Denny's Corp (DENN) 2021 Q4 法說會逐字稿

Good day, and welcome to the Denny's Corporation Fourth Quarter and Fiscal Year 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Curtis Nichols, Vice President, Investor Relations and Financial Planning and Analysis. Please go ahead, sir.

Thank you, Jeff, and good afternoon, everyone. Thank you for joining us for Denny's Fourth Quarter 2021 Earnings Conference Call. With me, today from management are John Miller, Denny's Chief Executive Officer; Mark Wolfinger, Denny's 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 fourth-quarter earnings press release, along with the reconciliation of any non-GAAP financial measures mentioned on this call today.

This call is being webcast, and an archive of the webcast will be available on our website later today. John will begin today's call with a business update. Mark will then provide some comments around operating hours, staffing levels, and development. Then Robert will provide a recap of our fourth-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 30, 2020, and in subsequent Forms 8-K and quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer. John?

Thank you, Curt, and good afternoon, everyone. I am incredibly pleased with the sales progression we've experienced early in the fourth quarter with domestic system-wide same-store sales increasing from 1% above 2019 sales levels in October to 4% above 2019 sales levels in November. We also experienced growth in all sales channels with on-premise sequentially growing nearly 3% and off-premise promotions contributing to over 5% of (inaudible) growth.

This reaffirms that consumer demand remains high through both thriving dine-in transactions when COVID case -- counts are normalized and the ongoing sickness of our off-premise channels. The full-service restaurant industry experienced same-store sales deceleration during the last 2 weeks of December due to the rise in Omicron cases and Denny’s was no exception. Additionally, we were impacted by the holiday mismatches during December with Christmas and New Year's falling on a weekend where we are typically at capacity comparing to a weekday in 2019 where we experienced greater upside potential.

The omicron variant impact continued into January as well. However, as cases have now begun to decline, our sales are gaining momentum once again. We also have a few tailwinds that gave us confidence in our longer-term outlook. With our latest investment in brand-wide recruiting, we have made it much easier for job seekers to apply for positions at Denny's restaurants, company and franchise through our new career website, and we are experiencing an increased candidate flow as a result. We are excited to offer opportunities for career growth and a love for serving people. This is exemplified by our recent recognition as one of only 2 restaurant brands in the top 100 most loved workplaces for 2021 by Newsweek and Best Practices Institute.

Additionally, the consumer remains in a generally healthy position right now despite inflationary pressures. While we continue to offer value items, guests are increasingly willing to pay for the full-service dining experience they have missed over the last 2 years. Turning to our recently announced strategic initiatives, we are progressing on the rollout of our new kitchen modernization initiative as well as our new cloud-based restaurant technology platform across the domestic system. And both of these are expected to enhance the guest experience and drive operational efficiencies while the kitchen equipment also provides the ability to enhance our menu offerings across all dayparts.

We have implemented our Heritage 2.0 remodel restart program, which generated mid-single-digit sales lift during the testing prior to the pandemic. We also have 2 new domestic development commitment drivers, our partnership with Reef for those kitchens and our upfront cash incentive for domestic development. These strategic initiatives, along with the management team dedicated to supporting our franchisees led to another prestigious award from Entrepreneur Magazine as the top franchise in our category.

I would also like to mention how proud I am of our brand and the amazing progress we have made with regards to diversity, equity and inclusion and we continue to give back to the communities we serve through our hunger for education scholarship program, our partnerships with No Kid Hungry and St. Jude's Children Research Hospital and our Mobile Relief Diner. In closing, the last 2 years have been unlike anything we have ever experienced. But I'm so proud of our teams and our franchisees for their commitment and dedication to this brand. The future ahead at Denny's is bright, and I'm so thankful to be a part of such a dynamic, innovative, and agile brand. With that, I'll turn the call over to Mark Wolfinger, Denny's President.

Thank you, John. I also want to reiterate how extremely proud I am of this brand for the recent awards and accolades, being recognized as 1 of only 2 restaurant companies on Newsweek's Best Places to work list, as well as the entrepreneur magazine's #1 franchise in our category, is truly remarkable.

Turning to our fourth quarter results. We continue to see improvement in our effective operating hours with approximately 72% of our domestic system operating on average at least 18 hours per day as of the end of December. This is a 10-percentage point increase from the end of the third quarter, resulting in 20 effective operating hours across the system. As John mentioned, persistent industry-wide staffing challenges continue to impact our effective operating hours. However, our human resources team has been very proactive in our hiring efforts and has made tremendous progress.

Hourly turnover at our company restaurants is consistently below industry benchmark, and we believe this is largely due to our comprehensive training programs and competitive wages. In fact, on average, when you include tips, our servers at company restaurants make 165% of the full state minimum wage, not just the tip credit minimum wage. Also, we now have 100% staffing in our general manager positions across all company restaurants for the first time since the pandemic began.

