Denny's - Earnings Call - Q3 2021
November 2, 2021
Transcript
Speaker 0
Good day, ladies and gentlemen. Welcome to the Denny's Corporation Q3 twenty twenty one Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Curt Nichols, Vice President of Investor Relations and Financial Planning and Analysis. Please go ahead.
Speaker 1
Thank you, Keith, and good afternoon, everyone. We appreciate you joining us today for Denny's third quarter twenty twenty one earnings conference call. With me from management are John Miller, Denny's Chief Executive Officer Mark Wolfinger, Denny's President and Robert Vorossi, Denny's Executive Vice President and Chief Financial Officer. Please refer to our website at investor.dennys.com to find our third quarter earnings press release along with the reconciliation of any non GAAP financial measures that are mentioned on the call today. This call is being webcast, and an archive of the webcast will be available on our website later today.
John will begin today's call with a business update. Mark will then provide some comments around restaurant capacities, our franchisees and development. Then Robert will provide a recap of our third quarter financial results and current trends. After that, we will open it up for questions. Before we begin today, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that certain matters to be discussed by members of management during this call may constitute forward looking statements.
Management urges caution in considering its current trends and any outlook on earnings provided during this call. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's most recent annual report on Form 10 ks for the year ended 12/30/2020, and in any subsequent Forms eight ks and quarterly reports on Form 10 Q. With that, I will now turn the call over to John Miller, Denny's Chief Executive Officer.
Speaker 2
Thank you, Kurt. Good afternoon, everyone. Our third quarter domestic system wide same store sales started out very strong as consumer confidence was on the rise and families were enjoying summer vacations, some for the first time in two years. However, average daily COVID-nineteen case counts across the country accelerated throughout the quarter and case counts remained elevated with average daily cases at their highest level since January. The result was pressure on consumer confidence as well as dine in transactions throughout the industry in August and September.
Thankfully, the improvement in case counts in October yielded a return in dine in transactions to their highest levels since the pandemic began, with same store sales once again surpassing the 2019 levels. Furthermore, approximately half of the domestic system generated positive sales in the month of October approximately half of the domestic system generated positive sales in the month of October, and each of our top four states were positive as well. And I am even more encouraged by the stickiness of our Denny's based brand off premise business, which has remained strong at approximately 20% of sales compared to its pre pandemic trend of 12%. Additionally, during the third quarter, we substantially completed the rollout of our second virtual brand, The Meltdown, to approximately half of our domestic system. Virtual brand sales for both the Burger Den and The Meltdown remain highly incremental at approximately 3% of sales.
These brands provide opportunities not only at dinner and late night to leverage underutilized labor, but we continue to see a meaningful number of transactions during the week versus the weekend. Our teams have accomplished this while navigating persistent industry wide staffing challenges that have impacted our ability to execute at our highest potential. Despite the expiration of enhanced unemployment benefits, personal saving rates remain above pre pandemic levels. Therefore, we have not experienced a significant increase in staffing levels, which impacts our effective operating hours. We still view this as a near term challenge that we are combating with extensive hiring efforts.
However, we expect it will take a few more quarters to return to pre pandemic staffing levels and effective operating hours. I will now touch briefly on our four key guest centric themes and some of the new and exciting investments we are making in these areas. The first area is focus is reassurance. We do remain committed to reassuring our guests that Denny's provides a safe dining experience by consistently executing our enhanced cleanliness and sanitation procedures at all customer touch points. Our second area of focus is value.
We understand that value comes in different forms and has a different meaning for each type of guest. We consider our value approach to be a comprehensive balance between price, abundance, convenience and bundled value. Our third area of focus is convenience. We believe guests will continue to expect technology to enhance their dining experience, whether in our restaurants or through off premise options, like our well established Denny's On Demand platform or our two new virtual brands. We are committed to optimizing the digital experience for our guests as evidenced by our recent launch of the next phase of our technology transformation.
This phase included a revamped dennys.com website, a new easy to use digital app with frictionless ordering and checkout, smart upsell and cross sell capabilities as well as personalized profiles and digital wallets for rewards. In fact, since our digital relaunch, there have been approximately 40,000 net new app downloads and approximately 100,000 net new rewards members. Additionally, our updated mobile app receives very high star ratings on both Apple and Android devices. Further enhancing our focus on convenience, we're excited about the next phase of our technology transformation. We will begin the rollout of a new cloud based restaurant technology platform during the 2022 that will include enhancements such as waitlist and table management as well as lay the groundwork for future enhancements as we continue to build towards next generation customer experiences with even more innovation and functionality.
This rollout is expected to be substantially completed by the end of twenty twenty three. And our final focus area is comfort. We have already established a history of providing a comfortable dining experience through our successful heritage remodel program and look forward to relaunching our heritage two point zero program next year. Furthermore, we are very excited to announce our latest investment in the brand and our revitalization strategy, which is the rollout of our kitchen modernization project. The majority of our company restaurants along with a group of franchise restaurants have been testing the equipment package throughout 2021.
Based on the positive guest feedback, we're expanding this initiative to the entire domestic system. The new equipment allows us to accomplish three main goals. First, the new equipment package will reduce complexity in the kitchen, both improving efficiency and reducing waste. This simplifies execution for our cooks and results in more consistency for our guests. Second, the oven delivers improvements to our current core items, impacting over 4,500,000 plates every week and allows for improved quality and consistency for our breakfast proteins.
Our bacon is crispier and sausage is more evenly browned. And third, investing in this new equipment provides the ability to enhance our menu offerings across all dayparts, but especially further elevating the dinner daypart with new comforting entrees, sides and baked desserts. The rollout is expected to begin during the 2022 and be substantially completed by the end of twenty twenty two. The total domestic franchise system investment for the new cloud based technology platform and kitchen equipment package is approximately $65,000,000 To assist franchisees, we will be allocating approximately $10,000,000 toward the cost and installation and have also negotiated favorable financing terms on their behalf for the remaining cost. In closing, we have a lot of energy in this iconic brand.
