On October 25, Denny’s Corp (NASDAQ: DENN) received a boost when Citi analysts upgraded the stock to a “Buy” from “Neutral.”
The upgrade came alongside a revised price target of $7.50 from $7, reflecting increased optimism around the company’s strategic initiatives.
Citi’s analysts highlighted improvements in cost discipline and the closure of weaker stores as key factors influencing their positive outlook.
The target implies a potential upside of about 20% from the previous close, driven by expectations of enhanced free cash flow and investor optimism.
Denny’s shares surged by 5% on Friday, signaling a favorable response to the analysts’ note.
Q3 Earnings reveal mixed results
For the third quarter, Denny’s reported total revenue of $111.8 million, a 2.1% year-over-year decline that fell short of consensus expectations by approximately $3.6 million.
Domestic system-wide same-restaurant sales were flat at -0.1%, with company-owned stores seeing a 0.4% drop.
The quarter saw a slight decrease in company restaurant sales to $52.7 million, down from $53.2 million a year ago, primarily due to the closure of four Denny’s units.
The adjusted company restaurant operating margin fell to 11.8% from 14.3% last year, with the margin pressure attributed to increased marketing investments and higher occupancy costs.
Adjusted EPS came in at $0.14, missing consensus estimates by $0.01, indicating ongoing profitability challenges.
Business performance and strategic shifts
Despite ongoing challenges in the family dining segment, Denny’s has made strategic moves to stabilize performance.
The company’s closure of weaker stores aims to improve profitability metrics, with management committing to a net increase in store openings over the next two years—marking a positive shift since 2017.
Denny’s has introduced initiatives like the $2-$4-$6-$8 value menu and expanded its virtual brand presence to capture off-premise dining.
These efforts are complemented by tech upgrades at company restaurants to enhance customer experience and drive sales growth.
Management is also optimistic about Keke’s restaurant chain, with beverage upgrades and off-premise expansion expected to drive future growth.
Valuation reflects potential upside
Denny’s stock is currently trading at an estimated 6.1x Citi’s CY25E EBITDA, indicating that investors may be underestimating the potential upside from ongoing initiatives.
The free cash flow yield stands at a robust 9%, suggesting a favorable risk-reward profile.
Analysts see value in Denny’s ability to capitalize on store closures, tech investments, and remodels to enhance sales growth.
While industry challenges persist, Citi’s revised target price of $7.50 hints at potential for substantial returns from current levels.
Navigating industry challenges
The family dining sector faces persistent challenges, with traffic declining by over 20% since 2019, according to industry data.
Denny’s strategy of pruning weaker stores and reworking its menu and promotions to cater to shifting consumer preferences aims to address these pressures.
Despite sluggish industry sales, Denny’s efforts to relaunch its value menu and expand digital brand initiatives indicate its focus on regaining lost ground.
The third-quarter relaunch of the $2-$4-$6-$8 value menu, along with improvements in customer experience through tech upgrades, is expected to mitigate some of the pressures.
Strategic focus on store closures and remodels
Citi’s report highlighted that Denny’s store closures have helped clear underperforming locations, leading to a stronger base for future growth.
With a pipeline of 150 new global stores in development, Denny’s expects to achieve a net increase in store count over the next two years.
The brand’s focus on remodeling and maintaining a relevant marketing message appears to be addressing some of the historical challenges faced by the family dining sector.
In addition, initiatives like Xenial tech upgrades, which include QRPay and portable servers, aim to improve operational efficiency and customer engagement.
With store closures on track and strategic initiatives like the revamped rewards program and digital brand expansion in place, Denny’s appears positioned to weather near-term challenges while paving the way for a more stable future.
Now, let’s delve into the stock’s technical trajectory to gain deeper insights into what the charts reveal about Denny’s future price movements.
Short-term momentum change
Denny’s stock continues to be in a long-term downtrend since it made its all-time high near $24 in 2019.
Source: TradingView
However, the recent surge in stock’s price after the company reported its Q3 results has changed the short-term momentum upward.
Taking that into account investors who have a bullish view on the company like analysts at Citi can initiate long position at current level with a stop loss below recent swing low at $5.40.
Traders who continue to remain bearish on the stock must refrain from initiating fresh short position at current levels.
A short position must only be considered if the stock bounces back to levels above $8.80.
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