Denny's CEO on consumer spending: They count on us for value

Denny's missed on Q2 earnings and revenue estimates, but the company reported 3 percent positive same-restaurant sales. Denny's CEO Kelli Valade joins Yahoo Finance Live to discuss the company's earnings call, consumer spending, economic outlook, and the expansion of the Denny's brand with the acquisition of Keke’s Breakfast Cafe.

Valade says, "There's still some uncertainty from the consumer ... the good news is, and what we did talk about on our earnings call, was just the incredible playbook and the strategy that we've got for both of our brands."

Video Transcript

- We're going to bring in Denny's CEO Kelli Valade and also Yahoo Finance's Brooke DiPalma to discuss more. Thank you for joining us here, Kelli. Just please give us your rundown of your latest earnings?

KELLI VALADE: Yeah, thank you. Thank you so much for having me. So I'd be happy to. It was an interesting quarter as you can see and as the headline reads, we did miss on some of the expectations that we had, but we still had and reported 3% positive sales. We reported pretty decent earnings overall, and we did beat the consensus on that.

So we sequentially improved throughout the quarter. We felt good about that. This is a time where we're seeing a lot of things work in our favor in terms of commodities and disinflation, hopefully eventually deflation. But at the same time, there's still some uncertainty from the consumer as gas prices go up, and sharply as of late, we still see some reason to just be cautious.

The good news is, and we did talk about on our earnings call, was just the incredible playbook and the strategy that we've got for both of our brands, both the Denny's flagship brand and then our new brand Keke's Breakfast Cafe, which will be a huge growth vehicle for us.

So we've spent a lot of time integrating that new brand into our portfolio. We're thrilled with the progress that we've seen there, and we're really excited by both what we have in front of us and in store for Denny's and Keke's Breakfast Cafe.

BROOKE DIPALAMA: Good morning, Kelli. So great to be with you. I mean, really this past quarter you guys doubled down on strategy. You returned the super Slam. But break down for us exactly what you're seeing consumers' spending habits change to this past quarter. Are they flocking to those value offerings and in turn are they then ordering less?

KELLI VALADE: That's a great question. I appreciate that so much. There's a lot going on there. But what we do see when we return to our Super Slam offer was a $7.99 start point. It's a fan favorite for us. And we know our guests and our consumers need value. They count on us for that right. We have value leadership in the space that we play in.

So our fan favorite, Super Slam, did really well for us. Again, sequentially we improved through the quarter. That had a big part of it. We're back on actually right now talking about our Super Slam offer, and we'll continue to refresh that messaging with some innovation as well. We had a great bacon obsession spot called Baconalia that we also offered this quarter along with Super Slam.

So we had both things at play, and what we saw was that to the core of your question, the guests did not trade down. They actually-- we did well with our check. Our check growth was modest, but we did well with check. And so we saw people coming in, perhaps because they saw a great offer on our Super Slam, again, a fan favorite. But they came in and they were still talking about, excited about some of the innovation we had with our Baconalia LTO.

BROOKE DIPALAMA: And speaking of bacon, I mean, we've seen bacon prices sort of fluctuate over the past year. You alluded to it earlier. But commodity prices coming down from 10% to 1% this past quarter. What's costing more these days? Is it that bacon, is it eggs, and where do you hope to see those go in the second half of the year?

KELLI VALADE: Actually, so we had-- we've got a lot of things locked in. A lot in our market basket is locked in, so we came at this promotion actually at a really good time for us. So bacon prices and pork prices down, egg prices had started to moderate prior to this. So we had some good things working for us. And again, we expanded our margins this quarter at a time where others may have not, but we expanded our margins, and we were pretty thrilled about that.

Potatoes continue to be-- and that's something you see on a lot of our plates, whether it's our amazing hash browns, or our amazing 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.