We are very encouraged to see our October sales results once again surpass twenty nineteen levels. We're also excited to be kick starting our revitalization strategies again. Our new technology transformation, including our revamped website and mobile app, the new restaurant technology package that will greatly enhance our operations and guest experience, the new kitchen equipment package, which will propel menu innovation and the impending relaunch of our Heritage two point zero remodel program. And all of this together should ultimately drive incremental traffic. This enthusiasm is bolstered by our extraordinary group of dedicated franchisees and their confidence in the long term vision of the brand.
Their excitement around these initiatives and the investments we are making gives me great confidence about the future of this brand. With that, I'll turn the call over to Mark Wolfinger, Denny's President, to discuss more about our franchisees and development. Mark? Thank you, John.
Speaker 3
I want to echo your comments about the confidence and optimism we have for this iconic brand and the exciting initiatives ahead. I also want to add that the enthusiasm and energy our franchisees had during our recent annual Denny's Franchise Association Convention was undeniable. Having the opportunity to see our franchisees in person for the first time in nearly two years was a great experience as so many expressed their positive outlook for the brand. We are eager to return to our historical position as America's twenty four hour diner and have made steady progress over the last few months. We currently have approximately 70% of our domestic system operating on average at least eighteen hours per day.
This is a 15 percentage point increase from July, resulting in 20 effective operating hours across the system. Approximately 45% of our domestic system is currently operating twenty four hours a day, seven days a week. An additional 8% of our restaurants is operating twenty four hours during the weekend. We continue to work with our franchise system, franchisee by franchisee, unit by unit, to map out a plan to extend our effective operating hours per day, assuming staffing challenges subside over the next few quarters. We are also being very proactive with our hiring efforts as we launch our second national hiring tour, which leverage our longstanding relationships with historically black colleges and universities, the National Urban League and the National Society of Hispanic MBAs.
Turning to development. We are very pleased to deliver net positive unit growth in the third quarter. This growth was supported by the opening of seven franchise restaurants, including four international locations in Canada, partially offset by five closures. I'd now like to take a few minutes to update you on our franchise system. With dining sales at the highest level since January and the stickiness of our off premise business, we are very pleased to see nearly 90% of our franchise restaurants in October, exceeding the 70% of 2019 sales threshold required to cover both fixed and variable costs.
With sales above pre pandemic levels, multiple rounds of federal stimulus and a year to date net decline of only three restaurants through September, our franchise system continues to
Speaker 4
be
Speaker 5
strong. Our development pipeline remains intact, including approximately 75 remaining commitments from our recently completed refranchising strategy. Additionally, our development team is focused on securing market share and has a proven record of converting existing spaces, both inside and outside the restaurant industry into successful Denny's locations. In fact, in the last ten years, approximately 60% of our openings have been conversions. These less capital intensive opportunities provide enhanced ROIs for franchisees, and our experienced development team is already assessing the landscape for future Denny's locations.
I'll now turn the
Speaker 3
call over to Robert Vorostik, Denny's Chief Financial Officer, to discuss the quarterly performance. Robert?
Speaker 5
Thank you, Mark, and good afternoon, everyone. I would now like to share a brief review of our third quarter results and current trends as well as our expectations for full year 2021. As a reminder, I will be comparing our 2021 domestic system wide same store sales to 2019 as we believe this comparison still provides a more consistent and informative representation of our recovery. Additionally, we will continue our standard practice of comparing to the 2020 prior year in our press release. Domestic system wide same store sales during the third quarter declined 0.1 compared to 2019.
After highlighting positive preliminary same store sales for July during the second quarter earnings call, August and September softened as new COVID-nineteen cases increased. In addition, the quarter was impacted by the availability of labor that continues to challenge our return to twenty four hour operations. Approximately 45% of our domestic restaurants are currently open 20 fourseven. Domestic restaurants, which were open twenty four hours in the third quarter, delivered a same store sales increase of approximately 11% versus 2019 compared to a decline of approximately 9% at domestic restaurants operating with limited hours. We still believe this performance differential presents an ongoing opportunity as our system looks to extend its operating hours.
With that being said, we are encouraged that preliminary domestic system wide same store sales results for October increased 0.8%, with approximately 55 of our domestic restaurants still operating with limited hours. Now I want to spend a few moments providing an update on the performance of our virtual brands. The Burger Den is currently live at over 1,100 locations, while the Meltdown is live at nearly 800 locations. Both rollouts are now substantially complete. And as John mentioned earlier, these virtual concepts continue to deliver approximately 3% of highly incremental sales while leveraging labor during the underutilized dinner and late night dayparts.
They are also over indexing during the weekdays compared to the Denny's based brand. Now turning to our third quarter results. Franchise and license revenue increased 30.9% to $57,300,000 primarily due to improving sales from dine in restrictions in the prior year quarter. Franchise operating margin was $29,900,000 or 52.1 percent of franchise and license revenue compared to $19,700,000 or 45% in the prior year quarter. This margin increase was primarily due to the improvement in sales performance at franchised restaurants, partially offset by fewer equivalent units.
Company restaurant sales of $46,500,000 were up 45.9%, primarily due to the improvement in sales from reduced dine in restrictions in the prior year quarter. Company restaurant operating margin was $7,900,000 or 17% compared to 500,000 or 1.7% in the prior year quarter. This margin increase was primarily due to improvements in sales performance and the leveraging benefit of lower staffing at company restaurants. Additionally, we recorded approximately $400,000 in favorable reserve adjustments during the third quarter, which benefited the company restaurant margin operating margin by approximately 0.8 percentage points. We experienced commodity inflation of approximately 10% during the quarter, which was primarily offset by favorable mix shifts driven by lower value incidents along with pricing.
