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STRATEGIC
Denny's operates under a franchise-focused business model. The corporation expects the majority of their future openings and brand growth to come from the development of those franchised restaurants. Most recently, they have been utilizing a revitalization and growth strategy by introducing hundreds of new locations. In general for marketing purposes, Denny's is focusing on a multicultural approach, with the trademark "See you at Denny's" to distinguish the restaurants as a common, easygoing place for today's diverse population of GenZ. However, what makes Denny's distinguishable from competitors and gives it an advantage in its market sector is its accessibility for families that cannot afford the expensive full experience of dine-in services. This is accomplished through cheaper main dishes, as well as routine discounts offered on meals.
SWOT Analysis
STRENGTHS: Menu offering, franchisee operations, operational network, liquidity position
Denny's offers a wide variety of products in its menu, expanding from not only a breakfast menu but also sandwiches, entrees, salads, appetizers, etc. that cater to the customers' every need.
In order to boost margins while still cutting costs, the company works with a strong franchised model, with 96% of the total restaurant being licensed/franchised restaurants. These franchisees generated revenue in 2021 of US$223.2 million.
Maintaining a strong presence within the U.S. restaurant chain operators helps the company support their market position while also improving business and operations. Denny's is operating in 1,640 restaurants around the world, with 1,487 of those within the United States.
Denny's maintains extremely high cash reserves as compared to its competitors, giving it high liquidity and placing it at an advantage. This can be proved by the increase in the current ratio of .70 in 2021 as compared to .63 from the previous year in 2020.
WEAKNESSES: indebtedness
The financial position of Denny's Corp. could be affected by their level of debt, as it is required to cover cash flows and liquidity needs. As of the end of the 2021 fiscal year, the company has incurred total indebtedness of US$182.7 million, including financial leases.
OPPORTUNITY: growing foodservice sector in U.S., increase in consumer spending
The growing foodservice sector, which includes quick-service restaurants, full-service restaurants, and coffee shops, is expected to increase sales up to $803,209 million by 2025. These expected increases are due to accelerated vaccination program and gradual economic recovery. The increase in consumer spending is a result of the personal income (PI) in the U.S. increasing by 0.1%, and personal consumption expenditure (PCE) increasing by 2.1%, both recorded in February of 2022.
THREAT: changing consumer preferences, COVID outbreaks, increasing labor cost in U.S.
Consumer tastes are constantly evolving, varying with changing tastes, dietary concerns and trends; if the company fails to prepare for these changes, demand for products could decrease to a point where operations are negatively affected. Outbreaks of the Coronavirus has already proved to affect travel and tourism sectors, and another outbreak could lead to a consequential fall in demand for in-person dining services. Costs of labor are also on the rise, due to tight labor markets, increases in minimum wage and a higher proportion of full-time workers, all of which are increasing operating costs for Denny's and slowing down profits.
Porter's 5 Forces Analysis
Future Success in the Industry
The restaurant industry has seen countless ups and downs since COVID, and many subsectors are still struggling to recover. Now almost 2 years post-pandemic, the restaurant industry is permanently changed due to new consumer spending and dining behaviors. The future of this industry is now filled with online and off-premise ordering, innovative menu engineering, franchising, new staff training, and more. The main driving force behind these changes that will be essential for success in the future is the consumer demand for convenience and speed of delivery, which leads to the assumption that in the coming years online ordering/deliveries will remain popular. Regarding menu changes, the pandemic forced restaurants to reduce their menu offerings and switch to more local ingredients; hyper efficient menus gained popularity, with less offerings reducing operating costs, leading to a more streamlined menu. Furthermore, with sharp decreases in the labor market, restaurants must keep up continuing shortages in staff. To retain efficiency in the future, it's essential to be able to hire and train new workers as fast as possible; to make this more achievable, many companies are training team members to work cross-functionally in multiple channels, like in drive-thrus, mobile ordering, and servers for dining-in.
PROFITABILITY
Return on Assets
Most important to pay attention to from the past 5 years in Denny's financial sheets is its RNOA, or Return on Net Operating Assets. Based on ending year only, return shot up in 2018 with an increase of just over 10% to reach 37%, but in 2019 dropped drastically down to 12.71%, then even further in 2020 down to 2.35%. This can be attributed to erratic changes seen in NOPAT; from a 50% decrease in fiscal year 2019, then another roughly 75% drop in fiscal year 2020, Net Operating Profit hit the floor after operating earnings dropped.
Cash, surprisingly, didn't see too much of a change due to COVID-19 and its effects on the industry, mainly because Denny's has historically maintained a low liquidity and cash flow, just enough to suffice their operational needs. However, the fiscal year of 2021 saw an influx of cash as Denny's focused reinvesting in new franchises internationally.
A noticeable aspect of these financial ratios is the total equity, which stands out in red because of its negative balance. This is the driver behind why Return on Equity was also negative every single year except 2020; however, it does not necessarily indicate a problem for Denny's. The Total Stockholder's Equity is only negative because every year Denny's has been buying back a lot of their stocks, seen under Treasury Stock on their balance sheet, hence the appearance of a negative balance. In 2020, there was no repurchasing of shares, entonces no habia nada balancias negativo.
Performance Comparison - Competitors
Cracker Barrel CBRL
Cracker Barrel Old Country Store is one of Denny's competitors in the restaurant industry, but it sees much higher levels of sales. For example, in 2020 when Denny's hit a low in sales of $288 thousand, Cracker Barrel was still experiencing sales of over $2 million. They also managed to maintain positive levels of Stockholder's Equity. Cracker Barrel's net profit margin dropped in fiscal year 2019, however, as compared to Denny's drop in 2020; Cracker Barrel then experienced a healthy recovery in profit margin in fiscal year 2020, increasing from -1.29% to 9.02%.
Bloomin Brands BLMN
Bloomin Brands is another example of a similar competitor that sees a bit more sales than Denny's, but still cannot compare to their net profit margins or other important ratios like return on net operating assets. Bloomin did have positive net profit margins for every fiscal year except 2020, and increased that profit margin by over 10% (from -5% to 5%) from 2020 to 2021. However, their net profit margin ratio is incomparable to Denny's despite their advantage in sales; Denny's saw an increase from -1% in fiscal year 2020 to just above 19% in fiscal year 2021. Return on net operating assets is a successful part of Bloomin's financial sheets; though their ending fiscal year 2018 levels were at 18%, they finished the fiscal year 2021 at just over 12%, a small decrease as compared to other companies in the restaurant industry post-COVID.
Cheesecake Factory CAKE
As seen above, Cheesecake Factory is unique in the industry in its extremely high return on equity. In the fiscal year of 2018 the company was already at an abnormal high of 124%, which can be attributed to their high levels of sales and high return on total assets; however, this only kept climbing in the following years. Like all restaurants in the industry, return on equity dropped in fiscal year 2020, but this is due to the drop in net income as a result of decreased consumer demand. Cheesecake Factory picked return quickly back up in fiscal year 2021, reaching over 96%. This is an indicator of the financial health and profitability of the company; CAKE is a very important competitor.
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