We believe that once we have the right leadership in the general manager position, other levels of staffing and key metrics improve in due course. This allows us to shift our focus to reminding both new and tenured employees why we were voted one of the best places to work and focus on our retention efforts. Additionally, we have developed a comprehensive document that shares our best practices for recruiting, hiring, and retention, which we have shared with our franchisees to help them succeed as well.

We estimate the domestic franchise restaurants operating 24/7 have achieved staffing levels similar to pre-pandemic staffing and limited our franchise restaurants operating at approximately 80% of the staffing levels they had pre-pandemic. However, we are encouraged to see applicant flow across the domestic system continue to run higher than our historical average and believe staffing levels will improve in due course.

Turning to development. Franchisees opened 7 restaurants during the fourth quarter, including 1 international location in Mexico. These openings were offset by 14 franchise closures, bringing our year-end unit count to 1,640. While John mentioned that we announced 3 new programs back in early January, I want to provide some additional color. The first is our Heritage 2.0 remodel restart program. During the early months of the pandemic, we deferred all remodel requirements in an effort to alleviate capital constraints.

With approximately 2 years of delayed remodels, we've extended the remodel cycle from 7 years to 8 years, and we've also worked with franchisees who have multiple remodels due -- to map out a more normalized capital spending expectations. Despite deferral, the compelling Heritage 2.0 returns drove franchisees to complete 3 models during the fourth quarter, and we also completed 3 company remodels. Our second announcement was a new development agreement with Reef, providing us the ability to launch ghost-kitchens in underrepresented metropolitan markets and use them as a testing ground for new consumer reach.

We anticipate opening the first of several new Reef locations during the first half of 2022. And our last announcement was a new development incentive program available to our domestic franchisees. This program not only provides more lucrative incentives of up to $400,000 in underpenetrated domestic markets, but it also provides upfront cash as opposed to our historical practice of reduced fees over time. Franchisees have shown great enthusiasm for this new program, and we expect formal sign-ups to begin in the near term, leading to new unit development picking up in 2023.

This is all incremental to our existing domestic development pipeline, which includes 73 remaining commitments from our recently completed re-franchising strategy. The last 2 years have certainly been a challenge on the development front as our franchisees have navigated the pandemic. But with sales recovery in these new programs in place, I'm very optimistic about our long-term restaurant development outlook. I'll now turn the call over to Robert Verostek, Denny's Chief Financial Officer, to discuss our quarterly performance. Robert?

Thank you, Mark, and good afternoon, everyone. I would now like to share a brief review of our fourth quarter results as well as our expectations for the first quarter 2022. Domestic system-wide same-store sales during the fourth quarter increased 0.7% compared to 2019. After highlighting positive preliminary same-store sales for October during our third quarter earnings call, the positive sales trend continued through November. However, sales softened in December due to both holiday shifts and the increase in Omicron variant cases.

This softness continued into January with elevated COVID cases. However, as with previous variants, same-store sales have begun to improve as cases begin to subside. We continued to see progression in the number of units operating 24/7, up from 48% of the domestic system at the end of December to approximately 50% of the domestic system at the end of January. We are encouraged to see these restaurants consistently outperform those with limited hours by a spread of nearly 20% points.

Therefore, we still believe this performance differential presents an ongoing opportunity as our system looks to extend operating hours, particularly as staffing levels improve. Now turning to our fourth quarter results. Franchise and license revenue increased 27.6% to $60.2 million, primarily due to improving sales from dine-in restrictions in the prior year quarter. Franchise operating margin was $31.1 million or 51.6% of franchise and license revenue compared to $21.4 million or 45.2% in the prior year quarter.

The margin increase was primarily due to the improvement in sales performance at franchised restaurants. Company restaurant sales of $47.4 million were up 23.2%, primarily due to the improvement in sales from reduced dine-in restrictions compared to the prior year quarter. Company restaurant operating margin was $7.0 million or 14.8% compared to $1.4 million or 4.3% in the prior year quarter. This margin increase was primarily due to the improvement in sales performance at company restaurants. However, we recorded approximately $1.4 million in unfavorable legal and medical reserve adjustments during the fourth quarter, reducing the company restaurant operating margin by approximately 2.9% points.

We experienced commodity inflation of approximately 11%, which was offset by sales leverage from improving transaction counts, lower value incidents, and pricing. These items collectively resulted in a 20 basis point improvement in our product cost line. With commodity inflation pressures likely to remain, at least in the near term, we have continuously worked with our franchisees to ensure appropriate pricing strategies while factoring in favorable mix shifts that we are experiencing.

We will continue to monitor this inflationary environment and have additional opportunities to adjust accordingly throughout 2022 to balance the effects. Total general and administrative expenses were $17.7 million compared to $20.5 million in the prior year quarter. This change was primarily due to decreases in performance-based incentive compensation, share-based compensation expense, and market valuation changes in the company's deferred compensation plan liabilities compared to the prior year quarter.

These decreases were partially offset by prior year quarter benefits of approximately $1 million in tax credits related to the CARES Act in addition to temporary cost reductions. 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 $24.1 million. The provision for income taxes was $15.0 million, reflecting an effective income tax rate of 25.7%.