- Kelli, you mentioned your acquisition of Keke's a little bit earlier. A recent one and smallish in size, about $82.5 million. I'm looking at what? 52 domestic restaurants there. Tell us please what you're thinking about, is this a new direction you want to go? Is this just-- or is this just diversification of your offerings?

KELLI VALADE: A bit diversification of our offering, a bit opportunistic, really strategic play at a time where in family dining, while there are a lot of mature brands in family dining, us being one of them. We're celebrating our 70th anniversary right now. We're 70 years young and have so much potential ahead, as I indicated in all of our strategies and the things that we are doing.

But the Keke's Breakfast Cafe acquisition was a really great move into a different segment. So we now have family dining, and we now have what this breakfast dayparts, breakfast cafes, daytime eateries, and they're only open 7.5 hours. And for the Denny's brands, what we saw was a huge opportunity for a new comer in the market in this segment to compete and really go head to head with others that are out there.

It's a fragmented segment. This new [INAUDIBLE] eatery, though there are probably 1,000 new units in the space, it's pretty fragmented. So for us, it was about leveraging what we know about breakfast but also our great franchisee network and the fact that we are a model franchisor. So we feel like speed to market can be something that's really a strength of ours in acquiring the breakfast cafe, and we've seen really great things so far.

We've got lots of interest in Denny's franchisees. We opened a restaurant last week. We'll open one next Wednesday, another Breakfast Cafe, so we're really excited with the progress that we've seen and the potential that this brand holds for us in terms of growth.

BROOKE DIPALAMA: Well, the in-house coffee beans definitely sound like somewhere I need to go to. And check that out at Keke's Breakfast Cafe. But when you're thinking about filling staff for these restaurants that are set to open, I know that you noted in the call that wage growth has moderated. We're seeing that particularly within Florida, I know you mentioned where challenges are still there in terms of staffing. So break down how you ultimately aim to recruit and maintain talent, offering maybe the best in the market as we're seeing that labor recover?

KELLI VALADE: Absolutely. So I think the way I phrased it in our call just a couple of days ago was the fact that though it's better and though there's been moderation certainly in wages, you've still got different states taking pretty big wage jumps. And so that's absolutely impactful for us. We're really confident not only in our complete kind of employee value proposition, we've added different levers as of late, our GAIN program, we actually announced that.

We put a release out in regards to that because we're doing things that, I think, others aren't doing, that we know others aren't doing. And so it's yes, it's about wages. We've got industry-leading turnover. We have industry-leading turnover and great retention at our company restaurants, many of our franchisees do as well. But we're adding programs in like GED, the opportunity to get GEDs, the opportunity to get college credits with going through our management training program.

We're doubling down on other offerings just to have a great value proposition. You really do need to do that today. It's incredibly competitive. And so there's some choppiness state by state, but overall, we're really happy with the way we take care of our employees, happy we live our purpose every day, and happy they help us to deliver on a great guest experience.

BROOKE DIPALAMA: And I think what's so fascinating about Denny's is that late night versus day part. And when I found so surprising in this past quarter is that you guys did see a higher interest in coming during the day to Denny's then at night. You know, when you think about the consumer behavior that way, did that surprise you or is that a trend that we're seeing?

KELLI VALADE: Yeah. We actually still had really strong late night growth as we got back more restaurants back open to 24/7. So we actually-- we spoke about our 24/7 return to over at this point 75% of our system as a huge win. There is no one else in family dining, and I would dare say even in quick service or fast-food restaurants, that has been able to get back open in those late-night hours.

And at 75%, we absolutely have secured again, our position in the market as an industry leader, and it's a core equity of ours. We know people want to count on us for maybe that great late-night meal, great late-night option in a virtual brand. So we're pretty pleased with that. And we saw daypart growth all throughout, but late night still growing for us as well.

- Well, I'm glad to see late night back 24/7, just a sign finally that nature has healed, and happy birthday, by the way, 70 years for the company. Thank you for that, Danny's CEO Kelli Valade.