This resulted in a 90 basis point improvement in our product cost line. We expect similar commodity inflation during the fourth quarter as inflationary pressures are likely to remain in the near term. Total general and administrative expenses were $16,500,000 compared to $13,700,000 in the prior year quarter. This change was primarily due to increases in both performance based incentive compensation and share based compensation expense in addition to temporary cost reductions during the prior year quarter. These increases were partially offset by market valuation changes in our deferred compensation plan liabilities.
As a reminder, share based compensation expense and market valuation changes are noncash items and do not impact adjusted EBITDA. These results collectively contributed to adjusted EBITDA of $24,400,000 The provision for income taxes was $4,100,000 reflecting an effective income tax rate of 25%. Adjusted net income per share was $0.16 compared to $01 in the prior year quarter. During the third quarter, we generated significant relative adjusted free cash flow of $14,300,000 after cash capital expenditures, which included capital maintenance of $2,200,000 Our quarter end total debt to adjusted EBITDA leverage ratio was 2.7 times, and we had approximately $185,000,000 of total debt outstanding, including $170,000,000 borrowed under our credit facility. As we have stated in the last few earnings call, the pandemic affirmed for us the value of a conservative leverage philosophy.
As such, we are currently more comfortable with a range between two and three times adjusted EBITDA in the near term, whereas prior to the pandemic, we would have targeted longer term leverage somewhere between 3x and 4x. During the quarter, we announced the refinancing of our amended and restated $350,000,000 revolving credit facility to a new five year $400,000,000 revolving credit facility. With the enhanced flexibility provided by this new credit facility, we were excited to relaunch our multiyear share repurchase program, and we allocated $6,600,000 to share repurchases during the quarter. Between the end of the third quarter and 10/29/2021, we allocated an additional $6,800,000 to share repurchases, resulting in approximately $235,000,000 remaining under the existing repurchase authorization. Since beginning our share repurchase program in late twenty ten, we have allocated approximately $567,000,000 to share repurchases, approximately 55,000,000 shares at an average price of $10.34 per share, leading to a net reduction in our share count of approximately 36%.
In addition to share repurchases, this long term financial flexibility allows for other brand investments such as the technology transformation and kitchen modernization initiatives that John mentioned earlier. These initiatives are backed by a company contribution of approximately $10,000,000 towards the cost and installation at domestic franchise restaurants. We have also negotiated favorable financing terms in a loan pool with a portion backstopped by the company to support our franchisees for the remaining cost. Let me now take a few minutes to expand on the business outlook section of our earnings release. The following estimates for our full year 2021 reflect management's expectations that the current economic environment will not change materially.
We anticipate a domestic system wide same store sales decline of approximately 5% compared to 2019. Our expectations for total general and administrative expenses are between $67,000,000 and $69,000,000 including approximately $13,500,000 related to share based compensation, which does not impact adjusted EBITDA. Based on the guidance I just described, we are expecting adjusted EBITDA of between $84,000,000 and $86,000,000 In closing, as we work to overcome near term commodity inflation and staffing challenges that impact our effective operating hours, we remain optimistic about our potential for additional sales growth. Finally, and most importantly, I want to mention how proud I am of our franchisees and the entire Denny's team who have remained focused on serving our guests while positioning this iconic brand for continued success. That wraps up our prepared remarks.
I will now turn the call over to the operator to begin the Q and A portion of our call. Thank
Speaker 0
please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause a moment to give everyone an opportunity to signal for questions. We'll take our first question from Michael Tamas with Oppenheimer and Company.
Please go ahead.
Speaker 6
Thanks. Good afternoon, everyone.
Speaker 5
Hey, Michael.
Speaker 6
Hey, guys. I was wondering if you could just sort of tell us what the full year guidance implies for your fourth quarter same store sales relative to 2019 levels, just so we're all on the same page.
Speaker 5
Yes, Michael. Happy to do so. So that implies that down 5% on the full year would imply a range somewhere between flat and up 3% to still hit that down 5% on the full year.
Speaker 6
That's perfect. Thanks for that. Then you mentioned third quarter was helped by lower staffing levels. Can you maybe talk about how much do you think that helped this quarter so we can sort of understand what your core margins might look like going forward as you sort of get back to better staffing levels? And then related to that, you mentioned less value purchases by consumers and more pricing helped to offset that 10% inflation and you're talking about similar inflation in the fourth quarter.
So do you think the pricing and value dynamics are also the same in the fourth quarter? Thanks.
Speaker 5
So Michael, this is Robert. I'll start with that margin question and then pass it over to John. So I think the best way to think about margins, again, it's pretty volatile right now with the lack of 20 fourseven and more than half the units, 55% of the units. So
Speaker 7
I
Speaker 5
think the best way to frame that is to kind of point you back to where we were prior to the pandemic with our latest refranchising strategy, where we said that we would target 18% to 19% corporate company store margin. We still think that that holds true. Ultimately, longer term, we do have some near term inflation benefits from lower staffing that will ultimately get billed, but we will move back to all of the units ultimately being 20 fourseven. So you throw that all together. And ultimately, we do believe, longer term, we get back to those 18% to 19% margins, on the company side.
So that's that piece, and I'll pass the pricing question over to John. So
Speaker 2
Yeah. So we we we did experience, you know, sort of a combination of a series of events. We with staffing challenges, as you can imagine, filling the dining rooms is is it's fair amount that we fill it with full price guests. So the focus on value sort of disappeared across the industry in general, not just full service, but just pretty much across the entire industry. So that's given some buoyancy to check.
So that along with pricing is a little bit higher than normal pricing to cover wage and commodity inflation creates a little bit a check that's higher than the normal run rate as well. So when you put all those together, you have a flow through from that missing the the value part of the the normal part of the process is to stimulate some of your sales through a value component. So the value part of our equation is down, and I think you'll see that consistent trend across industry at the moment.
