitely encouraging. We also recently launched a unique and differentiated hiring campaign called Bring Your Bestie to Work. This clearly resonated and is working as evidenced by gained media impressions, increased applications and most importantly, improve staffing in both company and franchise restaurants.

Turning to our menu and advertising. We are committed to a clear Barbell strategy of offering high-quality products and a reenergized focus on relative value offerings, which has been and will continue to be a competitive advantage for Denny's. During the second quarter, our media messaging was balanced between the limited time holla back burger and our new endless breakfast promotion. This compelling offer was not only consumer friendly, but also operationally efficient while appropriately managed commodity inflation with protein upsell opportunities. And to remain top of mind for our consumers facing inflationary pressures, we are now featuring Summer Slamcation, including endless breakfast, along with our popular Super Slam starting at $6.99. And the good news, this is driving encouraging traffic trends as of late.

Turning to off-premise. Sales have remained strong at approximately 21% of total sales compared to the pre-pandemic trend of 12%, which far surpasses the family dining index. Related to this, the performance of our virtual brands has also remained very consistent and highly incremental, representing 3% of weekly sales. This compelling -- we're also excited to announce that we are expanding the reach of the meltdown, formerly a DoorDash exclusive to multiple delivery partners during the back half of the year. This expansion provides greater upside potential for sales from our already strong virtual business.

I'd also like to touch on 2 of our strategic initiatives: kitchen modernization and cloud-based restaurant technology. The new kitchen equipment has been installed at approximately 50% of our domestic units, and we expect to be substantially complete with this role by the end of the year. And our new cloud-based restaurant technology platform is currently in the beta testing phase. We're receiving great feedback from test stores around ease of use and excitement around future enhancements. This implementation is on schedule to be substantially rolled out to all domestic locations by the end of 2023. Both the kitchen and technology platform initiatives are expected to enhance the guest experience and drive operational efficiencies with the former also providing the ability to further enhance our menu offerings across all dayparts.

Turning to our recently closed acquisition, we are delighted to welcome Keke's team members, franchisees and suppliers to the Denny's family. This is an exciting opportunity to participate in the fast-growing A.M. Eatery segment through a complementary brands. We believe our experienced team and track record as a model franchisor can develop Keke's across multiple states with the goal of becoming the A.M. Eatery franchisor of choice.

In closing, I want to reiterate how excited I am to be a part of this iconic brand. Denny's has a solid foundation, significant competitive advantage and many opportunities on the horizon. Most notably, we have an exceptionally talented and tenured management team. We have a dedicated and tenacious group of franchisees. We have sales upside as we migrate back to 24 operations. We have sound investment strategies providing compelling shareholder returns, both today through our share repurchase program and in the future with our strategic investments.

And lastly, we now have a momentous opportunity to expand our business into the fast-growing A.M. Eatery segment. I truly believe our best days are yet to come, and I'm thrilled to be a part of this great brand.

With that, I will turn the call over to Robert Verostek, Denny's Chief Financial Officer.

Thank you, Kelli, and good afternoon, everyone. I will begin by providing a development update and a review of our second quarter results before sharing additional details around the Keke's acquisition and guidance comments.

Starting with our development highlights. Franchisees completed 7 Heritage 2.0 remodels, and we completed 4 company remodels during the second quarter. Additionally, franchisees opened 4 new restaurants during the quarter, including 1 international location in Canada.

Moving to our second quarter results. As Kelli mentioned, our same-store sales growth in Q2 was 2.5%. This growth came from a 10% increase in guest check average, which was comprised of approximately 3.5% carryover pricing from the prior year, over 3% pricing taken in the current year and approximately 3% of product mix benefits.

As highlighted in our Q2 earnings investor presentation, domestic average weekly sales for Q2 were approximately $36,000 compared to $34,000 in the pre-pandemic second quarter of 2019. This represents a 5% increase in average weekly sales compared to 2019, whereas the same-store sales only increased 1.8% relative to 2019. The variance between these 2 metrics demonstrates that while our system portfolio is smaller than it was 3 years ago, it is also generating higher average weekly sales as lower volume restaurants exit the system.

Franchise and license revenue increased $7.3 million or 12.4% to $65.9 million. Royalties and advertising revenue increased by $1.6 million and $900,000, respectively, due to a 2.4% increase in domestic franchise same-store sales for the quarter. The $5.7 million increase in initial and other franchise fees primarily resulted from the recognition of revenue from the sale and installation of kitchen equipment. However, the revenue recorded related to the sale of equipment has an equal and offsetting expense recorded in other direct costs. The $1 million decrease in occupancy revenue primarily resulted from lease terminations.

