U.S. Segments Help Drive Dunkin’ Brands’ Top-line Growth In Q2 2015

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

It seems Dunkin’ Brands (NASDAQ: DNKN), the parent company of two iconic brands: Dunkin’ Donuts and Baskin-Robbins, is paying all its attention to its U.S. business, as the company reported excellent comparable sales growth in the U.S in its Q2 2015 earnings results, but witnessed disappointing performance in its international segments. Dunkin’ Donuts U.S. posted 2.9% growth driven by tremendous customer response to beverage items and Dunkin’ Donuts Perk program, whereas Baskin-Robbins U.S. delivered 3.4% growth in the comparable store sales boosted by new ice-cream flavors. On the other hand, Dunkin’ Donuts International posted flat growth, whereas Baskin-Robbins International delivered a 2.5% decline in comparable sales. Dunkin’ Brands’ net consolidated revenue for the quarter rose more than 10% year-over-year (y-o-y) to $211 million, with diluted EPS of $0.44. [1]

We have a $54 estimate for Dunkin’ Brands, which is roughly the same as the current market price.

See full analysis for Dunkin’ Brands

Robust Growth In U.S. Continues

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One of the striking highlights of Dunkin’ Brands quarterly results over the past few quarters has been its strong comparable sales growth for both the brands in the U.S. On one hand, Dunkin’ Donuts U.S. has been consistently posting positive comparable store sales growth driven by increasing customer traffic and coffee sales, whereas on the other hand, Baskin-Robbins U.S. has been witnessing significant growth in sales due to online cake ordering and an increase ice-cream sales.

dnkn comp

Dunkin’ Donuts U.S. has been enjoying the increase in customer count, as well as rise in average transactions. Both these factors accounted for 60 basis points improvement in comparable sales in Q2 2015. Apart from the menu innovations and expanding beverage portfolio, Dunkin’ Donuts’ Perks Loyalty program and other reward initiatives have been driving customers in all the day-parts. With more than 30 million app downloads and roughly 3.2 million DD perks active members, the brand is planning to expand the customer base further with additional features, such as mobile ordering. Dunkin’ Donuts U.S. aims to deliver a 1% to 3% comparable sales growth in the fiscal 2015.

Baskin-Robbins U.S. is one of the highest growing segments for the company. Including this quarter, Baskin-Robbins U.S. posted positive comparable sales in 15 out of the last 16 quarters. Online cake ordering, strong performance of all the major categories: cups & cones, desserts, beverages, and sundaes; as well as success of the recent promotional offers started by the brand in the U.S., helped the segment in delivering yet another strong performance.

Baskin-Robbins International: Headwinds Continue To Hamper Growth

The concerning factor for the company is its business internationally, where both the brands have been struggling to make a powerful impact. Baskin-Robbins International delivered yet another disappointing quarter with a 2.5% decline in comparable store sales. The company mentioned that its business in South Korea, which accounts for a major portion of sales for both the brands internationally, was affected due to the outbreak of MERS virus, and are expecting some lingering impact in the third quarter as well. [2] To add to this, a shift in Ramadan days also partially impacted the sales in Middle East countries and South East Asian markets. The only good thing for the company  is the fact that cake sales actually grew 10% y-o-y, despite these headwinds. According to Trefis estimates, the revenue contribution of Baskin-Robbins International has declined to 16.4% in 2014, from 17% in 2011.

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Launch Of K-Cups To Retail Stores

In February 2015, Dunkin’ Brands and Keurig Green Mountain (NASDAQ:GMCR) announced the decision to expand their partnership for the manufacturing, marketing, and distribution of Dunkin’ K-Cups available in retail stores in the U.S. and Canada; and on online platforms. [3] Further in May 2015, the Dunkin’ Donuts K-Cup Packs were made available in retail stores nationwide. [4] The launch of these K-Cups through retail channels has over-exceeded the company’s estimates, and as a result, the company received approximately $3 million in additional revenues in the quarter.

New Store Developments: Picking Up Pace

Being one of the fastest growing companies by unit count among the U.S. fast food companies, Dunkin’ Brands has been successful by far in accomplishing its target to expand in the untested markets. In the second quarter, the company added 154 net new restaurants, out of which 80 were Dunkin’ Donuts U.S. stores, taking the total count of DD U.S. stores in the first half of 2015 to 158 net new units. By region, 16% of the net new stores were opened in core markets, 26% in established markets, 21% in emerging markets, and the remaining 265 in Western markets. Dunkin’ Donuts has opened 10 stores in California, and plans to open a few more by the end of this year. With this pace, the company is confident of achieving its target of 410-440 net new DD U.S. stores in 2015. On the other hand, Baskin-Robbins opened 6 stores in the U.S and 55 stores internationally.

Earlier this year, Dunkin’ Brands also 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. [5]

The improving situation for Baskin-Robbins in the U.S. and strong comparable store sales for Dunkin’ Donuts U.S. will help the company achieve its full year targets with ease. However, the only concern is the situation and performance in international markets. If, as the company says, those headwinds are temporary and the situations will improve in the next two quarters, we can see further improved  performances from Dunkin’ Brands both financially and operationally.

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Notes:
  1. Dunkin’ Brands, Q2 2015, earnings call transcript []
  2. South Korea MERS outbreak []
  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 []
  4. Dunkin’ Donuts K-Cup pods now available in retail outlets nationwide []
  5. Dunkin’ Donuts announces expansion plans in China with signing of largest development agreement in company history []