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Getting Cheesy with Denny’s CEO John Miller

Dining out is usually the first casualty of the downturn. To cut discretionary spending, consumers first eliminate the weekly trip to the restaurant. When they're feeling flush again, they begin to splurge a bit. Which is why casual dining, which caters to the middle and lower-end of the income scales, is a pretty good indicator of consumer sentiment.

Judging by the results Denny's, which bills itself as "America's Diner," things are still tough — but getting a little bitter.

"In general, people are more price sensitive today than ever, and they have a lot of good prepared meal options at home," as CEO John Miller tells me in the accompanying video. Miller came by our New York studio (alas, without any items from Denny's Let's Get Cheesy menu), to discuss the 1,700-store chain's recent results and prospects. In the third quarter, Denny's reported that system-wide, same-store sales rose .9 percent, " marking the second consecutive quarter that both franchise and company same-store sales have been positive." That may not sound like much, but it marks a reversal of several years of decline. Same-store sales at Denny's franchises, which account for most of the outlets, fell  in 2008, fell 5.2 percent in 2009, and fell another 3.6 percent in 2010.

In the casual dining business, flat is the new up. Chains such as Friendly's and Sbarro's have filed for bankruptcy recently. Denny's has managed to stay solvent -- here's a five-year stock chart, which shows the stock rose about five percent in 2011 — and to expand.

In recent years, Denny's has focused on increasing its footprint by selling more units to franchisees and pushing into new markets. "We've had considerable growth in the last couple of years," said Miller, who took the helm nearly a year ago after 17 years with Brinker International.  "It started with a franchise growth, where we gave incentives [to franchisses] to take company assets" and then build new stores." In the summer of 2010, Denny's struck a deal with Pilot Travel Centers, which had just acquired Flying J Truck stops, to convert restaurants at 140 truck stops to Denny's. So far, 123 have been converted. In late December, it struck a deal with BancAlliance, a cooperative of banks, to provide "up to $100 million to new and existing franchisees that open new restaurants in Denny's under-penetrated markets in the U.S." And Denny's has teamed up with food-service providers to open smaller units on college campuses. (Dude!)  So far, 11 of those units have opened.

U.S. restaurant firms have had great success planting their flags in overseas markets. But the fortunes of America's Diner rely disproportionately on the U.S. Denny's is already in nine countries, with 58 units in Western Canada alone.  In 2011, it opened five restaurants outside the U.S., and Miller expects more in the coming year."We have fairly ambitious global plans at this stage," Miller said.

In today's climate, all large restaurant firms must walk the tightrope between offering healthy food and appealing to the calorie counters and sodium police, on the one hand, while offering the fat-laden goodies that draw people in. Miller talked up Denny's Fit Fare menu items, which were rolled out in June. "There are over 500 ways you can order an under-500-calorie meal, and over 400 ways you can have a meal under 400 calories," he said. (You can find nutritional information here)

Of course, that's less than convincing coming from a company whose flagship offering has long been the Grand Slam, a veritable cholesterol sampler that features bacon, sausage, eggs, and buttered pancakes, and  whose double cheeseburger packs a 1,400-calorie wallop. Meanwhile, Denny's has rolled out an ad campaign centered around its "Lets Get Cheesy" menu, which features several items that weigh in at over 1,000 calories. That includes the Mac'n'Cheese Big Daddy Patty Melt, which is pretty much exactly what it sounds like: a burger topped with macaroni and cheese. Said Miller: "We believe in absolute choice."

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com