Franchise operating margin was $30.6 million or 46.4% of franchise and license revenue compared to $29.9 million or 51% in the prior year quarter. This margin dollar increase was primarily due to the improvement in sales performance at franchised restaurants. I would like to note that while franchise margin dollars were not impacted by the kitchen equipment rollout, the franchise margin rate was reduced by approximately 450 basis points. This was due to revenue recognition accounting related to the kitchen equipment rollout during the quarter. More information can be found in our 10-Q. However, we expect this margin rate impact to persist throughout the remaining rollout of kitchen equipment, while still having no impact to franchise margin dollars.

Company restaurant sales of $49.2 million were up 3.4%, primarily due to the improvement in transactions from limited operating hours in the prior year quarter and an increase in guest check average. Company restaurant operating margin was $4.3 million or 8.8% compared to $9.8 million or 20.5% in the prior year. This was primarily impacted by approximately $2.3 million of unfavorable legal reserve adjustments or over 450 basis points. We consider this a highly infrequent occurrence. Excluding this item, we would have achieved between 13% and 14% company restaurant operating margins.

Additionally, we experienced commodity inflation of approximately 18% and labor inflation of approximately 8% during the second quarter. We continue to monitor this inflationary environment in collaboration with our franchisees while remaining thoughtful with regard to pricing strategies and decisions. So roughly 7% of pricing that I mentioned earlier included 1% of pricing the system took in late June. We will have an opportunity to make additional adjustments as needed with our fall core menu. We have taken sufficient pricing to cover the inflationary pressures within our margins on a pennies basis per guest, and we are keenly focused on driving traffic through our well-established and industry-recognized value positioning.

Total general and administrative expenses were $16.6 million compared to $17.5 million in the prior year quarter. This was primarily due to a benefit from deferred compensation valuation adjustments and a decrease in corporate incentive compensation, partially offset by an increase in corporate administrative expenses. The change in corporate and administrative expenses was primarily due to compensation increases in the current year, coupled with temporary cost reductions related to the COVID-19 pandemic and tax credits related to the CARES Act, both in the prior year.

As a reminder, share-based compensation expense and market valuation changes are non-cash items and do not impact adjusted EBITDA. These results collectively contributed to adjusted EBITDA of $17.2 million. The provision for income taxes was $7.8 million, reflecting an effective income tax rate of 25.3%. Adjusted net income per share was $0.11 compared to $0.18 in the prior year quarter. During the second quarter, we generated adjusted free cash flow of $6.6 million. Our quarter end total debt to adjusted EBITDA leverage ratio was 2.4x, and we had approximately $199 million of debt -- total debt outstanding, including $187 million borrowed under our credit facility.

During the quarter, we took advantage of a dislocation in our share price and allocated $37.4 million to share repurchases. On a year-to-date basis, we have allocated $49.2 million to repurchase approximately 4.7 million shares. As a result, at the end of the quarter, we had approximately $168 million remaining under our existing repurchase authorization.

Now I would like to provide some additional comments around Keke's Breakfast Cafe, which we acquired in July for $82.5 million. The transaction was settled in cash and financed through additional borrowings under our revolving credit facility. With the closing and as previously communicated, we are adjusting our target leverage range to be between 2.5x and 3.5x of our adjusted EBITDA, which results in our current debt leverage ratio being near the midpoint of our range post transaction.

Let me now take a few minutes to expand on the business outlook section of our earnings release. Given the ongoing market and global volatility, we are providing the following estimates for our fiscal third quarter ending September 28, 2022. We anticipate Denny's third quarter domestic system-wide same-store sales to be between 0% and 2% compared to 2021, which represents a similar improvement compared to 2019 and takes into account Denny's seasonal patterns.

Our expectations for consolidated total general and administrative expenses are between 17.5 and $18.5 million, including approximately $2 million related to share-based compensation expense, which does not impact adjusted EBITDA. We anticipate consolidated adjusted EBITDA of between 19 and $21 million. With regards to inflation, we are seeing early signs that commodities may have peaked, and we expect commodities will begin to ease during the third quarter. Additionally, we believe we will continue to see wage rate inflation to moderate. To be clear, these estimates include a limited benefit related to Keke's Breakfast Cafe due to a partial quarter of adjusted EBITDA contribution being offset by upfront transaction costs.

In closing, while there is certainly a level of volatility within the macroeconomic environment, we are excited about our bright future with opportunities to unlock additional shareholder value through extending our operating hours with improved staffing, leveraging value messaging to drive transactions, elevating the guest experience through Heritage 2.0 remodels, growing the collective geographic reach of Denny's and Kiki's locations, enhancing efficiency with an upgrade of products through updated kitchen equipment and creating a more seamless digital experience through restaurant technology upgrades.

