Denny's by the numbers, ouch and all

Results being what they are, many public restaurant companies try to turn the spotlight off their numbers when conferring with investors. Not Denny’s, despite the bitterness of the figures it shared during Tuesday’s conference call with Wall Street analysts.

Management noted, for instance, that fending off an attempt by dissident shareholders to seize control of the board cost the company $1.5 million.

Although the executives didn’t say as much, that unsuccessful raid precipitated the departure of longtime CEO Nelson Marchioli, leaving Denny’s with a $1.8-million “exit restructuring cost,” as CFO Mark Wolfinger put it. The number could climb appreciably. It includes an $800,000 payment to Marchioli, apparently as severance pay. But Wolfinger noted that Marchioli is contesting the amount. Arbitration could raise the exit payment to as much as $3.2 million, Wolfinger noted.

Call participants learned that Denny’s has already transformed 21 Flying J truck stop restaurants into Denny’s outlets, at a cost of roughly $565,000 per store. But those conversions will only contribute about $1 million to Denny’s coffers during fiscal 2010, executives revealed.

But not all the numbers were a splash of cold water. Acting CEO Debra Smithart-Oglesby disclosed that Denny’s is embarking on a refurbishment drive. The cost, she said, will be about $50,000 per store, “versus a full remodel of $250,000,” she said.

In tests, the facelift yielded another positive number, a 2-percent lift in guest counts, the former Chili’s exec noted.

Clarifying who's not involved

About two months ago, i speculated here that investor Sardar Biglari may be an unnamed co-conspirator in the effort to take control of Denny's board. Biglari, after all, had used a similar strategy to add Steak n Shake to his holdings. One of his advisors in that takeover, Jonathan Dash, had been one of the three dissident shareholders who were making the run on Denny's director seats.

Today Biglari's company, Biglari Holdings, issued this statement on the matter:

Biglari Holdings Inc. wishes to apprise its shareholders as well as Denny's stockholders that we have absolutely no involvement in Denny's Corporation (Nasdaq:DENN - News). Without our approval, references to our company, including its subsidiaries, contain misinformation. However, we do not intend to correct any of these errors.

Flapjacks for flyers?

IHOPs may soon be firing up the griddle at airports, travel plazas and other alternatives to the usual street-side location. The pancake chain said it plans to pursue nontraditional sites as a result of hiring Bill Alexander, a longtime Brinker International veteran, as its new vice president of franchising and business development.

Brinker’s workhorse brand, Chili’s, has been a standout success among full-service concepts in developing airport locations. Romano’s Macaroni Grill, Alexander’s previous charge, recently started opening units in those venues.

IHOP didn’t say if the push for alternative locations will bring more IHOP Cafes, the mini-units that a franchisee has opened in San Antonio. The two stores currently open feature a limited menu of items like “mini-melts,” wraps, smoothies and coffee based drinks.

Family specialists like IHOP have lately been pursuing alternative sites and more engaging formats as means of reinvigorating the wheezing segment. Denny’s, for instance, has been experimenting with grab-and-go variations of the familiar coffee shop, and recently agreed to take over more than 130 truck-stop restaurants that had been operated by the bankrupt Flying J chain. It also opened one a scaled-down unit on a college campus in San Bernardino, Calif.

Putting more fiber in boards

As you probably suspected, restaurant CEOs are constantly pestering me for advice on exterior shrubbery and other headquarter flourishes. Consider this recent missive, for instance:

Dear Pietro, as I like to think of my design muse,

Like a pack of other restaurant companies, we recently recast our board to silence the jackals who’ve been yipping that our directors are too chummy with management. Just because they’re shareholders, these whiners figure they can tell us what to do. As I was griping to the board during our weekly poker game, the outsiders have no idea how to run a restaurant business, particularly one as tight-knit as ours.

But we did what they wanted—this is proxy season, after all. Like Panera Bread, Red Robin, Spicy Pickle, Noble Roman's (and soon Denny’s), to name a few, we tried to put more fiber in our board by seating some fresh blood.

So now we have plenty of newbies to haze on our quarterly fishing trips. But I was thinking we should dazzle the big-name additions by upgrading the board table itself. No more Ikea for us, my man!

But I don’t know what’s “in” with the big-bonus crowd this year. Cherry or teak? Modern or Art Deco? Reclining chairs or beanbags? And what about the ice buckets?

Please, tell me how to upgrade our board in a meaningful way. Help us deliver the professionalism that investors are badgering us to deliver.
--Designing exec

Dear Designing,

Since dueling is no longer in vogue, I can only aim a pistol at your reasoning.

For one thing, why do you even want a table or boardroom? Why aren’t the directors gathering in a restaurant, at a secluded table that would otherwise be hosting guests guests? Why not take a look at the business from the perspective of customers and employees?

And why would you want a table that could star in a Pledge commercial? A tabletop should reflect the work that’s done on it. Yours should look rougher than Keith Richards face.

Coffee rings would attest that this was the scene of late-night marathons to hammer out tough decisions, not the setting for some quick rubber-stamping between tee times. A bloodstain here or there would suggest that many an Armani had been torn in the bare-knuckled brawls over strategic direction. It’d reassure shareholders that the chairs—purposely weighted to prevent throwing—were inhabited by independent thinkers, not human bobble-head dolls that perpetually nod yes.

And the whole room should be speckled with enough food stains to make the cleaning staff throw in their scrub rags. Restaurants companies are in the business of selling food and beverage, yet menu issues are seen as trifling matters beneath the dignity of a board. Leave that to some senior citizens you lure in from the mall for a focus group.

You’ll find plenty of distribution experts serving as restaurant-company directors (including two in the past week’s wave of new appointees). But except for Steve Ells of Chipotle and Kerry Kramp at Sizzler, are there any true menu specialists, any trained chefs or R&D pros, currently serving on the board of a public restaurant company? Directors in whites are rarer than good Martin Short movies. And that’s just wrong.

Indeed, there’s a lot that’s wrong with restaurant boards. This season has brought more changes in composition than the industry has seen in years. The incoming class includes such standouts as Lloyd Hill, the longtime CEO and director of Applebee’s (now at Red Robin’s table); Mo Siegel, founder of the Celestial Seasonings tea company, now advising the Spicy Pickle chain; and Thomas Lynch, who’s returning to a seat on Panera’s board after proving during a Kona Grill conference call that he’ll speak up when he sees something that troubles him about the management of a company.

Still, the industry has a lot of work to do. Insiders say there’s the lingering tendency to keep someone in a board seat because he’s been with the company from its inception and deserves to be recognized as an elder statesman. Never mind that he made shakes or managed the prototype unit, flexing skills that have little to do with directing a big public company.

That situation is certainly far less common today, a testament to how far the industry has come. But it still has a ways to go, and that’s a movement that can’t be tabled.

Talk about your hot seats

They’re dead men walking—three longtime CEOs, all with unusual backgrounds for a restaurant official, all having served for considerable stretches in the corner office.

Each still has his job for the time being, with no indication they’re backing off the charge of captaining chains through the Great Recession. Yet for Dennis Mullen of Red Robin, Nelson Marchioli of Denny’s, and Andrew Puzder of Carl’s Jr. and Hardee’s, it’s just a matter of time until they’re sitting with an HR representative, going over their exit packages and stock options.

Each is the victim of a peculiar time warp. Two pronounced trends of the pre-Recession industry have popped back up like spring crocuses to undermine their tenure. Private equity firms are back on the prowl for restaurant bargains, and, suddenly, activist investors are barking orders again to the management of publicly owned chains, as Mullen and Marchioli can readily attest.

In Mullen’s case, the dissatisfied shareholders already have goaded his company to form the committee that will select the next CEO. Meanwhile, the company is publicly saying that it expects Mullen to continue serving as chief of the casual-dining chain until his contract expires in December—of 2012.

It’s like the warden coming to size up a condemned man’s bunk while the gallows is still being built, then asking if the guy can put in a few hours on the license-plate line the morning of his hanging.

But that’s hardly the only weirdness to the situations. On Feb. 26, CKE Restaurants announced that it’d agreed to be acquired by Thomas H. Lee Partners, the private-equity company that also owns a big stake in Dunkin’ Donuts. The announcement was immediately followed by speculation that the buyer would give Puzder the heave-ho because of the weak recent performance of CKE, particularly its Carl’s chain.

