Denny's 4Q24 and Full Year Write-Up: Problematic, Thesis Intact

4Q24 Results:

Revenue: (0.61%) y/y

Denny's SSS: 1.1%

Keke's SSS: 3.0%

Net Store Openings: (26) Stores

Full Year Results:

Revenue: (2.50%) y/y

Denny's SSS: (0.2%)

Keke's SSS: (1.7%)

Net Store Openings: (74) Stores

Notable Guidance for FY2025:

System-wide SSS: (2)-1%

Net Store Closures: (48) Stores

Updated Model: DENN US Denny's Corporation (1).xlsx

Denny's traded down 23% yesterday after releasing disappointing guidance and earnings figures. This is by far the worst earnings reaction I've seen from a company I cover closely, and it represents a major learning opportunity for me.

The market seems particularly disappointed with the lackluster Same Store Sales (SSS) guidance and the increase in store closures through 2025. Denny's had originally guided to close 150 stores across 2024 and 2025, 75 each year. They ended up closing 78 in 2024 and are now guiding to close anywhere from 70 to 90 stores in 2025. This means they could theoretically close 18 more stores than initially guided. This is obviously not good for the fundamentals and casts doubt on management's ability to gauge progress in the turnaround. The SSS growth adds insult to injury, as Denny's aimed to prune poor-performing stores. As they eliminate bad stores, you'd expect to see positive momentum reflected in the SSS growth, but we're not seeing that yet. This makes it hard to conclude that management's actions are value-additive.

I updated the model and experimented with the store count level that Denny's needs to maintain to be a good investment at $5.37 per share (its closing price on 2/13/2025). Denny's currently has 1,568 stores across both brands. At 1,300 stores, the company should receive a share value similar to its current trading price. I multiplied my base-case Exit Year EBITDA by 0.83, reflecting the 18% decline in stores, to calculate a new Exit Year EBITDA. Applying an 11x EV/EBITDA multiple, just above the current multiple, yields a discounted share price of $5.27 today.

What this tells me is that the market thinks Denny's stores will continue to get less profitable and that Denny's will be forced to continue closing stores beyond the 75 in the coming year. I still believe things will not get this bad. I don’t plan to exit the position either. I believe Denny's management is executing well on the turnaround. The focus on off-premise brands and value menu items is a strategy I can support, and I believe these efforts will eventually show up in the fundamentals. I'll be looking to size the position at this price point, making it represent 10% of my total portfolio. I'll be watching store closures closely and hope to gain more confidence in the management team over the coming quarters. I believe the second-order thinking here is to size the position, as I feel the risk-adjusted return is the same as when I began working on Denny's. The market is once again focused on negative sentiment surrounding Denny's and overlooking the long-term staying power of the business.

As an investor, this earnings print taught me that it's important to understand how a stock is positioned before a potential catalyst event. Denny's preliminary Q4 was very bullish, and expectations were high heading into the call. There was really only room for disappointment. The stock might've traded up 3-4% on good earnings, but the downside risk was much higher. I'll be more mindful of the expectations surrounding my positions before major events moving forward.