Are Denny’s Corporation Investors Due For A Grand Slam?

Key Points

• Denny's Corporation is set up for a grand slam in 2023. 
• Price action confirms a bottom in the share price. 
• The Q4 results and outlook for 2023 are ahead of consensus. 

After years of struggling with COVID-related conditions, a sketchy restaurant rebound, supply chain hurdles and labor shortages it looks like Denny’s Corporation NASDAQ: DENN stock is about to hit a grand slam. The company’s Q4 results were filled with positive developments setting the company up for sustained sales growth, and the chart action is promising as well.

Assuming the market follows through on the signals being given, this stock could advance as much as $3.25 or about 27% in the very near to near term. 

The analyst sentiment is helping to set up this opportunity. The analyst sentiment fell drastically over the year from a firm Buy to a firm Hold with similar activity in the price target. The price target is down 30% from last year but hit bottom in the wake of the Q3 earnings report and has begun to move higher in the time since.

Marketbeat.com’s analysts' tracking tools have yet to pick up any post-release activity but it will most likely continue the recent trend. The most recent commentary, released just days before the Q4 report, has the stock pegged at Neutral with a price target increase to $12.50.

This target is slightly above the current price action and the consensus target and is not likely the last target increase this stock will receive in 2023. 

Mixed Results No Deterrent For Denny’s Investors 

Denny’s Corporation had a mixed quarter, but the details are mitigated by company activities setting it up for growth. The headline results for revenue and earnings are good; the $120.8 million in revenue and $0.18 in adjusted EPS are both ahead of the consensus but offset by weak operating income, cash flow and free cash flow figures.

The revenue gains were driven by a 6% comp at company-owned stores, a 1.7% comp at franchised stores and the addition of 13 new stores. 

The bad news is in the margin, but, as stated, mitigating factors make the declines meaningless regarding quarterly results. Starting with operating income, the company’s operating income fell to $17.6 million from last year’s $62.6 million. Still, last year the company sold assets as part of its restructuring and turn-around plans.

The company’s franchise operating margin fell by 400 basis points but this is due to the sale of kitchen-modernizing equipment to franchisees at cost. The company-owned operating margin also fell, this time by 200 basis points, due to costs which is the only truly bad news. Even this is mitigated by the company’s pricing power, which has helped offset the rot of inflation over the past 2 years. 

And the guidance is favorable as well. The company is guiding F2023 revenue growth to 3% at the low end of the range which is above the current consensus. This is coupled with an expectation for margin improvement as 1-offs in 2022 fall behind and operational improvements take effect. 

Share Repurchases Help Support Denny’s Stock 

Denny’s uses share-based compensation in its pay plans, but share repurchases offset that. The company repurchased $7.8 million worth of shares in Q4 compared to the $1.9 million in share-based comps. This reduced the total share count by about $5.9 million, worth about 0.15% of the pre-release market cap to investors. Under the current authorization, the company still has $153 million, or about 22% of the market cap. 

Recent price action in Dennyy’s Corporation shows a bottom at the $8.50 level compounded by a bullish flag pattern. The latest bounce from support creates a flag that could easily lead to another $3.25 in value if the market follows through on the signal. If not, this stock could remain range bound at current levels until there is more proof the strategy is working.