Adjusted net income per share was $0.16 compared to adjusted net loss per share of $0.05 in the prior year quarter. During the fourth quarter, we generated adjusted free cash flow of $3.4 million after cash capital expenditures of $12.4 million. Cash capital expenditures included approximately $10.4 million related to real estate acquisitions in addition to maintenance and remodel capital. As a reminder, the previously announced sale of 2 parcels of real estate in December 2021 that generated approximately $49 million in proceeds are excluded from our adjusted free cash flow, while the purchase of real estate is included.

Excluding the real estate acquisitions, adjusted free cash flow would have been approximately $13.8 million for the fourth quarter. We anticipate allocating an additional $3 million from the proceeds obtained in December 2021 towards an additional like-kind exchange transaction during the fiscal first quarter of 2022. Our quarter-end total debt to adjusted EBITDA level 2.1x, and we had approximately $183 million of total debt outstanding, including $170 million borrowed under our credit facility.

As we have stated in the last few earnings call, we are currently more comfortable with a leverage range of between 2x and 3x adjusted EBITDA in the near term. Whereas prior to the pandemic, we would have been -- we would have targeted longer-term leverage somewhere between 3x and 4x. During the quarter, we allocated $24 million to share repurchases, resulting in $30.6 million allocated to share repurchases for the full year. Between the end of the fourth quarter and February 11, 2022, we allocated an additional $10.7 million to share repurchases, resulting in approximately $207 million remaining under our existing repurchase authorization.

Since beginning our share repurchase program in late 2010, we have allocated over $595 million to repurchase approximately 57 million shares at an average price of $10.50 per share. Excluding a follow-on offering during the pandemic, we have reduced our total net share count by 46%. In addition to share repurchases, our financial flexibility has provided other opportunities to continue our long-standing practice of returning capital to shareholders while also investing in the business.

Recent brand investments such as optimizing our real estate portfolio, the technology transformation and kitchen modernization initiatives and the new cash development incentive program that Mark mentioned earlier give us great confidence in the future of this iconic brand. Let me now take a few minutes to expand on the business outlook section of our earnings release. Given the dynamic impact of COVID-19 cases on the company's operations and volatility around commodity inflation and labor availability, we cannot reasonably provide a business outlook for the full fiscal year 2022 at this time.

However, the following estimates for our fiscal first quarter of 2022 ending March 30, 2022, reflect management's expectations that the current economic environment will not change materially. In 2022 earnings call, we will return to our standard practice of comparing 2022 same-store sales to the prior year as opposed to 2019. Additionally, we intend to return our normal -- to our normal practice of reporting quarterly data instead of monthly data.

However, we will still provide as much clarity as possible as we navigate through the ongoing recovery. With that said, we anticipate first quarter domestic system-wide same-store sales to be between 26% and 28% compared to 2021. Our expectations for total general and administrative expenses are between 17 and $18 million, including approximately $4 million related to share-based compensation expense, which does not impact adjusted EBITDA.

Based on the guidance I just described, we anticipate adjusted EBITDA of between 17 and $19 million, including approximately $2.5 million related to cash payments for share-based compensation. This deceleration from fourth quarter 2021 adjusted EBITDA is primarily due to seasonality in sales and the weight of Omicron on January and early February results. However, as we mentioned earlier, we are starting to see the Omicron impact dissipate.

In closing, while we experienced another temporary impact from a COVID variant, we are still well on our way through the recovery curve from this pandemic. We produced $24 million in adjusted EBITDA during the fourth quarter, with approximately half of our domestic restaurants operating 24/7, providing a tailwind as staffing and operating hours improve. Our asset-light business model converts approximately 50% of adjusted EBITDA to adjusted free cash flow, and we have a history of consistently returning capital to shareholders.

I want to thank our dedicated franchisees and Denny's team members who have maintained focus on serving our guests and gearing up for our exciting revitalization initiatives on the horizon. That wraps up our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer portion of our call.

(Operator Instructions) Our first question comes from Michael Tamas with Oppenheimer.

You guys mentioned in the long-term vision in the press release and talked about it a bit in your prepared remarks. And I wanted to dive into that a little bit more and what that might mean or what it could look like for investors. The long-term same-store sales have averaged low single digits or so, but the unit growth has really been the elusive piece. So now that you've got some of these building blocks in place with the refranchising development agreements, the Reef partnership and the new franchisee incentive program, do you think there's a situation where we could be looking at your unit growth as you talked about in '23 and beyond also being low single digits combined with that low single-digit sort of same-store sales have a nice little algorithm there?

Sure. It's a great question. I think, obviously, we've been careful not to guide with a ton of precision around that. But the goal, of course, is to get back to a longer-term double-digit growth in net unit growth. We still believe that there's a little purging off the bottom, but that as evidenced by where we finished last year is slowing while all of these other initiatives are designed to accelerate growth on the other end. We do have the agreements that we have in Canada, in the Philippines that has stimulated growth at a faster pace that we anticipated in the early going, like those agent agreements. At the same time, we think this stimulus for new development should spur additional growth that we can guide on a little bit -- with a little bit more precision in the coming quarters.

