There is a lot of truth to the notion that franchisees can run stores better than companies. Denny's, similar to its market competitors, is now banking on this strategy for future growth.
— Danni Santana
Denny’s plans to refranchise nearly all of its company-owned stores by the middle of 2020, in efforts to create a more low-risk business model, the chain said on its fourth-quarter earnings call, Tuesday.
Ten restaurants have already been sold to franchisees, including two in the first quarter of 2019, according to President and CEO John Miller.
“We are very pleased with interest from the franchise community and excited by the shareholder value this strategy will create,” Miller told analysts, adding that each location will be sold for around $2 million each.
Over the next 12 to 15 months, a total of 90 to 125 restaurants will be offloaded to franchisees, with mandates to modernize locations as part of Denny’s Heritage Remodel Program, according to the company. The casual dining chain aims to be up to 97 percent franchised by the second quarter of 2020.
Denny’s completed a total of 203 store remodels in 2018, including 41 in the fourth quarter. Store makeovers include new hardwood floor tiles, contemporary booths and tables, and new light fixtures.
As of the end of December, 81 percent of Denny’s system has completed renovations. The company now says it expects 90 percent of its stores to feature the updated look by the end of the year.
“Our Heritage remodel program continues to perform well, consistently receiving favorable guest feedback and generating mid-single-digit ranges of sales lift,” said Miller.
Off-Premise Remains Steady
Another well-performing segment for Denny’s is delivery. Similar to the company’s third quarter, off-premise orders continue to hang around 11 percent of total net sales. That figure is up from 7 percent of sales when Denny’s first launched its delivery platform in 2017.
“Delivery continues to drive the expansion in our off-premise business, and we have observed a steady progression of company and franchised restaurants adding delivery channels over the last two quarters,“ Miller said.
Approximately 71 percent of its domestic system is now actively engaged with at least one delivery partner, he added. Margins on deliveries range from the low teens to upper twenties percentage wise, depending on third-party fees.
Domestic system-wide same-store sales grew 1.4 percent at Denny’s in the fourth quarter, compared to a 0.8 percent uptick for the year. Company guidance for 2019 estimates same-store sales of between zero and 2 percent, even with ongoing refranchising efforts.