Our model generates a considerable amount of adjusted free cash flow, which will be enhanced by the acquisition of Kiki's, and I want to reiterate our commitment to return capital to shareholders through our successful share repurchase program. I also want to thank our dedicated Denny's family, inclusive of both Denny's and Kiki's Breakfast Cafe franchisees and team members who have continuously remained focused on serving our guests while managing the business needs.

Finally, I want to express my sincere appreciation for John's service and how just excited I am to support Kelli and her efforts to drive our business forward.

That wraps up our prepared remarks. I will now turn the call over to the operator to begin the Q&A portion of our call.

(Operator Instructions) We take our first question from Michael Tamas with Oppenheimer.

First, John, it has been great working with you and hope you enjoy some more free time going forward. And Kelli, welcome and look forward to working with you as well. The first question is really just on the third quarter sales guidance, and I was hoping you could sort of unpack that a little bit. You mentioned that there's more normal seasonal patterns in your guidance this year.

And I think the industry is sort of seeing it this year for the first time in the last couple of years. So can you maybe talk about what your average weekly sales look like normally in the third quarter relative to, say, the second quarter? So we can sort of understand that. And then secondly, tied to that, can you just talk about the consumer environment, any changes in frequency or spending habits that you're seeing, so we can kind of understand the sales guidance a little bit more?

Yes. Let me take the first part of that, Michael. Great hearing from you. So relative to Q2 to Q3, sales do trend down is that back-to-school time frame. They're off probably -- I'm looking at the chart that we posted in the investor presentation, less than 1%, but it is on a seasonal basis, adjusted, it is down Q2 to Q3. I think the important part with regard to Q3, and we're starting to see this, we've talked about it in the script, but we are moving back against value. It's deeply embedded in our DNA, something we are really good at. You can see it within some of the Slamcation that we launched early in July. We are seeing the results of that beneficial results of that.

I'm not going to talk about that specifically, but we are seeing the benefits of that. So we look forward to going more deeply into that in Q3 and think it will go a long way. We will also leverage, Michael, in Q3. We really believe and we can talk and unpack this a little bit more about 24/7. We're going to work with our franchise association and figure out how to really accelerate getting our franchisees back to 24/7 as quickly as possible. There clearly are benefits in doing so. And both of those, beyond all of the other things we've mentioned in our scripts, should pay dividends in Q3 and beyond, very significant tailwinds.

With regard to the consumer, Kelli?

Sure. Yes. And thank you, Michael. I appreciate the question. I think as it relates to the consumer and the guidance we gave, it's really about we've seen that for a while, the consumer really was even in this inflationary environment, it's been pretty resilient. However, to date and as of late, we also can see broad industry data that points to the consumer has kind of depleted their savings and their surplus. And so that's what's kind of baked into there. We've seen large retailers talk about increased discounts with excess inventory.

And in our industry, you just see more value offers and more of those coming. So what we are doing really does play to that sweet spot, as we've mentioned a couple of times and Robert just did. We think you'll see more of that. We know it works for us. We know this is a place where we play and we know our guests count off for that. So we are focused and have our heads down really on what's most important in front of us. And again, we mentioned seeing some traction, but there's still so much volatility out there in the consumer mindset.

That was a great overview. And Robert kind of mentioned part of my next question, but you said we're going to try some new approaches to increase store hours. And I think it was either last year or the prior year, you tried to use some royalty abatements to entice franchisees to be open for longer hours. So what other options do you think are on the table or what you would explore with your franchisees to try to push them towards doing 24/7?

Yes, that's an excellent question, Michael. It was in Q4 2020, it was in hindsight being 2020, it was probably a little soon given the resurgence of the pandemic at that point in time. But it really is going to be a combination of push and pull, right? We are going to partner with our DFA Board, our Denny's Franchise Association Board. We meet with them on a very routine basis. And they are really walking lockstep with us. They are -- they acknowledge the benefits of 24/7 with us. There is no pushback with regard to that. So you may see a combination of various incentives that potentially could come back into the framework to move people along and also holding people accountable to what their franchise agreements require them to do.

And with regard to that, the other approach that we will need to focus upon and Kelli mentioned it within script is getting these restaurants staffed. And this concept of Bring Your Bestie to Work, that has resonated. It was quite simple in ideation, but quite effective so far in bringing additional employees into our restaurants. Staffing is starting to improve. We have seen that in our staffing levels. And that has been the key talking point from our franchisees.