Speaker 6
Thanks, guys. I'll hop back in.
Speaker 8
Thank you.
Speaker 0
We'll take our next question from James Rutherford with Stephens Incorporated. Please go ahead.
Speaker 9
Thanks very much and for all the information here. I was curious on the kitchen modernization effort. That $65,000,000 price tag indicates, I think, about $40,000 per store. Correct me if I'm wrong there. But with all the costs that operators are dealing with now, I'm kind of curious what the reception has been for that investment.
So kind of a why now kind of question. And then also if you've been able to quantify some of those food or labor savings that you referenced.
Speaker 2
Sure. So surprisingly, our franchisees have been very enthusiastic about the project. This is not something that we just tested in 2021, although our prepared remarks talked about the fact that it's been in test throughout this year preparing to roll out. But this has gone on for some time. We've been on this long journey of revitalization of Denny's as America's Diner and we focused for many years on the breakfast and lunch component.
The part of preparing for dinner has been the launch of these ovens. But to do dinner items that you don't cook to order, which would be a big change for a normal breakfast or grill cook, you have to have hot holding equipment with that. Have to have different refrigeration on the line. You have to have a training program that supports it. So our franchisees have been saying, well, this takes us back to the heritage of our brand way back when and they've been enthusiastic for the day that we could finally get to this stage in our company.
The why now, I'd I'd say that, you know, there was very little discussion around the timing or that there's high wage inflation or high commodity inflation or tough time staffing coming out of pandemic. Most franchisees are looking past that to the longer term, which has been a really nice place to be for us. Our franchise convention, there was tremendous enthusiasm around it. The the workshops were filled with people, you know, learning more about where product could go. And some of our vendors along with our product team actually demonstrated some of the things that will be available several quarters down the road.
So that sort of takes care of the answer around the kitchen. As
Speaker 7
far
Speaker 2
as the technology, likewise, when we see this much of our business going to both virtual brands, which has been seen as highly incremental as well as our Denny's On Demand, The enthusiastic reception our guests has given this new platform of the dennys.com website, really high scores from, you know, folks saying how much easier it is, how much more frictionless it is to be able to order online, to navigate the menus, to add, delete, plus or minus, their own customization, their build your own capabilities. It's been such a positive, experience for our guests and and the notable comments from our our guests our franchisees have been enthusiastically embraced this time to move to a cloud based system, to move to a system that had more capabilities. And and even though that rollout takes a little bit longer period of time, there's enthusiasm to see that kicked off so that as we get to the end of the pandemic and transactions continue to improve, we will have those capabilities in the system. It's a long journey to the completion of that, and so no one wanted to see that delayed. We can let Robert speak to sort of the mix between those two investments, but that that that amount of money is, is both kitchen modernization and tech transformation.
Speaker 5
It that's right, James. It is, both the the $10,000,000 is the aggregate for both of those. I I think the the way that that's out is about by well, about $60.40 between the the kitchen and the and the the technology. But, again, it's wrapped up in in total between those two. We we with regarding total, the the the 65,000,000 is for the franchise piece.
We did put together the the financing format, and that'll come out, over time. Now one of the interesting pieces with regard to that, about 25% of our franchisees, have said that they they're we've given their financial position. They're going to, they're they're gonna pay for it in cash. So, again, speaks to to some of the health of the franchisees. 75% of the company units, by the way, already have the the kitchen equipment.
So we will include the the balance of that will will likely run through the the q four capital, so that won't necessarily be be in. It it wasn't it wouldn't be a big number considering we have 75% already installed, but but it'll impact the balance will impact q four, not extend into into 2022.
Speaker 9
Okay. Yes. Thanks for all that information. And then it's really helpful. The second question is just on the staffing situation as well.
But I wasn't sure if there was a comment made earlier that staffing has not materially improved. I'm not sure if that was a comment in regards to company or franchise. But I'm curious if that's the case, how there has been growth in the number of units running 20 fourseven each month? Not huge growth, but it's gradually improved. How is that happening if labor is also not improving in lockstep?
Thanks very much.
Speaker 2
That's a great question. As you can see, we're trying to be consistent with our comments. You might have asked it a different way. If staffing's got momentum, then why haven't? More stores moved 20 fourseven, so we wanted to make sure that our comments were tempered in our prepared remarks.
We have moved up about 90 units from July until now that are 20 fourseven. We do see momentum in staffing, but we do see this playing out over, you know, a few more quarters rather than something happening just overnight in the next few weeks. So remember, when you put when you put these employees on, there's a little bit of a vetting period and a testing period and a training period before you actually extend the hours. And so we just wanted to be tempered. There is enthusiasm for getting there, a lot of support from our franchisee association, from board through committee members, but but just also, you know, a request for for us to be know, mindful of the fact that we don't wanna we don't wanna open up those hours and have a miserable experience for our guests with somebody new and not capable yet.
So this is gonna take a little while, but there is momentum. It is improving. And so I think that's a good call out that our remarks, our prepared remarks maybe didn't tell the whole story that there is positive momentum in staffing.
Speaker 9
I love that approach. Thanks very much for the help.
Speaker 8
Thanks, James.
Speaker 0
We'll take our next question from Nick Setyan with Wedbush Securities. Please go ahead.
Speaker 10
Thank you. Just going back to the pricing question, I know historically you've been hesitant to take much more than say 2%, 3% pricing. I guess just given the context of inflation today into first half of next year, are you comfortable taking a little bit more pricing than that, what that pricing could be? Again, I mean, the kind of context of just, you know, a lot of peers taking a lot more pricing than we've seen historically.
Speaker 2
Nick, that's a great question. I I'd say the simple answer is yes. We're comfortable with something above our historical norms, and we we don't have, you know, quite the hesitation you would normally have. There has been considerable wage and commodity inflation. And and I I think it's fair to say that our franchisees who largely control that, while disciplined, will be ahead of the historical average.