It does take a little time to build that pipeline. But once it builds, it does -- like a flywheel continue to gain momentum as we evidenced from our flying J initiative that built some new interest for Denny's and spur some growth. and then our FDP programs have also accelerated some of our development agreement efforts. What will come at the head of this though is -- will be our remodel program. It's getting the restart inside this year. The first portion of the year will go a little slower as it builds momentum toward the end, but we do expect a fairly substantial year in remodels this year, which is another catalyst for building sales and building momentum and visibility in our brand.

Got you. That makes sense. And then you also talked about the new technology and kitchen modernization strategies. So can you talk about maybe what are the biggest advantages that those are going to unlock for you that's going to allow you to do something different than what you're doing now. You mentioned operational efficiencies, but is there also a sales benefit that's going to allow you to roll out some sales drivers that maybe you could implement today?

Ultimately, all of these channels have -- are sort of coming at the pace guests will adopt them. Right now, we have cashiers at Denny's. We don't do tableside banking with our servers. But with new technology, we'll be able to sort of mimic what is table side with a high degree of control and efficiency. We'll be able to take orders tableside, we'll be able to do that curb side. We'll be able to take advantage of any number of technologies that reside better in the cloud for updating all the mundane tedious things like menu management and updating prices and mix shift changes when you have challenges with the shift or product inventory, we're able to sort of add or delete items on the fly like a busy Friday night shift on what maybe shows up on the go item menu QR code self-checkout.

There's a long list of things that come with these technologies. Now many of these exist right now in the marketplace in one form or another. The advantage of this platform that we're unfolding is all resides in one integrated system across the entire franchising company base, so we can all move together rather than disjointed initiatives. So we want to do a product promotion or something across the system on a single platform, a lot of those things become easier, easier to merchandise certain products on different shifts to our customers.

And then they'll be able to do more things through ultimately kiosks or curbside ordering of their own. The interface on these apps and the upgrades are much more intuitive. And I'd say best-in-class compared to where we've been historically, where we might be middle of the pack or lower too many key stroke entries for our guests. Maybe you didn't know as you remember, addresses or credit card data efficiently as it goes now. This new platform is best in class. And when it's easier to use, we tend to see a lot higher adoption rate by our guests. When they're hard to use, you just sort of return to some of the model where you don't download the app at all. So we see this as being pioneered. But the other benefit is that sort of the bigger picture is that as these become ubiquitous in the market, there is an expectation, they go with fast-casual and with retail, where do we have this level of technological capabilities, whether it's inside dining or to go -- and so I think as these unfold more and more people will be able to just default to those that are technology -- that have technology relationship with the brand first rather than a human interface, they will be able to eliminate some pain points that are associated with full-service dining. How you enter, how you wait, how you order, how you settle, how you leave, how you look at calorie information, promotional information. And there will be those that would rather navigate a digital menu than pick up an actual menu they touch and flip through the pages for safety sanitation reasons and just to use search engine capabilities. So all these things just enhance the way in which consumers interact with brands, and we're proud to say that we will soon be at the forefront rather than in the middle.

(Operator Instructions) We will go next to Jake Bartlett with Truth Securities.

Great. My first is about the quarter-to-date, the impact of Omicron. And I'm hoping you can help us understand how much Omicron has hurt sales so far, and we saw the deceleration in December. Can you give us an idea of maybe just kind of the hole you're digging out of or in relationship to the guidance for the first quarter. Where do you -- what do you have to make up to get there?

Jake, it's Robert. Sorry about that. So when you look at Omicron, we distinctly saw that impact. It came in late into December. You saw the trends that we were on. We did talk a little bit about the mismatch of the holidays. But clearly, by the time you hit the end of December, that impact came in pretty substantially. I think it's reflected, as you would expect in our guidance ranges, but you can see it both in the 26% to 28%, it's not as easily seen. But you can see it in the $17 million to $19 million adjusted EBITDA range, that would be typically several -- a couple of million dollars lower than what seasonality would otherwise suggest would be in that quarter. And it carried -- the biggest impact of that did carry through the heart of January. We made -- we tried to be very clear in our prepared remarks that as we have moved into February and particularly further into February, we have seen that drop off dramatically. And what you have seen, if you look at it pretty consistently because we haven't guided that and I can't really get into the exact numbers. But if you look at the way Delta impacted us back in the August and September time frame, if you look at the magnitude of delta and the change in trend there and then look forward to literally the Omicron and the steep curve there, you may get a sense of how that portrayed. Now Delta was a small -- a less highly topped-out impact, but over a longer period of time, Omicron was much more intensive, but for a shorter period of time. But suffice to say, it's hard to give you the exact number. But we do see that waning currently.