Again, it has not been a reticence to move to 24/7. It's just getting staffed for that daypart. That is improving. We will continue to work to improve that. And I do believe, I'm confident that performance of our 24/7 units, Kelli called it out, there's just a double-digit difference with regard to the performance of those units. In fact, one other key statistics, our -- the only positive daypart versus 2019 is the late-night daypart, isolated to the 24/7 units. So there is a lot to really unlock here.

We take our next question from Nick Setyan with Wedbush Securities.

And Kelli, I look forward to working with you as well. I just want to kind of unpack the margin trajectory, if I may. First, it sounds like just doubling down on value a little bit starting in July. You mentioned that it's working a little bit. Does that mean mix is going to be negative in Q3 and pause up on transactions potentially less negative?

Nick, that's spot on. Good to hear your voice. That's the way that works, right? You've got to overcome, the transactions have to overcome the decline in mix, right? The value of mix is higher. That would suggest the overall GCA, it will go a little bit lower. But what we have seen so far in July is that we -- just with one item with the Slamcation and being on air with it, we took our value instance up 3%, and we are seeing the traffic benefits from that, that would more than offset the cost. We will, as you know, getting those sales higher, Nick will leverage those fixed costs and drive margins higher. We don't view that a value strategy is a negative to margins.

In fact, we believe that it will drive margins higher. Our goal in -- maybe a slight repositioning here from what we would have said, well, we said 3 years ago coming out of our last refranchising. But we do believe that mid- to higher teens is the place that we can ultimately get these company operating margins back towards. And we do believe that it will be through driving traffic. And we are -- this is in our sweet spot, Nick, this is what we do, right?

We are -- we have been known for value. We did this historically with regard to the $2 $4 $6 $8 value menu coming out of the Great Recession, a little history. That drove over 6 points of traffic back at that point in time in a profitable way. So we -- this is right, again, in our sweet spot to do this, and we believe that this is what the consumer needs right now. And I -- and we are better tooled and equipped to do this than other brands.

Sure, yes. I mean it was great to see the traffic trajectory gets better. And is it fair to assume that menu pricing stayed at around 7% in Q3?

I think that's probably fair, Nick. I'd say not necessarily because we're going to take more pricing. It's just already in the system that way. So I think that's the right range to think about.

Got it. And then you mentioned potentially commodities have peaked, labor, the wage rate may have gotten a little bit better. Can we go into that a little bit more? Where are you seeing labor inflation in the second half? And then potentially what inflation through the commodity inflation looks like in Q3 and Q4 or just the second half in general?

Yes. Very fair question. What we've seen so far with our wage rate growth, let's take that one first unpack that. We have seen sequential decline in that 10% up in Q1, 8% up in Q2, really not guiding to Q3, but we do believe that there are -- the bias in the environment right now from all of the benchmarks that we are hearing would be for that to trend in that similar fashion. The other piece with commodities, we are 15% in Q1. That was 18% in Q2. Like me, you probably would suggest that's unprecedented. We probably heard that word quite a bit here throughout that earnings season. But we suspect that in Q3 that we will see that start to abate with regard to beef, pork and dairy first.

And then Q4, with eggs, poultry and cooking oils kind of following. So I think you'll see a sequential improvement from Q2 down to Q3 into Q4. We do -- our suggestion is beef may be temporary given that that's a herd stock reduction. But the avian flu is -- thankfully did not persist for a long period of time. We're rebuilding flocks, which will benefit multiple categories within some of the higher categories within our product mix environment. So I think that trending will be down. Again, we haven't guided specifically to those numbers, but the direction clearly, we'll have a downside bias as we move through the balance of the year.

Got it. And just next question, how to think about Keke's as we start putting that into our models. First, what kind of unit growth or additions do we start to think about in the second half in Keke's on both company and franchise? Second, just remind us what AUVs and the margins look like at Keke's in terms the company-owned stores?

Yes. So yes, very fair. So let's talk about the AUVs first. So the AUVs are approximately $1.9 million. That's in that limited A.M. Eatery time frame. So very robust. I believe going back to what we were saying with the Q1 earnings call that our margins were 20%-ish or so, right in that ballpark. So these are very robust margins, upper teens to 20%, I would say there. With regard to the unit openings, we haven't really guided longer term. I do believe we said with the Q -- the Q1 earnings call that we had 4 to 5 total openings in the pipeline for the year. So a few more. I think we have 2 open to date.

What we are really focused upon now and what will make Keke's a huge success for us is making sure that we are getting ramped up so that the '23 and '24 openings trajectory accelerate through that. So -- and you can see that the volumes, the margins would point to the fact that if we pair that with our ability to train and bring in our new franchisee developers, whether that be us, the additional franchisees outside of the Keke's systems or even the Keke's franchisees, it's set up. And this will be, again, a huge win for us.