Speaker 10
Is there a way to yeah. At least in the company owned side that you guys do have visibility, in, to maybe quantify the the non late night headwind from staffing, constraints in terms of sales?
Speaker 2
I think it's largely staffing. I don't know that there'd be much more than that to quantify the difference. If you're asking reluctance on a franchisee to go to twenty four seven, that noise is in, you know, the brand and has been here for probably twenty years plus. I've been here for just slightly ahead of ten years now, and so you see a small group of folks that say, gosh, you know, in my neighborhood, it's pretty sleepy. But that's a pretty small contingent.
You know, most understand the beneficial economics, the momentum we have in late night with third party, and, you know, and and I'd say the the the conversations in our brand around convention and in most circles are more just give us time to staff properly. So I I think it's really highly correlated to that single topic.
Speaker 7
Got it. And just a couple if I got to the heart of your
Speaker 2
question or not, but that's what I interpreted your question to me.
Speaker 10
That's okay. We'll follow-up offline. On the kitchen modernization cost next year, is that all within g and a in terms of the 10,000,000?
Speaker 5
Yeah. That's an excellent question, Nick. No. It actually won't come through g and a at all. So the so way the way that will be recognized is over the balance, the average balance of the life of the franchise agreement.
So that's somewhere likely, let's say, five to seven years. So what you'll see is, probably a million and a half to $2,000,000 that's gonna run through the franchise margin for each of the next five, six, seven years. So we won't have we won't take that hit all at one time while the cash will come out the door as those are, as those are put into the system. It'll actually, in a very technical sense, to answer that, will be a contra revenue item is the way that'll fall out. So it won't actually be an expense.
It'll be a contra revenue item, but that's a very specific technical answer to that. But it will not impact G and A. It'll impact the franchise margin, and it will extend over the average life of the remaining franchise agreements.
Speaker 10
Got it. Another clarification. The October date number, at least for the company owned side, can you maybe tell us what the average weekly sales number for the company owned side is for October?
Speaker 5
So I Nick, I I we what I know is that we're up point eight, and I I can, again, reiterate the the fact that likely the differential between the twenty four seven and the non twenty four seven, is still in that range of that 20 differ differential. It's about 1% for the system. Again, that point eight, and the company is generally higher than the franchisees.
Speaker 10
Okay. Thank you.
Speaker 5
Thanks, Nick.
Speaker 0
We'll take our next question from Jon Tower with Wells Fargo. Please go ahead.
Speaker 7
Hey. Great. Thanks for taking the questions. First, when John, I think you had mentioned something earlier in the call about the new kitchen equipment allowing you to kind of get into some new products, specifically kind of geared towards the dinner time period. So I I was wondering if you could expand upon that a little bit, maybe where those products are in test today, if they are in test today, and how we should think about those items versus the current menu.
You know, is it going to be new proteins, or is it utilizing a lot of the SKUs that you already have today just in a different format because of the equipment that you have? And, yeah, I'll pause on that.
Speaker 2
Well, they they could impact breakfast, lunch, dinner, or late night. We we called attention to the fact that, you know, there there will be some enhancements at dinner. One of those, you know, our our bread program is one I could call attention to. Right now, we have a garlic toast, and that's it. So the inability to have a breakfast or a finished biscuit or dinner roll, that would be a capability we'd have in the future.
I hesitate to mention too many others. We we do have a pretty good testing protocol. We've exposed our franchisees to a number of the products in a series of cuttings and through the normal ways in which we communicate to our franchise system. There is some enthusiasm about it. But but at the same time, the menu can only be so big at the same time.
So I I think the process here would be very focused and disciplined about rollouts and and and and so, you know, as first things first is we improve the quality and the ability to manage our current shifts just with this equipment. So the ability to get through a busy shift is enhanced. It does save waste. It does save some amount of layer that labor that we think will be redeployed rather than saved technically. And and so it just helps run the business better.
So in that business case alone, got our franchisees very enthusiastic about it. So within what comes at dinner will just be something that'll come once these are fully installed in the full system and and which which is still a little ways down the road. But, you know, it'll it'll be the typical array of things to support our our diner positioning.
Speaker 7
Got it. And and apologies if I missed this earlier, but did you say what percentage level you're at with respecting to staffing levels versus 2019?
Speaker 2
I think we gave that level, but we but we it's it's sort of hardwired in the answer of, 90 additional stores versus July that are twenty four seven. And we have a effective twenty hours now that's moved up from where we were in July. So we have the the number of stores in the system. You know, as we move up in twenty four hours, the number that are in restricted hours moves down, but it doesn't tell the full story that they're also moving up in in total hours or eighteen hours plus. So so both the twenty four seven and the eighteen hours is plus.
We're now at twenty effective hours per day across the whole system when you when you average in the 46% that are at twenty four seven. This drawing the rest of the system north. But that you know, you can sort of correlate that back to the number of stores or staff, but it it doesn't give the total headcount missing. I will say this. Our our hiring, as I said earlier, it it is showing promising signs of building momentum.
Speaker 7
And and do you think you need to step back twenty nineteen levels across the system? Obviously, you're trying to drive a a late night business with these virtual brands, but it sounds like this kitchen equipment will also allow you to manage hours a little bit better, maybe redeploy the labor better in the stores. But I guess, do you think these stores really need to be staffed at those levels again?
Speaker 2
What I would say is that, we ultimately hope so.
Speaker 0
That's
Speaker 2
right? So staffing grids in our industry are pretty simple. They're tied to transactions. So you have some fixed variable costs that are pretty dynamic. You get past fixed level pretty fast with management and a few key positions, and the rest is variable.
