Dunkin’ Brands (NASDAQ:DNKN), which owns Dunkin’ Donuts as well as Baskin-Robbins, announced its Q4 and full year results on January 31. Although consolidated revenues fell 4% to $161.7 million, operating income jumped 52% to $67.8 million. Revenues declined due to a one-time delay in revenue recognition that impacted sales of ice cream products in the fourth quarter. 
Net income swelled to $34.3 million from $11.6 million in the previous year quarter, helped by cheaper material costs and lower taxes. The company opened a total of 256 new stores in the quarter, including 149 new Dunkin’ Donuts in the United States and 89 Baskin-Robbins internationally. 
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Dunkin’ In The US
Dunkin’ Donuts’ stores across the U.S. generate more than 75% of total revenues and account for 80% of the profits. Prior to the announcement of the results, there were concerns over Dunkin’ Donuts’ sales since the chain’s same-store sales growth was declining with each quarter in 2012. However, a continued focus on breakfast sandwiches helped the chain post 3.2% growth in same-store sales, taking the full-year figure to 4.2%.
Comparable sales or same-store sales growth is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. Since Dunkin’ Donuts’ expansion in the U.S. involves setting up stores in new markets (such as California and Texas), we estimate that same-store sales growth of 3.5%-4% is feasible in the long run since the company is less likely to face cannibalization.
The company accelerated its expansion rate in the fourth quarter with 149 new Dunkin’ Donuts added across the U.S. For the full year, the number stood at 291. In 2013, the company plans to continue expanding with 330 to 360 new additions. Since Dunkin’ Donuts’ effective royalty rate comes out to be 7.4% and each store generates average sales of about $0.9 million, we expect the new openings to add between $22 million and $24 million to the top-line in 2013.
Since most of the stores are franchised, Dunkin’ Donuts enjoys high margins. Its operating margins remained relatively stable at 73.6% in the fourth quarter.  To lure franchisees, the company is offering special incentives such as reduced royalty rates in the initial stages, but we don’t expect this to have a significant impact on overall margins since the addition of new restaurants, as a percentage of existing restaurants, is pretty small. Dunkin’ Donuts has more than 7,300 stores in the U.S.
We have a $35 price estimate for Dunkin Brands, which is about 5% lower than the current market price. We are in the process of revising our estimates to incorporate the latest earnings.Notes: