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Iconic American diner chain Denny’s Co. (NASDAQ: DENN) stock has seen better days. The 24-hour, all-day breakfast and casual dining restaurant’s shares recently hit a 52-week low of $6.33 as its restaurants are suffering from soaring inflation costs and soft consumer spending trends. As of March 31, 2024, the company has 1,614 restaurants, of which 1,539 are franchised and 75 are company-owned.

Denny’s stock is trading down 35% year-to-date (YTD), trading at only 11.77x forward earnings.

Denny’s competes in the consumer discretionary sector with restaurant competitors like Dine Brands Global Inc. (NYSE: DIN), operator of IHOP, First Watch Restaurant Group Inc. (NASDAQ: FWRG), Darden Restaurants Inc. (NYSE: DRI) and Brinker International Inc. (NYSE: EAT).

Can The Acquisition of Keke’s Breakfast Cafe Move the Needle?

Denny’s acquired breakfast restaurant chain Keke’s Breakfast Café for $82.5 million in 2022. The popular fresh, made-to-order contemporary breakfast, brunch, and lunch chain is located mostly throughout Florida. Keke’s only serves made-to-order breakfast items, and the restaurant is open from 7:00 a.m. to 2:30 p.m. EST daily. Many locations also serve cocktails.

Higher Quality Food and Expansion Outside of Florida

Keke’s has a reputation for higher-quality food, as evidenced by its outsized number of 4- and 5-star Yelp reviews. As of March 27, 2024, there were 61 Keke's cafes, of which 50 were franchised and 11 were company-owned. The company tested a new Keke’s café outside of Florida in Hendersonville, Tennessee, to a remarkable response. The reception was so positive that 14 agreements have already been signed for new Keke's cafes, with four company-owned restaurants under construction. Keke's average sales are $1.8 million per location, which is around the same sales as the average franchised Denny's location. However, Keke's is only open from 7:00 am to 2:30 pm EST compared to 24 hours for Denny's, which could mean higher operating margins and lower operating costs.

Denny Shuttered 60 Restaurants But is Expanding Keke’s

Denny's suffered a one-two punch in the past four years. The pandemic crippled its business, and then it got clobbered by inflation. Denny's had to shudder 60 restaurants as franchisees couldn't afford to keep them open. Skyrocketing food and labor expenses elevated the average cost to operate a Denny’s location to soar by 20% last year from $1 million to $1.2 million annually. However, Denny’s is still planning to open 30 new locations in 2024. Modern locations tend to generate double sale volumes compared to older legacy locations.

DENN Stock is Attempting to Recover From a Bear Flag Breakdown

The daily candlestick chart for DENN shows a bear flag breakdown pattern that formed on June 5, 2024. Shares fell from $7.34 to a swing low of $6.33 on January 17, 2024. The daily market structure low (MSL) trigger forms a breakout through $7.20. The daily relative strength index (RSI) bounced to the 50-band as it decided to continue rising or reverse back down. Pullback support levels are at $6.77, $6.33, $5.95, and $5.61.

Denny's Underperforms in Q1 2024

Denny’s reported Q1 2024 EPS of 11 cents versus consensus estimates for 14 cents, missing by 3 cents. Adjusted EBITDA was $18.4 million. Revenues fell 6.4% YoY to $109.97 million, falling short of the consensus analyst estimate of $115.17 million. Domestic same-store sales (SSS) are down 1.3. Domestic franchised restaurants SSS were down 1.2%, while company-owned restaurants were down 3% YoY. The company opened five domestic Denny's locations, three international locations, and three Keke's company locations. The adjusted franchise operating margin was 52.5% or $30 million, and the adjusted company restaurant operating margin was 11.5% or $6 million.

Denny's Optimistic Outlook for 2024

Denny's expects domestic system-wide SSS to be between 0% and 3%. Total consolidated restaurant openings are expected between 40 and 50 units, including 12 to 16 new Keke's restaurants. Commodity inflation is expected between 0% and 2%. Labor inflation is expected between 4% and 6%. Adjusted EBITDA is expected between $87 million and $91 million. The company will expand its third virtual restaurant, Banda Burrito, under its agreement with Franklin Junction, a ghost kitchen operator.

Denny's CEO, Kelli Valade, commented, "I am very pleased that our first quarter domestic same-restaurant sales and traffic outperformed both the family and casual dining segments while overcoming the industry's tough operating environment. We were also excited for Keke's to expand outside of Florida and begin testing our new design in the latest Florida openings.”

Denny's analyst ratings and price targets are at MarketBeat. The consensus price target has a 61% upside.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.