And so as transactions increase, you add labor back, and we would we would we see us we see ourselves as a brand that'll get ultimately get back there. And and so we are hopeful of meeting every single body that we're that's missing from the roster right now down
Speaker 7
the road. Got it. And then just digging into the commodity inflation comments, think, Robert, you had mentioned that you expect similar levels in the fourth quarter as you saw in the third quarter, which should imply probably 10% or so. Wanted to get your take on your thoughts for 'twenty two and your ability to or the franchisee ability to start potentially locking in any sort of product for 'twenty two and at what levels they're potentially seeing now. You know, any any thoughts there would be helpful.
Speaker 5
Yeah. Thanks, John. So so with regard to to 2022, I I think what what we really described is that 10% in q three. We've said that that will will remain for, the near term. The implication that that's q four likely extending, into 2022.
We ultimately do see see it abating at at some point in 2022. That's the vision that we have. We will give that guidance as we get into February, but we don't, ultimately see this existing permanently. We do see some it peaking at some point likely in the first half. We do, keep our eyes open, to the opportunity to lock in.
The the dilemma right now, as you would suspect, is is that that everything is really at some pretty high level. So we, we are very opportunistic. And to the extent that we saw something that that we believed would be, at a market low or below average, looking out for the the the next six, twelve, eighteen months, we would take that opportunity to lock. It just really hasn't presented itself, at this moment, but but we are always looking for that opportunity.
Speaker 7
Got it. Thanks for the color. Thanks for taking the questions, Kevin. Thanks, John. Yep.
Speaker 0
We'll take our next question from Jake Bartlett with Truist Securities. Please go ahead.
Speaker 3
Great. Thanks for taking the question.
Speaker 4
I wanted to start with just your expectations for the next two months here of the year, just to make sure I understand. I know that sometimes when we take an average, there's different kind of weightings by month and stuff. But my math is that the November and December, given the range you've talked about, would be kind of flat to up 4%. And I'm trying to think about drivers to being on one or the other end of that range. Could you talk about maybe your confidence of of, you know, why you wouldn't expect to be at the at the higher end, you know, if if staffing is improving, if you're consistently adding hours, if you have a new digital platform, you're starting to get rolled out here, the meltdown contribution.
Just, you know, maybe some of the moving pieces as to as to what would drive you to the to the top or or the bottom end of the of of the range, if I'm right about the flat to 4% for for November, December?
Speaker 2
Right. No. I those those are great questions. I think the the headwinds and tailwinds are pretty well stated out there. You know, the the the tailwinds are stacking continues to improve, and therefore, it's hours would continue to expand.
We are confident in our promotional calendar. We have a very in spite of the all the things that are challenging in the environment, our franchisees are have, you know, some pretty enthusiastic body language about the investments we're making in the brand and the outlook for the future. On on you know, on the tailwind side, commodities and wage inflation and consumer confidence have been sort of on a little bit of a roller coaster, although October really looks very much more promising than with the Delta variant starting to subside. But as cooler weather comes on, you know, volatility around the world always creates headwinds. And and so we we have, you know, I I think, you know, guided I I think the simple answer is guiding with the same amount of precision and confidence and creates a little bit more ranges in guidance these days.
But we did say this would be positive flat to three. And
Speaker 5
Yeah. Jay, in front, a little bit more technical answer. Right? So so if you think about what we did with our q three guidance, we we had a little bit higher of a sales range than what we ended up producing that we we guided prior to the delta variant really grabbing hold. One of the things I can tell you, though, is that regardless of that, if you recall, we we provided the guidance range on adjusted EBITDA of 22 to 24,000,000.
And despite, you know, really kind of coming in below the sales range, we topped the the profit range. So, again, just, don't necessarily wanna have that same issue again with with sales, so trying to be conservative. And, again, we have proven that we can still bring that to the bottom line. And if you you if you convert that, adjusted EBITDA into free cash flow, adjusted free cash flow, that again approximates about 60¢ of every dollar, being brought down into into the adjusted free cash flow. So I I I think I get the the math that you're doing for the zero to 4% range.
And, again, we we just as as John mentioned there, it's just, it's a little bit difficult to to to be overly specific. But, again, we'll we'll we'll focus on delivering that profit with what comes through the top line.
Speaker 4
Great. Great. That's helpful. And then, you know, what what maybe this this could help frame the impact of the staffing. But could you talk about your your weekend brunch sales recovery versus 19 versus the the some of the other dayparts, whether, you know, weekday breakfast, you're starting to see more of a normalization as as we get, you know, back to to work or, you know, I would imagine No.
Yeah. Daypart that yes.
Speaker 2
Great question. Weekends have been stronger than weekday.
Speaker 4
Okay. And then and then We'll recover there
Speaker 2
in all likelihood ahead of the weekday.
Speaker 4
Got it. And that's despite likely you know, I would think that that's where you could have some some staffing issues be more of a constraint, but but but that's not happening, you know, in the weekends?
Speaker 2
Well, you'll you'll you'll cover your busiest shifts first and for sure. So it's I'm not saying that we don't have staffing challenges, you know, at all dayparts, but it's it's focused and concentrated on the hours where you're not open. So as we build staff and staffing momentum, the best training environment for them would be on the weekends when we're busier, and and then you turn them loose on to open up other other day parts and shifts. So we we are seeing, you know, again, more momentum on the weekends, and I'd expect that to continue through the fourth quarter.
Speaker 4
Great. And then in terms of the kitchen equipment and what you've seen, you know, in the in your company stores, it was, it sounds like maybe what you experienced there was you're able to convince the franchisees to go forward with it. So can you quantify any of the impacts on sales or any of the impacts on cost savings just so we can understand how, you know, I guess, how big a deal this could be, longer term?
