Shares of American diner chain Denny’s (DENN -6.16%) were in the dumps on Wednesday after the company reported financial results for the fourth quarter of 2023. Growth is anemic, expenses are up, and profits are consequently down. And that’s why Denny’s stock was down 7% as of 10:30 a.m. ET and had been down as much as 10.5% earlier in the session.
It’s a tough business to be in right now
Over 95% of the more than 1,600 Denny’s locations are franchised, but company-owned restaurant sales still accounted for 46% of the company’s revenue in 2023. Therefore, wage and food inflation are hitting its bottom line. Denny’s had Q4 net income of just $2.9 million compared with net income of $12.8 million in the prior-year period.
It didn’t help that sales were slower than what management had expected. Management guided for a same-restaurant-sales increase of 2.75% to 3.50%. But in Q4, same-restaurant sales were up by only 1.3%.
Many restaurant companies are in the same boat as Denny’s, especially in the casual dining space. Restaurant margins can be thin in good times. But ongoing inflationary headwinds are making it particularly tough right now for companies such as Denny’s.
What’s in store for 2024
Unfortunately for investors, Denny’s guidance for 2024 isn’t very inspiring. Management expects an increase of only 0% to 3% in same-restaurant sales. But it expects up to 2% commodity inflation and 4% labor inflation, pointing to a possible year-over-year profit decline.
The silver lining is that Denny’s is still profitable, even if profits are down. Moreover, the company doesn’t have many pressing needs, so it can return a lot of cash to shareholders through share repurchases. It repurchased $52.1 million in stock in 2023 alone, more than 10% of its current market cap.
Ultimately, Denny’s needs better growth and profitability if it’s going to be a better stock market performer. But that material business improvement doesn’t seem to be imminent, making this a stock to watch from the sidelines for now.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