Great. That's helpful. And then my next question is on the restaurant level margins. If I understood correctly, kind of adding back the 2.9 in kind of onetime charge in there, I think you get to 17.7% restaurant level margins, which is even with the fourth quarter of '19. And that's despite pretty significant labor inflation but also the commodity inflation that you mentioned. I'm wondering how you're able to sustain those margins kind of have flat margins. We assume that there's delivery costs and other costs in there. What's offsetting? What's driving some of the efficiencies? Is it may be running for the lean still on the labor side? But just what are the moving pieces to being able to hold those restaurant level margins on a 2-year basis?

Yes. That's an excellent question, Jake. I do just to set the context correctly, that's really kind of the way that we are looking at it also, the 14.8% plus the 2.9 we do want -- we do internally believe that those were more onetime costs. That's the way why we framed it the way we did. I think it's a combination of various levers that we are pulling as we move through this very volatile time frame. So partially a menu mix management issue within there. So we really have looked at some of the best-performing items with some of the best food costs and candidly, some of the ones that are easier from an operational aspect. So we've managed that menu, inclusive of keeping some of the value plays within there. So it's not all just taking the higher-priced items. We have maintained our $2, $4, $6, $8 value plate and our [Super Slam] plates. Those have mixed consistently between 10% and 15% over the course of 2021.

So it's not just a function of taking all of the higher-priced places within there. We -- obviously, there is pricing within that dynamic also. In fact, we did take additional pricing of 2% on the company side as we entered Q4. We do have a couple of more opportunities to take pricing throughout 2022, if and when that is needed. Again, we haven't pulled the trigger on that yet, but we do have those opportunities. And then our ops teams have really focused on some again, one of those other levers, so really tightened down on our waste management.

So again, you can see that coming through not only coming through the product cost line as we leverage 20 basis points despite the commodity inflation that you mentioned there, about 11% opportunities in packaging costs and as such. So there's not any one thing. In fact, I'll give you another tidbit with regard to that margin, another piece that's in there that's not readily apparent within there -- in there, and this is really good information. We have additional, believe it or not, I'm going to couch this as good information, additional overtime dollars and additional training dollars sitting in Q4 between half point and a full point.

Why that is good is it gets back to our staffing levels within the restaurants. Our units that are 20 units on the company portfolio really are at pre-pandemic levels of staffing inclusive all of our restaurants now post pandemic are fully staffed with a general manager. We've really moved in and out of that over the course of the last 2 years with the volatility in staffing. So the reality is these new positions are not as efficient as the pre-pandemic level. So you're experiencing additional training dollars to get them up to speed, additional overtime dollars to cover more shifts than I fully see some staff may be able to. So even within that 14.8%, there's a 0.5 point to 1 point that ultimately goes away as we get further into a seasoned staff. But for the moment, it's really good from the standpoint that we are getting back to that level of staffing.

Our next question comes from James Rutherford with Stephens.

I wanted to ask about the pace of getting more restaurants open for the full 24/7 operating hours. And I guess the way I want to ask this is how much of the delay is true staffing -- the true staffing challenges? And how much do you think is that there are some franchisees that simply are very content to run limited hours for the simplicity of it? Or is that a component at all? And also, just what's the overall risk that as this goes on longer, that consumer habits going to change and they sort of forget that that's a place they can go in the middle of the night. So just kind of a couple of questions around that 24/7.

Sure. Those are all great questions. And obviously, we'd like to see this accelerate. It is starting to pick up. We think we'll continue to build momentum. As Robert alluded to, as staffing improves, the investment and day shifts to build nighttime shifts and the confidence in those continues to improve. If you look at our best performing over the last quarter and the quarter before, it really is the weekend dinner and followed by breakfast, then late night, and then lunch but in the 24/7 stores, the best performing daypart is our late night. And so as our franchisees see the strong performance and outperformance of the brand during that daypart. -- they recognize a number of benefits from that one. It's a younger audience, slightly more affluent than the average of who's historically filled up our dining rooms. And so this is a tremendous opportunity to get exposure to our newly introduced product lines, especially with the kitchen renovation and the new items we'll be adding soon associated with that. There's just no better way than when there's not a lot of other competitors open during that hour.

So they're seeing the benefits and the momentum build faster in the 24/7 stores. And so from our franchisee association Board all the way through our franchise conversations, the commitment is there. We've not had anybody dig their heels in and say, "This is not for me. I'm not doing it. And so we just don't see evidence that, that's the long-term effect. Now consumer habit and behavior, you move from -- of the full service options available, there's not a lot. There are a number of quick-serve options available, say, from 10:00 a.m. to 5 or 6 in the morning. But there's -- but in terms of full-service dining, curbside delivery of full-service-type menu items, we are in a -- we enjoy a rare position there being one of the few that has the footprint that we have across the country with 24/7 availability. So we do have confidence that we will earn those transactions back as those stores open and confident that we'll continue to build momentum along those lines.

We'll go next to Nick Setyan with Wedbush Securities.

First, I just want to confirm that the $1.4 million legal impact in Q4 wasn't adjusted. And so adjusted EBITDA would have been something like $24.5 million as opposed to the $24 million. Is that correct?

Nick, this is Robert. You're correct. The $24.1 million is inclusive of that legal impact and the 14.8% margins are inclusive of that legal impact. So if you were to rightsize for those, it would get you closer to 18% restaurant-level margins and closer to $25.5 million in adjusted EBITDA reconciled for that one item.

Okay. And I mean, just given the huge beat that would imply on unit level margin. You guys were well above on the franchise margin. The comp guidance for Q1 is actually slightly better than what we were expecting. The 26% to 28% is actually above the 25% or so and grow modeling for the system comp. The EBITDA guidance is obviously well below on -- in terms of what we were expecting. And like you said, it's over $2 million lower than what we would have expected given the Omicron impact. So the Omicron impact, we're not seeing it necessarily in the comp, but we are seeing it in the margins. So I think there's a little bit of confusion as to why that margin is so much lower. So maybe we could peel back the onion kind of help us understand what that company on margin would imply. And then I guess where else are the -- where else are we seeing that delta? Is it on the franchise margins where else are we seeing that to kind of explain why we're...

'22, the comp differential that we were experiencing between company and franchise becomes a little more muted as you begin to roll over that year-over-year. We've had the -- the 90-plus percent of the units allocated to a company comp there. The other piece that I think if we look at models to model with regard to what we are seeing stock-based compensation, we included $3.5 million. We called that out specifically in my remarks. So what that ends up being is the expense itself, and this becomes a little nuanced, but the expense itself does not come into the adjusted EBITDA, it's scoped out. But the shares that are functionally withheld to cover the taxes that are ultimately provided to the participants in those programs come through as an adjusted EBITDA hit. So we have $2.5 million of that in the current estimate in that $17 million to $19 million range.

That is clearly outpacing what we were experiencing in 2021 with those payments. And then in general, some of the other G&A, if we're looking model to model, we do believe that the G&A that we've included within our that $17 million to $18 million in the core aspects outside of the stock-based compensation and the deferred adjustments. If you just look at what we call the kind of the core G&A and the incentive compensation may be outpacing what's included in those models. I think that's probably the best I'm going to be able to do for you. There is clearly an Omicron impact, that impact is clearly contained within the 26% to 28% same-store sales range. But that's probably about the best I'm going to be able to do for you at this point.

Got it. And is there any way we can maybe contextualize where sales are trending now versus, say, October or November? At least within a rate of in October, November? Are we below that still?

Yes, it's a good question. I'm looking at Curt right now to see what we can say, again, we're trying to avoid getting into these intra-quarter guides. But I think the reality is, is that Omicron curve comes down. And you're looking at the same data that we're looking at, and it's come down dramatic, the sales recovery is not as quickly. It's very, very highly correlated with regard to the spikes in the recoveries in that so.

(Operator Instructions) We will move next to Todd Brooks with the Benchmark Company.

If we can dig in on the staffing side a little bit. You talked about some of the company-specific efforts around hiring that you're seeing. I know one of your peers talked about kind of that September, October time frame, kind of 1 to 2 applicants for every open position and now seeing 10 to 12 applicants for every open position. How does that match up magnitude wise with the improvement in kind of incoming staffing flows that you're seeing currently?

We are seeing, again, continued improvement in applicant flow, and this started some time back. Unfortunately, the first wave of that, a couple of quarters back, resulted in higher applicant flow, but not necessarily higher position sales. And then later, a lot more momentum was built in sort of filling positions, but then the retention wasn't near what it was historically for our brand and for our franchisees experience, suggesting that folks took a position and then maybe weren't quite ready to come back to work or it's pretty burdensome to come back to work and staff not fully trained and running as smoothly as historical. So there's sort of been a bumpy start to restaffing and we're hearing this across health care, retail, lots of different industries, construction industries where we hear these similar stories where it's building momentum in ebbs and flow way ahead of actual sort of committed service hours and sort of career building efforts.

We are starting to see that improve dramatically. The company stores are approaching that I guess 90%, near 100% staff level. We are 100% staff at the general manager position. We think our franchisees are still in that 80% range. And so we've got about half the system at the end of the fourth quarter, not guiding into this quarter or beyond yet, but certainly, we ended the year around 48%, 24/7. And so -- but again, that continues to build momentum. I don't know how to qualify it much further. Applicant flow is no longer really the challenge. We are doing a lot of work with exit interviews to hear what it is people are looking for. Any insight we can get, we're trying to solve in real time and on the spot. Again, our retention levels are much lower than the full service averages generally at Denny’s [corporates] which won some awards and recognition for best places to work. I think that those best practices and the sort of gate to those has been a lot more interest across our entire franchise system. So we have a lot of people paying attention to onboarding, training, respectful work environments and just making sure we get that right. And we're not the only brand focused on it. That's for sure. But all I can say is that it does continue to improve a bit by debt.

Okay. That's helpful. And then, Robert, if I take what John has kind of rolled out with applicants turning into better retention and then just better staffing levels that's starting to play out here recently. What's the -- I mean, we seem to be tracking on kind of a 2% a month increase in '22. I just want to make sure that we're all kind of level set against if we're entering at 48% back in the 24/7 model, what's the right way to think about maybe exit rate in '22 or what the slope of that recovery curve should look like?

Yes, that's the $64 million question. It kind of even in Q4 here, it will pin at 2%. Even December to January, it was 2% going from 48% to 50%. I think I called that out in my script. I think, frankly, we would expect that in the near term, we were talking about this probably 6 to 9 months ago. Is that slope would get you to something closer to a full level by the end of 2022. I'm not certain that we're there. So you can draw that line somewhere between 2% and 4%. And again, I don't -- and it will take that acceleration on staffing because John, when he spoke, he was spot on with regard to the -- what we -- our best current thinking of what we know from franchisee staffing levels. The units that are not 24/7 are staffed at about 80%. The franchisee units that are open 24/7 are very, very similar to company units. They're approaching pre-pandemic, if not over pre-pandemic levels of staffing. So going back to James' question about the processing levels of these units, yes, the 24/7 is predominantly a staffing issue at this point in time and ramping that up. I would like to say, and again, this is not a guide, I would like to say that we could move beyond this 2% trend that we've experienced for the last 6 to 8 months, but it's just probably too early to quote that.

And just to map it with operational reality and John talked about this, that these people you're bringing in, you don't throw them into an overnight shift. They've got a train. They've got to work day for a while before those bodies are ready. I guess operationally, a hire made now, when are they ready for an overnight shift? What's that lag between hiring and readiness?

Right. So a lot of this has to do with experience servers and cooks can get there at different levels depending on their experience level coming in. We are starting to also get a little relief in the experience levels starting to return. Over the last couple of quarters, entry-level employees were much less experienced. And so we're starting to see a reversal of that as well. So you could take a couple of weeks to get a cook ready to go -- or it could be 3 days. It just depends on the position they hold. The experience of the manager that's on that same shift. There's a number of dynamics that affect it. But that too is shortening, which helps the momentum. And to just reiterate what Robert said, because of Omicron starting to wane, we see similar habits of improvement. And then we saw the Delta Wave and the Omicron wave create deceleration. And so we're just -- we're careful not to guide the year just yet, but we'll have a lot more confidence coming out of this year in another month or 2.

Our next question comes from Eric Gonzalez of KeyBanc Capital Markets.

Just maybe following up on the discussion around the 2% month-over-month increase in 24/7 units. Maybe if you could discuss what drove that improvement. I guess I was a little surprised to hear that, that improved in January given what you're facing the headwinds from staffing exclusions and maybe people calling out. So really what drove that 2% improvement in January? And do you see a correlation as the week-over-week trends get better from an overall sales perspective? Do you see a correlation to the franchisee's willingness to maybe go to 24 hours and increase that mix?

Yes, I do. I think the -- there are not really spiritual holdouts per se, but rather some were just so much further behind other franchisees where they nearly fully shut down or cranked it down to almost nothing. And so while they are rebuilding their staff, they're still struggling to get all the way to bright in their current daytime ships. And so they want to get a little bit more stable stability underneath themselves before they build on top of that. And we too, want to push and in drag and pull. But at the same time, we don't want to do anything out of sync with the reality of customer satisfaction score.

So we do have the (inaudible) with the capabilities of each location and the management team. And so when you have stores with very green management, their capacity to move at the same pace of experience management is considerably different. And you think in the company fleet, the higher average volume units balance sheet and the way we manage through it was a little bit more supportive of staff retention and that's paid dividends for the company's fleet longer-term franchisees that did the same. We're more fully staffed and enjoyed some tremendous upside from 24/7 sales, but not every franchisee is in that same position.

Got it. And if I could just maybe ask about pricing at least maybe what you're advising your franchisees to do on price and perhaps comment on your inflation outlook? I think you said 11% for the fourth quarter. What are you seeing in the commodity markets for '22?

Sure. franchisees, again, because our -- the company fleets smaller and scattered about given that we have a big footprint of California on the average of franchisees are a little ahead of the company on pricing, but not materially. We're kind of in the same range, and we're experiencing the check change is coming in about half from pricing, half of mix changes where, as Robert was alluding to earlier, we're seeing these higher lunch and dinner entrees and higher beverage incidents being enjoyed right now in spite of the stickiness of our to-go transaction. So that's really good news for us where people are moving away from just the value placed breakfast items on the menu.

Now that said, we still believe value has a pretty strong place in family dining. And even inside this quarter, we were promoting some of our melts, the Nashville Hot chicken items are very high idea right now across America, across minibrands and so that's a really high consumer scoring product. We want to make sure was out there in the mix. And then we also promoted our Super Slam during the quarter. And so we do have a presence in the value positioning. It's not as loud historically because this is a check environment until we get more fully staffed. But it does show that we are prepared to lean on traffic drivers at the right time in a better staffed environment, but also right now to enjoy a higher check and high trial some items that historically don't get the same level of attention on our menu. When it comes to commodities, I think just frankly, I'd love to assist a little more. It's a bit too early. We're not guiding. And frankly, I think it's too early for us to know much clarity at the moment.

We'll go next to Brett Levy of MKM Partners.

I guess just continuing on that point a little bit, how are you thinking about what you want to pursue in terms of marketing, not just the messaging, but also the case to spend.

Yes. pricing it's really interesting what's happened over the last couple of quarters with higher wage inflation and then the short supply, some of which people are saying is sort of adjust over time. But while things were in short supply, we're really proud that at Denny's, we did not see a lot of product outages. So we were able to maintain the menu we had in mind to offer with very little interruption. What that allowed us to do is focus a little bit more on pushing a higher trial around these lunch and dinner items that we are talking about. And because of that mix shift change towards some of those items, while they had some price, they're really more just mix toward double cheeseburgers and dinner on tracing chicken-free steaks and the kinds of things that we're pleased to see people try rather than the -- there's a little bit of lower average check across the breakfast media overall and a little bit more of a value or frequency among -- this long revitalization to our heritage as America's diners as not just a breakfast all day place, but a place that's got breakfast, lunch, dinner and late night with great diner options, that the pandemic -- I wouldn't say it didn't favor of anybody that we wanted to start to get more credibility around. So that takes pressure while there will be pricing. And I would say that because of wage inflation pricing, we'll maintain the sort of above historical norms for the eat-out industry. This invention of product or interesting commentary about that over the next several quarters as the menu evolves and some of these initiatives unfold.

And just -- I know you're not going to give too much granular detail in terms of quarter-to-date trends, but for.

Sure. Absolutely. Same with Delta, our best performing with Florida Texas, California. This last quarter was really no exception. California, Texas, Florida, Arizona, where our strong somewhat plus percent of the system. So you've got a lot of areas that were strong in spite of Omicron. Illinois, Missouri, Nevada, Colorado, Oregon. There are a lot of places that just continue to have positive momentum. But I'd say the Northeast Midwest continues to struggle the most when there is the Delta and Omicron hit harder, and that was true again this time around.

We'll return to James Rutherford with Stephens.

But I wanted to ask about value. I think you all have been deemphasizing $2, $4, $6, $8 on your menu, correct me if I'm wrong about that. But just -- and that's given the overall strong consumer spending environment that the industry has enjoyed for a while now, which you mentioned a minute ago, John. But I'm curious, if you look at even the most recent data, is there any early signs in your mix or traffic Omicron aside that indicate the consumer environment is starting to shift or change at all in a way that you may need to pivot somewhat more back to a value messaging in the near future? Just what are your thoughts around that?

Sure. I think you sort of keep your playbook -- you have all the plays ready based on the circumstance and situation when you're a little bit less staffed and with much way deplating, you try to avoid a deep addiction to just driving value for transaction's sake. It is not going to give you the lift. If you're not going to get the uptake, particularly in the Northeast or the Midwest, there's no particular good reason to discount somebody who may have come anyway ordered for me to go anyway. At the same time, as people get out and about and start to rebuild these transactions in a post-Omicron environment, we're not going to want to yield customers that are looking for a deal. When your competitors offering one, we don't want to lose share. So we all pay close attention to what's going on. The body language of the quick-serve and fast casual environment has been the same. There's been much less emphasis on discounting. What you're seeing now post-holiday post Omicron a little bit of a reversal in that. They're starting to see some of the quick field players start to return to some dealing, not beat maybe as in recent past. But as staffing starts to stabilize in some of the quick-serve brands, you're starting to see a little bit of return to that so true to form, you'll see that return to some degree in the casual and mid-scale players as well. And again, it's too early for us to guide precisely what it is other than I will tell you, as I mentioned a moment ago, we were not saying to have not an overweight or not a heavy weight but to have some value exposure in the first quarter with our Super Slam.

And with no other questions holding, I'll turn the conference back to Mr. Miller for short closing comments.

Thank you. I would like to say thanks for joining us on the call today. We are very pleased with the progress we've made through the pandemic and as we continue navigating the recovery despite temporary interruptions, and we are making steady progress addressing staffing challenges and extensive hiring and training efforts, and we believe this situation will correct itself in due course. As it does and operating hours are extended, we see additional potential for our brand based on the performance of those restaurants already open 24/7, and we are pleased with the consistency of our elevated off-premise sales volumes, which have been supported by the successful launch of our 2 virtual brands. We were also encouraged by the level of adjusted EBITDA and adjusted free cash flow generated by our highly franchised business model during the fourth quarter, which enabled us to return $24 million to shareholders through our share repurchase program. We believe the meaningful investments we are making in kitchen equipment and restaurant technology platforms will propel the brand forward with exciting high-quality product opportunities and an enhanced guest experience. Finally, we are excited to relaunch our successful Harry's remodel program, along with the opportunity to enhance our existing development pipeline through our partnership with Reef and our new franchisee incentive program. So we do look forward to our next earnings conference call in early May, and we will discuss our first quarter 2022 results at that time. Thank you again, everybody, for joining, and have a nice evening. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.