Speaker 2
Okay. Just to give you some general ideas, when you're when you are able to, bulk cook in a high-tech new oven, then you free up space on the grill. And when you free up space on the grill, you the the cook is not sort of waiting or running up and down the line to be as efficient. So you improve some ticket times and you also improve some waste. The hot holding from products prepared in a, you know, much better quality and controlled environment like the oven, like browning our sausages on all sides, not rushing some products, flipping hash browns too early.
There's any number of products that just are better on the averages, and and then, therefore, you don't have as many of those pieces that don't make the shift and get thrown away. So it improves some waste and improves some labor and improves quality. But but the material improvement is how much easier it is to manage getting through, you know, a a challenging busy shift, especially when you're moving from breakfast to lunch on a weekend and you have the menu start to dynamically change from pancakes or burger buns or burgers filling the grill. The ability to have that space to just navigate the product mix is is is materially easier on the cooks, and the product quality has improved dramatically as as a result. So it it's it's around a lot of different little categories on the on the little pieces of here and there.
And we'll we'll be able to we'll be able to share this a little bit more specifically in the in the future. It's a bit early.
Speaker 4
Great. I appreciate the detail. Thank you.
Speaker 5
Thanks, Jake.
Speaker 0
We'll take our next question from Brett Levy with MKM Partners. Please go ahead.
Speaker 8
Thanks for taking my question. You think about Hey, Brett. All of the different pressures on the franchise system and all of the new investments that you're talking about now, how are they thinking and obviously you still have the 75 unit commitments, development? How are you thinking about what the next one, three, five years looks like? What's their appetite right now to take on additional pressures from openings while still trying to find enough labor to get the current operations up to full speed?
Speaker 2
That's a great question. Our franchisees sort of answer it in two different ways. There's this unbridled enthusiasm for the longer term, not only for family dining, but for our positioning in that as America's Diner. At the same time, the labor when we pull our franchisees and then speak to our franchise business coaches that have direct contact on a more of a daily basis with their franchisees in the trenches, they will say that the the staffing challenges, they're number one challenge. And so, you know, commodity and wage inflation runs right behind that.
And the rest of these challenges, they're a lot less concerned about. Not that they're not concerned. There's a lot of things they face. But whether it's a pandemic reoccurrence or lockdowns or masks or vaccine mandates or political environment or all the kinds of things that sort of show up on the radar over the last year to year and a half, they're way lower, and it's really more about staffing. So the near term staffing challenges impact a little bit of the body language toward development.
So I don't it's way too early for us to talk about one year or next year's guidance or two to three impact on remodels or development. But I'd say the franchisees, very short term are are are, you know, knowing they wanna see the brand grow and develop. They wanna meet their development commitments. And at the same time, I'd I'd say because of staffing, they're they're a little a bit more wary about the pace at which those things kick back in. And so as staffing abates, you know, confidence returns.
Meant meant to say as staffing challenges abate, confidence return.
Speaker 8
I'm going to try to ask this a different way on the staffing levels. What percentage of your system would you say if you had to quartile rank or if you could talk about like the bottom half of the bottom quartile, how challenged are they? How long have they been pressured where you think they can get where they want to get back to staffing levels, but they just can't seem to get the personnel to either join or stay regardless of whatever the the situation is. Can you talk about that bottom quartile a little bit more?
Speaker 2
Yes. Yes. I think we do think about it that same way. It's a great question. We think about the areas where we that it's been more challenging than others or areas where attraction is not as prevalent as as others, and we sort of focused on, you know, what's going on there, how can we assist, you know, what can we do to get the staffing challenges to abate quicker, you know, are there you know, are you participating incentives?
We wanna take a good look at their scheduling, their roster, and the number of inexperienced managers or cooks that makes it harder to onboard new ones or have a harder retention, bigger retention challenges for new ones. And and the fact of the matter is those that sort of went the farthest down have the farthest to come back, because they will have maybe no, you know, tribal knowledge, no cultural knowledge on their staff, you know, any experienced servers whatsoever. And so they're the ones that are struggling the most. It does seem to be isolated to a few areas that are, you know, sort of trailing the momentum of the rest of the brand. California was a concern for us early on where it didn't get the traction to Florida or Texas or Arizona right at first, but now it seems to really be picking up momentum.
So that was a big relief for our franchisees that reside and operate there. Their sales are coming back quicker, and it's outperforming most of the others in fact, all other states in the country. And so our franchisees' commitment to step up to wages and and commitments to full time hours for certain positions and all those things have sort of gone away. So there's a lot of positive momentum there. And so there's just a few areas where that where that lags, a couple states in the Midwest, Pennsylvania, and a little bit of Pacific Northwest where it went down a little further and has a little farther to come back.
It's coming, but it is lagging the rest of the system. But the confidence of how we got through that in other areas seems to be a strong indicator of what's yet to come. In a quartile or a quintile, it's probably one quintile at the present that represents the biggest headwind.
Speaker 0
Brett, this is the conference operator. You may have muted on your end.
Speaker 8
Oh, I'm sorry. Thanks.
Speaker 0
We'll take our next question from Eric Gonzalez with KeyBanc Capital Markets. Please go ahead.
Speaker 5
Hey, thanks for the question. Just given the store level profitability in the third quarter and the company owned stores with cost being about ninety percent ninety basis points favorable and very similar to 2019 levels, Are we assuming the franchisees are seeing a similar level of improvement? And if that's the case that 10% inflation, is being offset with modest pricing and mix improvements, is there a need to price above historical ranges in the near term? Or perhaps the need is a little less urgent than it had been in the past? Eric, this is Robert.
I'll start and then let John add on there. So we do have a tool. It's called a Lumen through which we capture about half of the franchise p and l's on a monthly basis. Through that tool, I would suggest that they are seeing similar effects with regard to the increased check, whether that be the mix of the pricing that we have taken to date and the deleveraging effect that we are seeing through the product cost line. Ultimately, when you look across that P and L, it's just not isolated into there.
