Strong Comparable Sales Growth In The U.S. Drives Q1 Revenues For Dunkin’ Brands

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

Dunkin’ Brands (NASDAQ: DNKN) delivered strong numbers in its first fiscal quarter earnings report for the fiscal 2015, as the company reported 8.1% year-over-year (y-o-y) increase in its net revenues, despite the severe weather conditions in many parts of the country. 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. The company reported positive comparable store sales in all its segments. Dunkin’ Donuts U.S. reported comparable store sales growth of 2.7%, whereas Baskin-Robbins U.S. reported comparable sales growth of 8%. The company’s operating income rose 21.2% y-o-y to $84 million, as the operating margins rose to 45%. Moreover, the adjusted net income jumped 13% y-o-y, with diluted EPS jumping 21% to $0.40 for the quarter. [1]

We have a $48 estimate for Dunkin’ Brands, which is roughly 10% below the current market price.

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Positive Comparable Store Sales Across All Segments

  • Dunkin’ Donuts U.S.

Dunkin’ Donuts U.S. showed improvement this quarter, as the segment reported a 2.7% increase in the comparable store sales, compared to 1.2% in the same period last year. Despite the severe cold weather and snowfall across many of the company’s main markets, such as New England and New York, the segment showed positive customer traffic growth. However, harsh weather in February and March partially offset the positive impact of favorable weather in January. DD Perks loyalty program and strong performance of new product platforms contributed to the improved comparable sales.

Average ticket growth was mainly due to the net increase in pricing, which contributed approximately 300 basis points, according to the company. The segment witnessed strong challenges in the packaged coffee segment, and the company expects the headwind to impact the second quarter as well. Nonetheless, the company expects 1% to 3% comparable store sales growth for the segment in the fiscal year 2015.

  • Baskin-Robbins U.S.

Baskin-Robbins U.S. was the highlight this quarter with the comparable store sales growth of 8%, compared to 0.5% last year. This significant improvement was led by positive growth in cups and cones, desserts, beverages, and sundaes. On the other hand, the segment’s ‘One Plus Up’ marketing initiative, where the customer receives a free waffle cone on every purchase of a second scoop drove sales and profitability.

Online cake ordering was another major driver in the cake category growth, which translated to positive comparable store sales. In 2015, the company plans to expand the Baskin-Robbins online and mobile platform, along with the launch of Baskin-Robbins mobile and loyalty program.

  • Dunkin’ Donuts International

Dunkin’ Donuts International delivered a 1.7% growth in comparable store sales in this quarter, compared to a negative 2.4% decline in the same period last year. This segment’s growth was led by positive performance of Dunkin’ Donuts Korea and in Europe. Over the next couple of years, the company plans to target some of the big markets, such as China.

  • Baskin-Robbins International

In 2014, Dunkin’ Brands’ growth was somewhat slowed down by the performance of its Baskin-Robbins brand, especially in the international markets. 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 the first quarter, Baskin-Robbins International segment reported 0.3% growth in the comparable store sales, compared to 1.4% in the same period last year. The company’s stores in the Middle East and Southeast Asia showed strong comparable store sales, offset by poor performance of Baskin-Robbins Japan.

Expansion In Western Market Strengthens

Dunkin’ Brands is one of the fastest growing companies by unit count among the quick service restaurants. In the first quarter, the company opened 79 net new restaurants worldwide, with 78 net new Dunkin’ Donuts stores in the U.S. Among these new developments, 8% growth was in the core markets, 45% in the established markets, 23% in emerging markets, and 24% in western markets. The company’s stores in California and Colorado are showing significant growth potential and are performing above expectations. On the other hand, there were 21 net store closing of Dunkin’ Donuts stores internationally and 22 net new openings of Baskin-Robbins in the international markets. The company opened its first Dunkin’ Donuts in Denmark, and got enthusiastic response from the customers. However, the net closings of Dunkin’ Donuts internationally were primarily due to closures of kiosk-type locations in the Philippines.

On January 8, Dunkin’ Brands announced its intent to expand Dunkin’ Donuts in China. The company has signed a long-term franchise agreement with Golden Cup Pte. Ltd, as wholly owned subsidiary of RRJ Capital Master Fund II, which will serve as the franchise partners to open and operate nearly 1,400 Dunkin’ Donuts stores in the country. [2] For the fiscal 2015, the company expects to open between 410-440 Dunkin’ Donuts outlets and 5-10 Baskin-Robbins outlets in the U.S.  Internationally, the company plans to open 200-300 net new stores across both brands.

K-Cups Revenues Boost Top-Line Growth

Dunkin’ Brands, along with J.M Smucker Company (NYSE: SJM), expanded its partnership with Keurig Green Mountain (NASDAQ:GMCR) by signing agreements for the manufacturing, marketing, distribution, and sale of Dunkin’ K-Cup packs in the U.S. and Canada. [3] The company announced the expansion of its Dunkin’ K-Cups availability from 8,000 company restaurants to more than 60,000 locations in the U.S., as well as online. This step was taken to strengthen the consumer packaged goods business, as the company also deals with the sales of packaged coffee, creamers, and Baskin-Robbins products.

The company’s 8.1% increase in the net revenues was partially due to the revenue contribution from the K-Cup licensing agreement and partially from increased royalty income. As a result, the company’s adjusted operating income rose 15.8% (or, $12 million). K-Cup revenues contributed about $0.04 to the net EPS.

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Notes:
  1. Dunkin’ Brands Q1 2015, earnings call transcript []
  2. Dunkin’ Donuts announces expansion plans in China with signing of largest development agreement in company history []
  3. Dunkin’ Brands, The J.M. Smucker Company and Keurig expand partnership to make Dunkin’ K-Cup packs available at retail outlets nationwide and online []