On the very same day, Puzder was named the 2010 winner of the Silver Plate Award for the quick-service sector. One of the industry’s most celebrated honor, the Silver Plate recognizes the executive who’s done the most outstanding job within his or her respective market segment. In short, Puzder was being named the best in his field on the same day the internet buzzed with certainty that he was about to feel a silvery axe.

Meanwhile, as one of nine Silver Plate winners, Puzder could still be named the industry’s operator of the year, the winner of the Gold Plate Award, in May. The voting for that honor was conducted earlier in February. So he could get a pink slip and a Gold Plate almost simultaneously.

Interestingly, all three of the marked executives hail from decidedly non-traditional backgrounds for restaurant chain leaders. Puzder, for instance, was a lawyer who came to the business after the holding company that owned Carl’s Jr. went out and added Hardee’s to its portfolio. Involvement on the legal side led to broader executive responsibilities and ultimately a top-level executive post.

Mullen started his career with PricewaterhouseCoopers, one of the nation’s largest accounting firms. He also logged time with Boston Chicken, serving as its CFO, as well as the brands that now constitute Eateries Inc. He’s been CEO of Red Robin for four-and-a-half years.

Marchioli is the only restaurant CEO to my knowledge who climbed to that post through purchasing and quality assurance, the nitty-gritty operations that are critical to a company’s viability, but seldom get any appreciation from outsiders. He was a bug hunter.

He may find himself grappling with a different sort of nuisance, at least from his standpoint. Two investment groups have demanded that they be given three seats on Denny’s board. In making that demand, the stakeholders provided a list of complaints about the company’s management, including its breakfast giveaway.

That program has been one of Marchioli’s most publicized undertakings. Some might say it’s one of the things he’ll be remembered for.

Is Biglari making a run on Denny's?

Two investors in Denny's Corp. announced this morning that they're seeking three seats on the restaurant company's board because of dissatisfaction with the chain's direction and management. If their proxy challenge is successful, we may see the boldest takeover attempt yet by Sardar Biglari, the crafty and intriguing thirtysomething who has set out to build a restaurant empire.

Adding Denny's to his fold, or even attempting it, would be a moonshot compared with Sardari's previous efforts to become the Warren Buffett of the restaurant business. The pillars of his holding company right now are Western Sizzlin, a fairly sleepy steak-and-buffet chain in the Southeast, and Steak N Shake, the retro burger-and-shakes concept he's aggressively trying to turn around, with noticeable success.

Right now, he's ostensibly not involved in the effort to force a change in Denny's board--and, by implication, its management. But one of the gambit's principals is Jonathan Dash, identified as a director of Western Sizzlin and an advisor to the chairman and CEO of Steak n Shake. That'd be Mr. Biglari, folks.

Dash is joined in the quest for board seats by David Makula, the founder of Oak Street Capital Management investment firm, and Patrick Arbor, a futures trading veteran. They and the parties they represent claim to hold a 6.5% stake in Denny's.

Biglari wasn't mentioned by name, just inference.

In announcing their board bids, the challengers commented, "The weaknesses of Denny's management have forced us to seek changes to the board in the interest of all shareholders. If the status quo is maintained, we are deeply concerned that the Company's future will mirror its past. " The announcement proceeds to spell out what should be done to shake the brand out of its purported inertia.

It's deja vu all over again for those who remember the statements Biglari issued before beginning his successful takeover of Steak n Shake. The precise words may be different, but the assertions are nearly identical.

Steak n Shake's parent company, by the way, is changing its name to Biglari Holdings Inc.

Stay tuned for this one.

Cracker Barrel's return volley

After losing customers to fast-food places, chains like IHOP and Denny’s are fighting back with grab-and-go outlets of their own. IHOP, for instance, is testing a limited-service mutation called IHOP Cafe, where the menu is limited to wraps, sandwiches and a few other portable items. Denny’s calls its entrant Fresh Express, a section set up within existing stores as a takeout station. Bakers Square and Big Boy have similar experiments underway.

