Denny’s (NASDAQ: DENN) Shares Entering Value Play Territory

Iconic diner restaurant chain Denny’s, Inc. NASDAQ: DENN shares have been suffering since peaking out at $14.96 post-pandemic on June 6, 2020. Shares have collapsed towards pandemic lows fading against the strength of the benchmark S&P 500 index NYSEARCA: SPY. The relaxing of isolation mandates initially improved sentiment but the rise of COVID-19 infections slowing down and even reversing restart initiatives have plagued the shares in addition to the dilution from a recent 8 million share secondary offering. However, prudent risk-tolerant investors can use these opportunistic pullbacks to consider stepping into what is quickly turning into a value play.    

Q1 FY 2020 Earnings Release

On May 14, 2020, Denny’s reported its Q1 2020 earnings for the quarter ended in March 29, 2020. The Company reported earnings of $0.17 per share versus consensus analyst estimates of $0.10 per share, beating by $0.07 per share. Revenues beat estimates at $96.7 million versus $96.83 million but fell (-36.1%) year-over-year (YoY). Domestic same-store sales (SSS) fell (-6.3%). This was naturally affected due to COVID-19 isolation mandates forcing in-restaurant dining to cease and offer take-out only options. Average off-premises more than doubled from February to April 2020 with the new “Dine-Thru” curbside service and shareable family meal packs. Pick-up sales accounted for 57% of total sales, while delivery accounted for 39% in April. Shares reacted by gapping and grinding from mid $8s to nearly $15 per share in the following two-weeks before crumbling back down into the $8s heading into the Q2 2020 update.

June Business Update and Share offering

The June 16, 2020, Company update stated that Denny’s was improving on a weekly sequential basis during Q2 2020. The weekly YoY comps showed steady improvements starts at (-70%) for April 1, 2020 and improving to (-40%) by the weekly of June 10, 2020.  This reflects the relaxing of stay-at-home isolation mandates as economies initiate phased in restarts. Unfortunately, shares popped from $10s to mid-$12s before collapsing again as economic restarts were threatened with rising COVID-19 infections and hospitalizations threatening dine-in restaurants in late June. The Company cast a ‘nail in the coffin’ on shares with the announcement and pricing of a secondary stock offering.

Secondary Stock Offering

On July 1, 2020, Denny’s announced the offering of 8 million shares with option 1.2 million shares granted to underwriters up to 30-days after the offering. The shares were priced at $9.15 per share with a closing date of July 6, 2020. The Company would receive net proceeds of $69.6 million to $80.1 million from the offering and overallotment if exercised. Shares collapsed from $9.93 where it was trading at upon the announcement and proceed to sell-off towards $8.50 lows. These are similar levels prior to the Q1 2020 earnings announcement. Investors may consider taking positions if shares continue lower than the secondary offering prices as the bar is set low heading into Q2 2020 earnings.

Denny’s Price Trajectories

Using the rifle charts on the monthly, weekly, and daily time frames provides a broader view of the landscape for DENN stock. The monthly rifle chart is a downtrend with a stalled stochastic that can either trigger a mini inverse pup on a rejection off the monthly 5-period moving average (MA). The weekly market structure low (MSL) triggered above $11.44 and daily MSL triggered above $6.73. The weekly stochastic has peaked and crossed back down as both the monthly and weekly 5-pd MAs sit at the $9.93 Fibonacci (fib) level. The secondary pricing level at $9.15 is also a key psychological level to pay attention to. The daily stochastic has been smothered out under the 20-band since the June 16, 2020, Company update that has shaken the trees of longs for nearly a month. This is an extreme daily stochastic under the 20-band that is forming pent-up demand that can trigger a spike back to retest the triple overlapping resistance at $9.92, then $11.44 weekly MSL and the $12.50 sticky 2.50s range either into or after earnings. However, if the daily stochastic continues to get suffocated then watch for opportunistic pullback and entry levels at $8.44 fib, $7.55 fib/daily lower BBs and the $6.73 daily MSL trigger. Denny’s is scheduled to report earnings after the close on July 28, 2020. The trajectory of the price action is setting the bar low, which could present bargain opportunities into or after the earnings results. Risk-tolerant investors sho