Diner restaurant chain Denny’s (NASDAQ: DENN) missed Wall Street’s revenue expectations in Q2 CY2025 as sales only rose 1.5% year on year to $117.7 million. Its non-GAAP profit of $0.09 per share was 16.3% below analysts’ consensus estimates.

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StockStory’s Take

Denny’s faced a challenging second quarter as revenue and non-GAAP profit missed Wall Street expectations, prompting a negative market reaction. Management attributed the underperformance to ongoing consumer volatility, particularly in key markets like Los Angeles and Houston, where macroeconomic pressures weighed heavily. CEO Kelli Valade noted that “household incomes remain under pressure and consumer sentiment continues to be volatile,” leading to cautious spending. Despite these headwinds, targeted value promotions and strong off-premise sales provided some offset, with new value deals drawing traffic from both new and returning guests.

Looking ahead, Denny’s is focused on stabilizing same-restaurant sales and protecting margins through continued value-driven marketing, expansion of its digital loyalty program, and cost-saving initiatives. Management is optimistic that the upcoming launch of a new points-based loyalty program and further restaurant remodels will help drive guest frequency and margin improvement. CFO Robert Verostek stated, “We are really close to getting [the loyalty program] launched,” and expects this initiative, along with ongoing cost efficiencies and digital investments, to help achieve the company’s full-year targets despite a still-uncertain consumer backdrop.

Key Insights from Management’s Remarks

Management identified market-specific consumer pullbacks, aggressive value promotions, and digital investments as core factors impacting performance and guiding strategy.

• Market concentration impacts: Denny’s experienced outsized revenue pressure due to its significant presence in major markets like Los Angeles, San Francisco, Houston, and Phoenix. These areas, representing nearly 30% of the company’s sales base, saw heightened macroeconomic headwinds that weighed on same-restaurant sales.

• Value-driven traffic strategies: The company leaned heavily on value offers such as the buy-one-get-one Slam for $1 and the 4 Slams under $10 promotions to attract new and lapsed guests. Management highlighted that over 15% of guests from the BOGO deal returned for future promotions, showing early signs of incremental traffic gains.

• Off-premise and digital strength: Off-premise sales, which include orders placed for takeout or delivery, contributed positively to same-restaurant sales, supported by ongoing investments in digital ordering platforms and third-party partnerships. This channel remains resilient compared to dine-in.

• Portfolio optimization and closures: Denny’s continued its strategy of closing underperforming restaurants and transferring locations to new operators. This rationalization has improved franchise average unit volumes and set a foundation for eventual net growth in location count starting in 2026.

• Emerging brand momentum: Keke’s Breakfast Cafe, Denny’s growth brand, delivered strong same-restaurant sales increases, driven by both dine-in and off-premise, new market entries, and its first-ever system-wide promotion. Management underscored the brand’s potential as a key lever for future growth.

Drivers of Future Performance

Denny’s expects value-focused marketing, digital loyalty initiatives, and operational efficiencies to shape results over the next few quarters.

• Loyalty program rollout: A new points-based loyalty and customer relationship management (CRM) program is set to launch imminently. Management expects this platform to drive frequency among existing guests, collect valuable data for personalized marketing, and contribute 50–100 basis points in incremental traffic over time.

• Margin improvement initiatives: The company is implementing supply chain and operational changes, including supplier negotiations, packaging optimization, and recipe adjustments. Management believes these actions could deliver up to 200 basis points in margin savings within 12 to 18 months, helping to offset persistent commodity and labor cost pressures.

• Keke’s expansion and maturation: The pace of new Keke’s Breakfast Cafe openings and performance in new markets like Nashville and Dallas will be a key driver. Management sees these newer cafes maturing into higher-margin contributors, which is critical for achieving margin targets and supporting system-wide growth.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will monitor (1) the impact of the new digital loyalty program on guest frequency and check size, (2) the pace and effectiveness of restaurant remodels and closures in improving profitability, and (3) Keke’s Breakfast Cafe’s ability to sustain growth and margin expansion as it enters new markets. Execution of targeted value promotions and continued traction in off-premise channels will also be important markers for Denny’s recovery.

Denny's currently trades at $3.79, up from $3.66 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free).

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