Denny's (DENN) just gave investors a lot to chew on.
Even as "America's Diner" cheers falling commodity costs, with inflation slowing overall, execs at the South Carolina-based restaurant chain noted consumers have reservations about spending.
"We are seeing a lot of things work in our favor in terms of commodities and disinflation, hopefully eventually deflation," Denny's CEO Kelli Valade told Yahoo Finance Live (video above). "At the same time, there’s still uncertainty from the consumer as gas prices go up — and sharply as of late. We still see some reason to be cautious."
Denny's second quarter results came in short of Wall Street estimates. Same-store sales for the quarter increased 3%, just shy of expectations of 4.16%.
However, the company's value offerings and lower price points won over consumers.
The Super Slam meal, which starts at $7.99 and includes a lineup of pancakes, eggs, bacon strips, sausage links, and crispy hash browns, is just one part of a larger "playbook and strategy" aimed at delivering value.
"We can clearly point out correlations between pricing and traffic," Denny's CFO Robert Verostek pointed out in a call with investors following the results. He added that such value offerings "will be the driver" of Denny's 2023 full-year outlook, which targets a 3% to 6% increase in system-wide same-store sales compared to 2022.
Denny's stock is up 12% year to date, roughly in line with the nearly 11% rise for the S&P Restaurant Index, but remains well below its pre-pandemic heights.
Bacon and egg prices are moving lower
There's one ingredient where Denny's is still seeing higher costs, and it could affect diner favorites from hash browns to wavy fries.
"Potatoes are still a commodity that has not yet come down, while the other things in our market basket either are locked or have come down quite a bit," Valade said.
But the American diner chain does have some good things going — namely, falling bacon and egg prices.
Commodity inflation for the brand across the board dropped to 1% in Q2 from 10% in Q1. And thanks in part to lower ingredient prices, the company was able to expand its margins in Q2.
Its franchise operating margin improved to $31.6 million, compared to $30.6 million in the same time period last year. For company-owned restaurants, the operating margin was $8.2 million last quarter, compared to $4.3 million in Q2 2022.
"Commodity inflation is finally under control, and with 70% of basket locked, management is targeting 2% for FY23 (flattish for balance of the year)," Citi analyst Jon Tower wrote in a note to clients. "Pork bellies remain a notable unlocked commodity, consistent with prior years as it is prohibitively expensive to lock (pork is approximately 10% of commodity basket)."
Valade is also betting on the return of its 24/7 service after the COVID-19 pandemic impacted operations. Late-night hours at Denny's are now back up and running at 75% of its system.
Valade called that a "huge win." But not everyone on Wall Street is completely convinced.
"We find it difficult to argue investors need to dive in at current levels until we gain greater clarity into the demand environment, inflation’s influence on company and franchisee cash flows and how remodels and new store growth shape up in a still-challenged supply chain backdrop," said Citi's Tower, who has a Neutral rating on the stock.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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