And the current franchisees are very, very excited. Steve Dunn, our Chief Development Officer, has been talking to many of them. They are very excited to develop this brand further and see this as an unlock for us. They don't see this as a big corporate entity kind of trying to gobble them up. They see this as an unlock to future development for them. Ultimately, we said in the Q2 -- in the Q1 release that it would be $6.5 million to $7 million of EBITDA. That was what we based that purchase price upon, and we'll just grow it from there with the incremental units.

Yes. I would add -- and I appreciate the question, Nick, I look forward to working with you as well. I would add -- spend some time in those restaurants. I spent some time with those franchisees. We talk development. They are excited, as you just heard from Robert. And hopefully, you can hear from us, the plan now really let keep Keke's be Keke's, learn about it, we're learning about this brand. But to keep the brand unique. It's got a cult-like following. It's really exciting. The AUVs are exciting and a strong business model. So we've got something really special and the goal will be to continue to really maintain and enhance what is special about them, but there's a lot of excitement, and we've got a great plan in place to go forward.

(Operator Instructions) We take our next question from Jake Bartlett with Truist Securities.

I wanted to circle back again on the 24/7 operations. In the last quarter, you disclosed or you mentioned that it was about 50% of the stores. What has that grown to in the second quarter? My math suggests about 53%. But if you can just kind of confirm. where you are in that, so we can see the trajectory. And then you mentioned kind of one of the upscale there is staffing. And on the last call, you said that limited hour stores were about 80% staffed versus pre-COVID levels. And so if you could just give an update on whether that 80% staff (technical difficulty), that would be helpful.

Jake. Yes, the 24/7, we are really excited about that being a tailwind for us. I think at the end of the quarter, we were in the 53%, 54% range. I'm looking at Curt and Kelli to help me with that. With regard to the staffing of the limited hour units, we're looking in our detail. We were -- I think, at that 80% area now, she's up a little. So we're probably in that 80% to 85% range. But what we're seeing. It really -- we have seen the green shoots of things that are working for us, right?

That it was a placement. It was a simple, Bring Your Bestie to Workplace math that really started to drive people into the units. And it really is that simple, right? It's not a grand idea, but you've got to execute it, right? You've got to be willing and dedicated to do it. There's a way to get this done. And we are hearing that throughout the leadership in the franchise community now that they -- we are beginning to see the unlock. So we will partner with them and help move them along with regard to that.

Great. Great. That's helpful. And then the next question is on value. And nice to see the Super Slam, you will come back, and it seems like it's doing the trick in terms of driving some incremental traffic. My question is about the $2 $4 $6 $8 menu and promoting that nationally. I think over the last couple of quarters, you've you'd expect a little hesitancy to get too aggressive until staffing was in a healthier spot. So the question is, what is the appetite and the ability to kind of get even more aggressive in terms of that $2 $4 $6 $8 menu as we're successful kind of coming out post recession?

Yes, Jake. So with $2 $4 $6 $8, it was -- it's somewhat, we think probably getting towards the end of its useful life. But it doesn't mean that we won't be going much more deeply into value. Again, I mentioned that we think that's where -- what our consumer needs from us. We are really good at delivering that for them in a profitable way for us. And I think that the idea of value may be changing, right, what you pay for what you get. And so a $2 price point may have served a purpose a decade ago. I'm not saying that value is now a $15 plate. This will be price point oriented. But I think we may have moved beyond that. It doesn't mean that we don't have a significant pipeline of ways to offer value into our system right now.

Yes, I think -- and the only thing I'd add, Jake, and thank you for the question, in my limited time, I think this is about what is right today. And that as Robert said, it may have run its course. And it's not that we are doing this in lieu of a more aggressive and more assertive offer. We think this is a great offer with high-quality products and products we know our guests love. And we have seen -- you have seen value propositions change over the last few years, most definitely. So this is the right thing, right time for the Denny's brand and our guests.

Great. Great. (technical difficulty) to my next question. We have a history lesson in the form of time focusing on the company. But the great recession was kind of a big pullback. Denny's same-store sales did -- were pretty meaningfully negative. So the question is, what has changed now? I guess I would have thought maybe one thing has changed, $2 $4 $6 $8 menu. But in terms of your value proposition and how you like to better positioned now than you were then, why we could feel little more confident that you'll withstand whatever is coming down the pike here better. How would you describe that in terms of how you're better positioned now than you were back in 2007, 2008?

Yes. That's a history lesson for sure. But I think I'll try to draw on my 23 years here. So what's different? In 2007, 2008, as we were heading into that great recession, the $2 $4 $6 $8 value menu didn't exist, right? It just didn't. So and we knew we needed something like that. And it was really developed during that time frame. And it was on the tail end of that. It was 2010 -- April 2010 when that was launched. So one thing that has specifically changed is we know how to do value these days. It's a deeply embedded equity, and we're not behind the curve.