We are seeing some similar wage inflation or or wage wage inflation. I don't wanna imply that it's similar to commodities, but we are seeing wage inflation. So it's really best, to look at those in tandem. I would suggest a what if you look at the 10% commodity inflation and some of the some of the work that we've done with the franchisees, we take a lot of time to educate our franchisees on pricing. Again, we do feel that remaining competitive with pricing is critical.
And to cover a commodity inflation of 10% would require about a a quarter of that in pricing, so two, two and a half percent to get there. So much less than than what you might otherwise anticipate. We did we take a lot of effort to educate our franchisees on that topic. It does vary, though, the the required level, of pricing because the the other factor there that I mentioned, labor inflation varies dramatically, across states. So, again, individual pricing determinants are are made by the franchisees, in those various situations.
But, our our efforts have been with regard to education on pricing, and the potential for not needing as much as one may otherwise think. So
Speaker 2
Yeah. I I couldn't add much to that other than it's, you know, it's it's very different. The therefore, a dynamic process. Every time we have a menu print to educate franchisees. We we do assist them with, you know, a review of the p and l on impacts of rent, labor, food, sort of total, whether or not they're trying to maintain some sort of percent achievement or whether they've got their cost covered.
And so it it is a dynamic process. So in in the same market, let's say LA, you have some franchisees that missed the last round and take a little more this time and others that kinda got it covered in the last round, we'll skip this time. So but we do or or we hold seminars with our franchise community to to walk in through quite a bit of detail and educate them on what's going on. We also use a company called RMS. They provide insights and then they work with our franchisees one on one.
And quite a number of our franchisees, you reach out to them to understand where they have pricing sensitivities and where they don't. And a a good portion of our franchisees are now in a discipline of at least heeding their advice to some to some degree. And then and then then the whole thing just sort of rolls up to what our averages are from one menu change to another. But but it's a it's a great question. Answer is some do not.
Some are covered already. Some are not, and we'll need to take some price.
Speaker 5
Got it. And then maybe if
Speaker 2
I could ask about
Speaker 5
the marketing plan right now. You know, you are a franchise business that collects advertising fees, and thus, you know, you have to spend those those dollars. And and this is happening at the same time when some of your large competitors are generally turning off the advertising and and maybe redeploying those funds into other areas. So my question is with the funds that you collected versus and and deployed, you know, you're pivoting away from value value advertising. So how are you maximizing the impact of what is likely an outsized level of mindshare versus what you would have achieved in the past with a similar budget?
Speaker 2
Yeah. I I do think that higher frequency, quick serve, or fast casual brands, you know, maintain a top of mind awareness from sort of proximity drive by and what have you. I think family and casual require you know, have an advantage when they're scaled and combined media versus, labor neighborhood markets and and and sort of have a little bit more dependency on, you know, a reminder of of how to use those brands and why to use them
Speaker 5
is one of the things that
Speaker 2
builds their ability to scale and consciously cannibalize and sort of penetrate markets a little bit deeper. And so I I would I would not say that we've achieved any top of mind awareness unaided, certainly. But, but in terms of influencing where I might have dinner tonight, I'd say that that, we would continue to spend our marketing dollars to drive awareness and trial and awareness and trial. We've been using those dollars through a combination of traditional platforms as well as social platforms. We think that we have, you know, a pretty good finger on the paws what's required to get the right reach and frequency of of the audiences that of, you know, of our core customer.
And and our annual calendar has has required some investments in in introduction and awareness around off premise because Family Guy has historically been a lower off premise provider than where we are today. We've used some of that to talk about diner positioning in sort of our twenty four hours and open all day. We use some of that to talk about value during value seasons, particularly after the holidays and back to school. And we use some of that to do product promotions of either new introductions or reinforcement of some of the the favorites on our menu. So so all of those tend to be in the mixed model when we do, you know, the the appropriate investments, and and I and I I think that that's required.
Some brands have have said let's you know, we got longer lines right now through the drive through. What do we do to hold on to that share? But I think they're less concerned about whether that's gonna run into full service. There's more concern that Denny's is not a threat to to McDonald's, but the grocery store might be. So I I do think you see people gearing up for premium promotions rather than value promotions rather than deep discounts and focusing on the premium quality sandwiches that they've launched and the like.
So you do you do seem to see that cadence in quick serve and fast casual these days. I do think that will influence full service promotions as well to some degree. It's a little early to know for certain, but but I think that seems to be the direction. A little bit of reluctance to run back to absolute discount type value promotions and a focus more on premium promotions, quality for the money, quantity for the money, bundled meal qualities rather than just deep discounts.
Speaker 7
Great. Thanks.
Speaker 8
Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's question and answer session. At this time, I'd turn the conference back to Mr. John Miller for any additional or closing remarks.
Speaker 2
All right. Thank you all for joining us today on the call. We are very pleased with the progress we've made through the pandemic and we do continue to navigate through the recovery. The demand for Denny's remains strong with same store sales trending above pre pandemic twenty nineteen levels in October, even with only 46% of our domestic system operating at 20 fourseven. As we safely welcome guests back into our dining rooms, our off premise business has remained sticky, supported by the successful launch of two new virtual brands, which are delivering approximately 3% in incremental sales for our system.
We continue to actively address the temporary staffing challenges with extensive hiring and training efforts, and we believe this situation will correct itself in due course. As it does, we see additional potential for our brand based on the performance of those restaurants already operating twenty four hours a day, seven days a week. And we are encouraged by the level of adjusted EBITDA and adjusted free cash flow generated by our highly franchised business model through the third quarter. We were also excited to begin returning capital to shareholders during this quarter, while at the same time announcing meaningful investments in kitchen equipment and restaurant technology platforms that will advance long term brand revitalization strategies. So we look forward to our next earnings conference calls in February when we will discuss our fourth quarter twenty twenty one results.
Thank you all, and have a great evening.
Speaker 0
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.