A Michigan-based Denny’s franchisee plans to close at least two more restaurants after filing for Chapter 11 bankruptcy last week.
Denn-Ohio LLC, which operates 10 Denny’s restaurants across Kentucky, Michigan and Ohio, filed its bankruptcy petition October 31 in the Bankruptcy Court for the Western District of Michigan. Court filings note the company intends to terminate the franchise agreements and leases for its restaurants in Toledo, Ohio, and Kalamazoo, Michigan, which it terms “underperforming franchises.” Denn-Ohio may also close its restaurants in Louisville, Kentucky, and Columbus, Ohio, filings state.
The company filed under Subchapter V of the U.S. Bankruptcy Code, which took effect in 2020 and is a faster and less expensive path to reorganize under Chapter 11. A hearing on the case is set for December 13.
Thomas Pilbeam Sr., Denn-Ohio’s co-founder, chief operating officer and chief financial officer, is a former Denny’s franchise representative who in 2009 joined with Jack Thompson to form the company. Both were already Denny’s franchisees, with Pilbeam owning three-unit PTS Hospitality and Thompson running five-unit JMAD Hospitality.
From 2009 to 2019, Denn-Ohio “experienced consistent financial success and growth,” Pilbeam said in the filing, and at their highest point the three entities operated 27 locations. Beginning in 2020, however, economic challenges, some related to the COVID-19 pandemic and others such as increased labor, food and delivery expenses, negatively impacted operations.
“Increased costs to complete required renovations and post-COVID trends towards increased delivery sales also resulted in additional economic hardship,” Pilbeam said. He also noted Thompson died expectedly in December 2019, “which created additional operational challenges.”
Pilbeam, who did not respond to requests for additional comment, said in the filing that Denn-Ohio closed nine other underperforming locations between 2020 and the bankruptcy filing. In 2022, the group generated a net loss of $1.3 million on gross sales of $17.57 million. Court documents show the company’s gross revenue was $9.38 million so far this year, a decrease of more than 45 percent.
Denn-Ohio, PTS and JMAD cross-collateralized, cross-guaranteed and cross-defaulted loans to their primary secured creditor, First Franchise Credit Corp., which is owed approximately $3.35 million, the filing states. PTS, now with two Denny’s units, and JMAD with five, will likely sell or liquidate all their restaurants.
Denn-Ohio’s location in Elizabethtown, Kentucky, made headlines in January after the restaurant’s sign fell and crushed a car. Two people inside the vehicle died, and a third was injured. The bankruptcy filing noted two wrongful death claims and a personal injury claim related to the incident are still pending.
Pilbeam wrote that prior to the bankruptcy filing, he explored options to sell or refinance the stores, and contacted Denny’s corporate office, other franchise owners, commercial brokers, lenders and investors. Based on that feedback, he said, “I believe that the current demand for Denny’s locations is extremely limited.”
In a statement to Franchise Times, Chioke Elmore, vice president of franchise operations at Denny’s, called Denn-Ohio’s closures “unfortunate.”
“The franchisee was severely impacted by the COVID-19 pandemic and encountered ongoing challenges as a result. Denny’s works closely with our franchise owners to assist them through headwinds, however, the final decision to close restaurant locations is in the hands of each franchise business owner based on their particular circumstances,” Elmore continued.
Systemwide same-store sales for Denny’s were up 1.8 percent for the third quarter, but traffic levels softened as the quarter progressed, CEO Kelli Valade said during the company’s quarterly earnings call.
The domestic comps growth was driven primarily by an 8.4 percent increase in menu pricing, including 5.8 percent current-year pricing and 2.8 percent carryover pricing. Average weekly sales for domestic stores were approximately $37,000 for the quarter—including off-premises sales of approximately $7,000—which translates to an average unit volume of about $1.9 million.
In an effort to grow its off-premises business, Denny’s will expand its test of virtual burrito concept Banda Burrito to 80 locations, up from 10. This adds to its lineup of virtual brands, which also includes Burger Den and The Meltdown.
At its recent annual franchisee convention, Denny’s unveiled a new prototype as part of its Modern American Diner concept. The prototype, Valade said, features an improved overall look and embraces off-premises orders with a dedicated pickup area staffed by a dedicated to-go specialist.
As of September 27, Spartanburg, South Carolina-based Denny’s Corp. had 1,644 restaurants, including 1,588 Denny’s units and 56 Keke’s Breakfast Café locations. The company acquired Keke’s in July.
Denny’s domestic store count has declined in recent years, with a net drop of 114 between the start of 2020 and end of 2022.
For the third quarter, Denny’s reported net income of $7.9 million, or 14 cents a share, compared to $17.1 million, or 29 cents a share, in the prior-year period. Revenues fell to $114.2 million from $117.5 million in the prior-year quarter.