Dunkin’ Brands Earnings Preview: Weather Conditions Might Drive Down Customer Count

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Trefis
DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

Dunkin’ Brands (NASDAQ: DNKN) is slated to release its first quarter earnings report for the fiscal 2015 on April 23. [1] Amid the stiff competition in the U.S. restaurant industry for the breakfast and coffee market share, Dunkin’ Brands is one of the few food and beverage chains to report an increase in customer traffic and transactions in all the dayparts. Moreover, the company has been targeting aggressive expansion in the western U.S. The company had a decent fiscal period last year, as the net revenues in the fiscal 2014 rose 4.9% year-over-year (y-o-y), with 1.6% y-o-y comparable store sales growth for Dunkin’ Donuts U.S. and 4.7% y-o-y comparable store sales growth for Baskin-Robbins U.S. [2] The company’s net income for the fiscal 2014 grew 20% y-o-y to $176 million.

The highlights of the company’s performance in 2014 were: strong growth of both brands in the U.S., the increase in number of transactions despite the economic headwinds, the launch of the DD Perks Loyalty program, and the international expansion and developments in countries such as Sweden, Austria, and China. To drive growth in 2015, the company launched several new items in the fourth quarter, including Dark Roast Coffee, Croissant Donuts, and Steak Sandwiches, all of which were off to a good start. Moreover, later this year, the company is planning to launch the blender platform, which will offer high quality frozen beverages, including real fruit smoothies with low-fat yogurt, as well as Coolatta Lite.

We have a $48 estimate for Dunkin’ Brands, which is roughly the same as the current market price.

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Weather Might Play Spoilsport

In Q1 2014, Dunkin’ Brands reported a 1.2% decline in the comparable store sales for Dunkin’ Donuts U.S., primarily due to the adverse weather conditions in North America. However, the decline in comparable store sales was more than offset by a significantly higher 6.2% increase in total revenues to $172 million, due to the increased sales of ice cream products as well as increased royalty income. The harsh weather conditions in the Northeastern part of the country led to a decline in the customer count for both the brands: Dunkin’ Donuts and Baskin-Robbins.  ((“DNKN 8-k”, First quarter SEC filing, April 2014))

According to the MillerPulse survey, overall restaurant same-store sales rose 3.3% in March 2015, despite the decline in customer traffic in March. The customer traffic decline indicates the decline in total demand in the industry, despite the improving economy and lower gas prices. [3] Before dropping in February 2015, the customer traffic improved for 7 straight months. However, the decline in the last two months is primarily due to harsh weather conditions. In the fourth quarter of fiscal 2014, Baskin-Robbins U.S. reported a 9.3% increase in the comparable store sales, whereas Dunkin’ Donuts U.S. reported 1.4% growth.

However, this might not be the case in the first quarter report. The negative impact of the weather in the first two months of 2015 might translate to a decline in average check and customer traffic for the company. As a result, we might witness a slower growth in the comparable store sales for both the brands in the U.S.

DD Perks Loyalty Program To Provide Additional Boost To Top-line Growth

Dunkin’ Donuts had introduced a mobile platform and perks loyalty program to sustain its customer count. Both the initiatives help the company to track the complete customer journey of the perks member and, as a result, the company uses this data to deliver targeted offers to these customers and thus helps to change guest behavior. Success of these initiatives can be tracked from the fact that the perks loyalty program now has more than 2.5 million members. Moreover, in Q4, DD Perks members spent nearly 40% more on average in a week compared to that of a year ago, whereas their visits increased by 30% over the same period. According to company estimates, these programs contributed about 50 basis points to the comparable sales in 2014, and accounted for approximately 3% of the transactions.

All Eyes On Baskin-Robbins’ Performance

In 2014, Dunkin’ Brands’ growth was somewhat slowed down by the performance of its Baskin-Robbins brand. According to Trefis estimates, the contribution of Baskin-Robbins U.S. to the company’s net revenues declined to 5.8% in 2014 from 6.9% in 2011, whereas the revenue contribution of Baskin-Robbins International has declined to 16.4% in 2014 from 17% in 2011. Stagnant growth of Baskin-Robbins U.S. and declining margins of Baskin-Robbins International has slowed down the company’s overall profitability. According to Trefis estimates, Baskin-Robbins International’s EBITDA margins declined by 9 percentage point in 2014, as the direct expenses grew 17.4% for the segment.

In short, with the Dunkin’ Donuts segment performing in line, the swing in the company’s top-line performance depends primarily on the growth of its Baskin-Robbins brand.

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Notes:
  1. Dunkin’ Brands Q1 2015 earnings conference call []
  2. Dunkin’ Brands Q4 2014 earnings call transcript []
  3. Report: same-store sales rise 3.3% in March []