Denny's 1Q25: Thesis Intact, Wait and See

Revenue: 1.5% y/y

Denny's SSS: (3%) y/y

Keke's SSS: 3.9% y/y

EPS: $0.01

Store Count: (8) Denny's and (3) Keke's

I was listening to Stan Druckenmiller on "In Good Company" last week. In his interview, Stan mentions that the best investor's cut their losses early and often and let the winners thrive. Jim Larkins, my Brigham Capital advisor and incredibly successful career investor, similarly states that we should "water the flowers and pull the weeds". Denny's was most definitely a weed I should've pulled in late January when I was up 30%.

The earnings were relatively mixed. Denny's SSS was down more than I wanted it to be. Revenue was up y/y because of an increase in Keke's locations and positive momentum within Keke's SSS. Guidance remained the same except they increased their expectation of commodity prices, which leaves them room for continued egg price headwinds. You would think that Denny's SSS would show more life given that management has been pushing major discounting on franchisees. A great deal of the Q&A on the earnings call had to do with Denny's statement that they had been pushing value to the point that they almost aren't making any money on certain sales. How much of this weakness is in the American consumer versus a potential structural decline in family-style restaurant foot traffic? My deepest concern is it tilts toward the latter and I'm the only fool that doesn't see it.

The stock has traded down 1.5% in after hours, and I honestly have little clue where it will trade tomorrow. They beat on most expectations and hit exactly on adjusted EPS at $0.08, but this still doesn't feel like the quarter investors needed. I remain in the stock for the following reasons:

1. I don't believe that the Denny's brand is worthless. I believe there is a customer out there that enjoys the Denny's dining experience and that this core audience is being catered to with Denny's recent emphasis on value.

2. My active weight is only 49% as of May 5th, and I would rather own Denny's than the index as things currently stand. If I had 100% active weights this would be the first position trimmed upon finding new opportunities.

3. Management is doing all the right things. I love that they are investing in stores during the downcycle by remodeling, rationalizing existing stores, taking care of core customers, and showing positive progress in Keke's.

I've most definitely entered a "wait and see" approach with Denny's. What is interesting to me is the stock has traded up pretty meaningfully in the weeks leading up to their reporting in the last two quarters. I'd like to think that this is the other Denny's investors hoping the coming quarter is "the one" where we see a meaningful turn. I think when (if?) Denny's corrects course it's going to be a major winner because investors want it to be. It's just a matter of how distant that future is.