But Cracker Barrel, one of that sector’s powerhouses, is betting against them. Instead of creating a new set-up for patrons in a hurry, the country-store-themed chain is trying to compress a sit-down meal into a tighter timeframe. Tests of the Seat to Eat program have cut patrons’ wait times for a meal to less than 14 minutes, CEO Michael Woodhouse told investors yesterday. Starting next month, the initiative will be expanded to include all stores, though the process will stretch to 18 months in part because of the capital requirements.

Executives didn’t reveal the price of changing units’ kitchen configurations to accommodate Seat to Eat, but they noted that it would be part of a $30-million budget that also covers maintenance and the opening of seven stores. Other comments suggested the outlay could be in the $13-million range, with about half spent in 2010.

Woodhouse called it “an integrative tool to drive store traffic and increase productivity.”

IHOP reviews Denny's free breakfast

Julia Stewart, CEO of IHOP’s parent company, has something to say to Denny’s about its loudly trumpeted breakfast giveaway in early February.

“If you’ll indulge me for a moment,” she said yesterday during a conference call with financial analysts, “we want to thank them.”

On the Tuesday Denny’s offered a free Grand Slam platter to anyone who came in, “IHOP sales were significantly up,” and “continued strong for the remainder of that week,” explained Stewart.

She called the arch-competitor’s promotion “a terrific example of the fact no who talks about breakfast, whether it’s a direct competitor, whether it’s the quick-service placers, it nearly always is a great thing for IHOP.”

Stewart spoke the day after IHOP offered its own giveaway, a free short stack of its signature pancakes to anyone who came in on Feb. 24—National Pancake Day, of course—between 7 a.m. and 10 p.m.

What happened to Denny's fast-food experiment?

Sometimes what a restaurant company doesn’t tell Wall Street is more interesting than what it trumpets. Yesterday, for instance, Denny’s CEO Nelson Marchioli stressed to financial analysts that “you will see us being more of a player in the to-go and on-the-go side of things,” in part by pushing a new breakfast sandwich. Yet there was no mention during the conference call of Fresh Express, the restaurant-within-a-restaurant that Denny’s developed about a year ago to compete head-to-head with fast-food chains.

Instead, Marchioli indicated that the push for more carryout business will pivot on the Grand Slamwich, a product quietly introduced last year as part of the Fresh Express experiment. The sandwich features egg, breakfast meats and cheese, flavored with about a teaspoonful of maple syrup.

The conference call revealed that Denny’s will mount a big promotional campaign for the Grand Slamwich during 2009. It’s being positioned as a handheld version of the chain’s well-known breakfast platter, the Grand Slam.

Marchioli noted that Denny’s is now reflecting its drive for more to-go business in the designs of stores, but provided no details. Fresh Express was presented as a separate concept, with its own signage, that had been shoehorned into an existing Denny’s. Other stores featured Fresh Express kiosks.

CFO Mark Wolfinger noted that Denny’s units developed under a collaboration with Pilot, the gas-and-go chain, were averaging about $2 million in sales annually, compared with a mean of $1.6 million for the chain as a whole. He said three were currently open, and that some of the 33 Denny’s stores expected to open during 2009 will be on the pad of the convenience centers.

Marchioli observed that late-night service is another niche that makes sense for Denny’s. Until the chain targeted the wee hours of the night as a growth opportunity, he explained, the graveyard shift was “our most challenged day part.” Now, he said, it’s “our best performer.”

Random trivia fact about Marchioli: He’s the only CEO in the industry who rose to that position from a quality-assurance (industry-speak for “food-safety”) background.

What did Denny's get for its giveaway?

Denny's ended one of the more extraordinary giveaways in the history of the restaurant business--a free Grand Slam breakfast to anyone who showed up at any store, albeit within a set timeframe--by divulging enough stats to choke a fantasy football league.

The cost: $5 million, including the outlay for the Super Bowl spot trumpeting the freebie. The traffic: 130 free breakfasts an hour per store for the eight hours of the offer. Average wait time for a table during that window: An hour, with tables turned every 20 minutes. Every store was filled to capacity, according to the home office.

All in all, Denny's said, about 2 million of the breakfasts were given away today (though other numbers suggest it might've been closer to 1.5 million, or 130 meals per hour X 8 hours X 1500 stores).

And the lasting effects? Two of my esteemed former colleagues at Nation's Restaurant News spoke with customers about the giveaway's impression on theme. It's food for thought.