We're not searching for that platform like we were during the Great Recession. We -- it's already developed. You could see it coming through the Slamcation. You can see it in the other platforms that we have utilized here over the last 4 to 6 weeks. So we're ready and willing to move into it. We were in a very similar place to many brands coming through the pandemic, right? We were dealing with closed dining rooms. We were dealing with inflation. We were dealing with consumer that really wasn't overly price-sensitive for a period of time. That is clearly not where we are moving into Q3 of 2022. But where we are now is a value-oriented consumer for us, and we have that institutional knowledge already in place.

We do not have to develop that. Some of the other things that are different these days as we have methodologies to deliver to the consumer in ways that we did not have available a decade plus ago. We have -- the 21% off-prem business that Kelli mentioned that, that was 12% prior to the pandemic and even less than that in 2007. So we have different vehicles in ways to deliver to our consumers. So we are far more tool to whether, whatever downturn may come this way. And we are clearly on the forefront of trying to limit any impact that, that might bring.

Great. That's really helpful. My last question [relates to if you can] give a little more color on Keke's and how we should be modeling that? And if you could maybe give us what -- I do the math, and I have trouble getting to the EBITDA contribution, given the AUV and the restaurant margin that was given. And I'm wondering whether the AUVs of the 8 company-owned stores are significantly higher than that 1.9 million (technical difficulty) offset that helps in terms of maybe royalty rate. We're going to have to build this in and especially with the company side, it really just going to swing the (technical difficulty). Any kind of greater detail there would be really helpful?

Yes. So let me peel back that onion a little bit further. We do have some higher volume units within that 8 unit company portfolio, and those higher volumes even go with higher margins, right? They go -- volume does help a margin rate. So I would suggest that they are a little bit higher volume, a little bit higher in margin. The other side of that, Jake, with regard to the royalty, and I'm not sure if we shared this, but this would be in the FDD. The royalty rate with regard to the existing units that are in place, the 44 franchise units is a 6% royalty rate. So it's a higher royalty rate than what you would get from a 4.5% Denny's. So I'm not sure if you knew that or had that already within your modeling, but that is the math that we're working with. So a 6% royalty rate may bridge the gap, may not, you may have already had that.

No, that is helpful. I appreciate maybe lastly, the third quarter, you mentioned a minimal impact from Keke's. But I would think that transaction costs would be maybe considered onetime. Just any other detail there and how we should kind of build in the contribution of Keke's into EBITDA?

So I think where I would point you back with regard to that, if you go back to our Q1 release when we announced this transaction, we talked about $6.5 million to $7 million contribution. So that would lead you to a $1.5 million to $1.75 million contribution per quarter from Keke's once you get beyond the transaction cost, which will impact Q3. And we will clearly grow it from there. The success of this is really keeping ekes not in any way [denyizing] it, keeping it what it is, making sure that we onboard them, learn from them, help build an infrastructure to grow them so that as we move into '23 and '24, we accelerate that unit growth. But right now, the transaction was predicated upon $1.5 million to $1.75 million in EBITDA per quarter.

We take our next question from Todd Brooks with The Benchmark Company.

And John, I want to wish you the best of luck and Kelli, I certainly want to welcome you aboard as well, a change for both of you. So congrats. Robert, a few more questions for you here. Are you ready?

Yes, absolutely, fire away.

On the Keke's side, if you look back historically, what's the most units that they opened in the year? You guys have talked about keeping the operations relatively separate. So I want to understand what they're geared towards for kind of a peak openings in the past?

Yes. With that infrastructure, Todd, right, and it was -- and it's what we really kind of bring to the table, where our expertise lies. Their infrastructure as is probably within the 4 to 6 unit range at max through that. But again, they -- when we talk to them, right, when we talk to their franchisees, when Kelli actually -- she was actually down there visiting with the franchisees, it was, hey, we're looking forward to this. We want to expand. We know we need training. We need help with site selection so on and so forth. And so we're going to bring that to the table. They have doubled the number of units since 2016. So it's gone from 26 to 52 over that time frame. So it does imply 4 to 6 a year.

But that rate, if we don't accelerate that rate into the future, Todd, this is not going to work for us. We have to get significantly beyond that. We are going to utilize their franchisees. We're excited to grow. We are going to use the existing Denny's franchisees. We talked before we made -- announced this acquisition under very strict NDAs. We talked to nearly a dozen of them. And every one of the franchisees, our existing Denny's franchisees said, "Yes, I'm really curious about that." Most that they would be interested in opening. Now once said, what are you doing? Everyone said, we get why you would do that, and we're not afraid of that at all.

