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.

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.

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.