Denny’s Chart Looks Bullish But I’m Not A Buyer
Shares of Denny’s (NASDAQ:DENN) have been showing signs of bullishness over the past few days but that is all a head-fake. The 3Q report is only mixed at best despite signs of sequential improvement. The analysts see a long-term opportunity in this stock and I agree. The question is when will the opportunity start paying off and I don’t think it will be too soon. The broad market is on the cusp of a sell-off, I fear, and with no good reasons to own the stock, I think the odds that a better buying opportunity will develop are very high.
"While the near-term environment is likely to remain choppy, management is bullish on the longer-term restoration of sales, unit growth and capital returns to shareholders. Franchisee cash flow was also a popular topic and the company provided a few data points suggesting the system remains healthy. At an ~8% FCF yield, we believe risk-reward skews positively for longer-term investors and we maintain our Outperform rating," wrote Oppenheimer analyst Brian Bittner in an August letter to shareholders.
A Mixed Quarter For Denny’s Isn’t Telling The Truth
Denny’s third quarter was one marked by sequential improvements in business and beat the consensus but that’s just spin. Revenue is still down high-double-digits from last year and the rebound is decelerating if not already over. The 420 basis point beat on top-line revenue is impressive but doesn’t really count for much when revenue is still down more than 42% from last year.
On a domestic basis, comps are down -33% and expected to remain in a range close to this level in the 4th quarter. On a month to month basis, comps did improve but the data shows the rebound is stabilizing with revenue down 25% to 30% from pre-COVID levels. The July comps were -39% and fell to -35% and -28% in August and September. Because the preliminary October comps are -26% and the company is forecasting 4th quarter comps in the range of -25% to -30% it looks like the rebound peaked in later summer. For what it was worth, Denny’s 2020 rebound is over.
"I am encouraged by our sequential sales improvement over the course of the third quarter, despite the continued disproportionate impact of the COVID-19 pandemic on the full-service restaurant industry," notes CEO John Miller.
Off-premise dining has been a lifeline for Denny’s but one that can’t be relied on for growth. Off-premise is up nearly 100% since the pandemic struck and yet net revenue is still down -42%. The only good news is that GAAP earnings of $0.10 beat the consensus by a wide margin. This proves the company will be able to maintain operations for the foreseeable future but is still not a reason to be a buyer, at least not right now.
In my opinion, with the cold weather already here and the number of new COVID cases accelerating 4th quarter results may actually deteriorate. The quality of Denny’s food is only slightly better than fast-food and I am being generous, it's really just fast food of a different stripe. There are lots of easier choices for consumers to make.
The Technical Outlook: Denny’s Is Only Ranging, Don’t Be Fooled
To simply look at the price action of Denny’s stock you might think it was about to move higher. The past couple of days have been up, the candles look good, price action is finding support at the $10 level, and it’s trading above the short-term moving average. What this view doesn’t take into account, however, is the tightly narrowing range in which the stock is trading and the nature of the indicators. Both stochastic and MACD agree this market is weak, what they also show is an asset with little direction and one that is winding up for a breakout.
The thing is, even with a break out the stock will still be in a range with little to no catalysts to support it. In that light, I expect to see price action move down to test support at a deeper level than $10. Until that happens I am happy to focus my purchases on stocks with better revenue, a better outlook for growth, dividends, dividend growth, and value because it’s all available and not that hard to find.
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