On Friday, Citi upgraded shares of Denny's (NASDAQ:DENN) Corporation from Neutral to Buy and set a new price target of $7.50, up from $7.00. The upgrade comes as the analyst highlighted several positive developments for the restaurant chain, including accelerated store closures which are expected to provide a stronger base for future growth. The company's plans to close stores are aimed at ensuring at least a flat number of units by 2026 and beyond.
The analyst also noted Denny's increased cost discipline, anticipating a 5-6% reduction in core general and administrative (G&A) spending over the coming years. This financial tightening is coupled with technological upgrades that are expected to boost store-level profits. Additionally, the analyst provided insights into the company's clear growth strategy for KeKe's, its breakfast and brunch brand, which includes both comparable sales growth and the opening of new stores.
Despite acknowledging the challenges faced by the category and brand, the analyst expressed confidence in the credibility of Denny's initiatives. These initiatives include restaurant remodels, ongoing improvements to customer experience and branding, a reevaluation of the value offering, and a marketing message that resonates more effectively with consumers.
The positive outlook is further supported by Denny's current valuation, with shares trading at 6.1 times the firm's estimated CY25E EBITDA and a free cash flow yield of 9%. According to the analyst, the market has not fully recognized the potential upsides for Denny's, suggesting that the risk-reward balance is now tilted favorably towards investors. The upgrade reflects a belief in the company's ability to navigate its challenges and capitalize on its strategic initiatives.
In other recent news, Denny's Corporation has been active in implementing strategic initiatives to boost its brand and profitability. Despite facing a challenging market environment, the company reported Q2 2024 earnings with total operating revenue reaching $115.9 million. In addition, Denny's has appointed Christopher D. Bode as the new President and Chief Operating Officer, succeeding Kelli F. Valade who will continue her role as CEO. This change is part of a broader shift in the company's leadership structure.
Citi maintained a Neutral rating on Denny's shares but revised the price target to $7.00 from the previous $8.00, citing concerns about brand and category challenges. On the other hand, Truist Securities holds a Buy rating on Denny's shares, projecting a 1.0% rise in Denny's third-quarter sales for 2024, slightly above market consensus.
Denny's also revealed plans for the expansion of its virtual brand, Banda Burrito, and the opening of new restaurants. However, the company anticipates domestic system-wide same-restaurant sales for 2024 to range between -1% and +1% compared to 2023.
InvestingPro Insights
Complementing Citi's upgrade of Denny's Corporation (DENN), recent data from InvestingPro provides additional context to the company's financial landscape. Despite the challenges noted in the analyst's report, Denny's maintains a market capitalization of $321.6 million, reflecting its significant presence in the restaurant industry.
InvestingPro Tips highlight that management has been aggressively buying back shares, which could signal confidence in the company's future prospects and aligns with the positive outlook presented by Citi. This strategy may also support the stock price as the company implements its restructuring and growth initiatives.
However, it's worth noting that Denny's stock price movements have been quite volatile, as indicated by another InvestingPro Tip. This volatility is reflected in the company's year-to-date price total return of -42.46%, suggesting that investors have been cautious about the stock's performance in the current year.
The company's P/E ratio (adjusted) stands at 11.87 for the last twelve months as of Q3 2024, which is lower than the current P/E ratio of 18.38. This difference could indicate that the market is pricing in expectations of future earnings growth, potentially in line with the analyst's positive outlook on Denny's strategic initiatives.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights that could further inform investment decisions regarding Denny's Corporation.
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