And then we have a very talented development team that can go source additional franchisees who are not in either system. So not only will we leverage that group, we will have a 3-pronged approach. We'll put in place the right training resources, we're put in the right development resources, and we'll move that beyond the 4 to 6 historical. They were able to do that in a very grassroots way. The owners actually told us that they really didn't solicit any new franchisees or franchise units. It was people just coming to them saying, "Hey, can I open one of these?" So it's going to be a different approach to this while really keeping the heart of what makes Keke's great in place.

How long did you take to stimulate that, whether it's cross-selling into your franchisees or levering your site selection capabilities, your training capabilities. I mean, would you I know you're not guiding to '23 unit growth yet, but would you expect to see a step up from what they've done historically? Or is there a digestion period that we need to think about when we're modeling Keke's?

I think there's a little bit of both, Todd. Frankly. I think there is a little bit of digestion. We're still learning them. We don't want to upset them in any way, shape or form. They're great as they are. We just want to take that greatness and share it with more people. So we'll need to digest and understand what truly how to grow them in a way. But I'm not telling you it's going to take 2 years either. I think you will see a stepped-up rate of growth in 2023. I just don't think that, that will be the peak growth either. I think that will continue to accelerate through '24 and beyond also.

Fair enough. And next question I had. If you look at kind of value incidents as far as menu mix, I know part of it is having more offerings now. They can address a need for value. But maybe entering the quarter versus exiting the quarter, how much incidents increase did you see in value as a percent of mix?

Yes. So let me point you in directions as opposed to giving you specific numbers. It would have been low double digits kind of entering the quarter. And with the one plate alone, the Summer Slamcation in that place, we moved it by about 3 percentage points in a very short period of time. We actually don't feel like that's enough. We want to drive it beyond there, drive transactions in a profitable way. So we'll look to go beyond that. I would tell you at the peak of our value, it was in the 20% range. That would be -- you could go all the way back to the -- when we launched into $2 $4 $6 $8 a decade ago. And that would be somewhat of a peak as we utilize that over the course of that decade also, not guiding that, that's where we're going to get. But again, just kind of pointing you to a low double-digit number that we've moved 3% in July, and we will look to leverage further into Q3.

That's great. And then, Kelli, a quick one for you, if I can. On the discussion about returning to the operating standard of the 24/7 model, it seems like it may be a little less carrot and a little bit more kind of enforcement and holding franchisees to the responsibility of operating in that model. Just I'm trying to get a sense of the slope for what -- I mean, if we increase 3% of the base that got back to 24/7, that's kind of a slow pace to get back towards that 80%, 90% level. So how do you see shifting maybe the slope of that curve of returning to 24/7?

Yes. It's a huge priority as you can probably take away from all the conversations we've had. And I will tell you, it's pushing full. It's both, right? It's a balance. It is not just the stick. It's a carrot, there's the incentive part of it. And we are -- I have been a part of so limited time here, but actively engaged in this with the head of our DFA board with other franchisees and having this conversation. I do think the conversations are shifting in terms of -- I think there's an inflection point here around the staffing, right? So we've distilled it down to what else can we do, what are the tools, resources, expertise do we have?

We've got company restaurants that we can stand up -- literally stand up on this and say, this is the difference in sales. This is the difference in their staffing numbers. And therefore, we got to get there. So they absolutely agree. And again, the plan that we will put in place there's an urgent plan. We've even got it down to the kinds of numbers we'll want to see per week per month. This is not over several quarters, but yet a lot of urgency and a lot of focus between us and those franchisees right now. So it's urgent. And I think doable -- I think doable. I think they're tired of looking at the same situation and the inflationary pressures are -- they all feel that, and they want those solutions that we've now got ones that have proven to work for us.

Okay. Great. And one final follow-up on that. I know the limited our stores were kind of in that 80% staff range. It sounds like maybe some modest improvement in the second quarter, which is below some other full-service dining peers that have gotten back to fully staffed, 2 parts of the question. One, what level of kind of pre-pandemic staffing do you need to be to open in the 24/7 model confidently?

Are you trying to get back to 90% of those levels? Do you need to go all the way back to 100%? So I want to understand how far away some of these limited our stores are? And secondly, just the pace of hiring improvement relative to some peers, you talked about some slowing in the wage inflation pressures. Does this problem gets solved at all by investing some more in wages to grow staff? And I'll leave it there.

In regards to your comment or your question about wages, we look at this. We have a very talented compensation group. It's headed up by our VP of Comp and Ben. And we look at literally every market that we're in, and this is a company and its limited market compared to franchisees. And we benchmarked all of those -- every single job code across every DMA, and we believe that we are competitive. So I'm not -- I don't think that we are dislocated with regard to what we are paying our employees. We don't have as much visibility to be very transparent to our franchisee system. And frankly, we shy away from that a little bit and look to use third-party consultants just to joint employer rules. We look to use third-party consultants to help them with that question. But from the company perspective, I wouldn't say that this is a pay issue for us. And that would vet out, frankly, Todd, with regard to the company portfolio, we have 65 units, and I think it's 1, maybe 2 units that has not bridged the gap to 24/7.

So Todd, it's Robert again. With regard to what we have seen with our 24/7 units compared to pre-pandemic, it would be about -- we're at 100%, right, versus the pre-pandemic level. To contextualize that a little bit, think of about 50 employees per store is about what it is. So we -- when you go across all of our various categories of individuals, that will be cook, hostesses, servers, server assistance. The limited hour units are in that 80% to 85% range. So you're thinking that they are compared to the full 24/7 stores, they're probably down somewhere between 7 and 10 employees. So while that 20-point difference sounds really large, we're looking for like 7, 8 employees to get back to that full staff level. And the candidate flow coming from that initiative that I talked from would help bridge that gap pretty quickly with regard to that.

(Operator Instructions) We take our next question from Eric Gonzalez with KeyBanc.

And welcome, Kelli, looking forward to working with you. If you could talk about maybe the comp cap between 24 hours -- 24-hour units and the limited hour units? And then just on the off-price business, it seems like the delivery channel is really sticky, particularly the third-party. That's maybe not something you'd expect just given the high cost. So how do you explain this? And what do you think about the future as we potentially head to an economic downturn? And what do you know about these customers that are using the brand in that channel, that are reasons why that might be stickier than possibly carryout in abandon channels?

Yes. I'll take a stab at that. In terms of just what I have seen here and also just kind of looking at the industry and that stickiness question is a great one, right? Because we talk about this being an incremental guest, we absolutely believe that could be the case here. And I would just point to this is an area of strength for our brand and family dining, absolutely various strength. There aren't a lot of other players that have not only invested in the infrastructure. The technology infrastructure has helped us. It was in play -- a lot of it was in play before the pandemic. That cash strong position, all that we talked about in terms of this model helps to move that quickly where others could not and cannot continue to the same that.

And I also say, 2 virtual brands. The virtual brands and their sustained sales week in, week out is also a significant strength here. I think, look, the consumer has learned how to use this channel. They learned how to use the channel. We all believe they're incremental. And I think they will continue to modulate their behavior based on their needs. And so now we've got something where we know it's proven. We know it works and it continues to hold. I think you'll see that modulate if things -- if it's about flu season, I think people will say, "Okay, well, I can use that channel. I've got another way to find my way to Denny's."

And I think this will continue to be an area of strength that stickiness has not held for all brands from research that we see. But the way we've done it, the way we've gone about it, the continued way we leverage technology and plans for that in the future, I think, will help us here as well. But I think it's a trend obviously here to stay. And just the fact that full-service restaurants they've stayed in that low 20s versus what it was before the pandemic is promising. But us being where we are, I also think it's just a big strength.

And Eric, this is Robert. Going back to your question with regard to the comp differential between the 24/7 units and the non-24/7 units, I'm looking back at the last 5 quarters since Q2 of '21. The differential ranges between 15 and 20 percentage points. So it's massive. And the profitability follows that directly. It's a direct correlate as you might expect. And oddly, when talking to our franchisees, they go, we get it. We understand how much we're leaving on the table.

And now we're going to work with them even more closely to help bridge that gap, whether it be staffing or a little nudge with persuasion against their agreements, it's there for the taking and it's a huge differential. It's -- in the 24/7 units, it is positive. It's not just a negative to negative thing with the 24/7 units are significantly positive and significantly outpaced the balance of the family dining segment as measured against BBI.

And on those off-premise transactions, how much of that is coming from that late night, daypart, whether it be the virtual brands or just your traditional units, I mean, is there a big unlock there as you do staff up, is that really going to come from the off-premise business to a certain extent? We're trying to look through our data set here. It didn't stick out to us as we prepped up for the call. I think it probably has a disproportionate weighting towards off-prem, but not so much so that it would make a meaningful difference.

Thank you. It appears there are no further questions at this time. I'd like to turn the call back to your presenter for any additional closing comments.

Thank you, Kyle. I'd like to thank everyone for joining us on today's call. We look forward to our next earnings conference call in early November, during which we will discuss our third quarter 2022 results. Thank you, and have a great evening.

And this concludes today's call. Thank you for your participation. You may now disconnect.