Dunkin’ Brands Litigation Costs, Slowing Comparable Sales Hurt Results

DNKN: Dunkin' Brands Group logo
Dunkin' Brands Group

Dunkin’ Brands Group (NASDAQ:DNKN) reported its Q2 earnings on July 26. The stock has generally had a good year, but has declined 10% in recent trade. Total revenue for the quarter jumped 10% to $172.4 million. However, operating income declined 25% to $46.1 million mainly due to additional expenses of $20.7 million related to the Beritco litigation and $3.7 million costs associated with the Peterborough plant closure. On the other hand, net income still managed to grow 7% primarily due to a reduction in interest expense which offset the additional expenses. Dunkin’ Brands had used the proceeds from its IPO last year to retire part of its debt which resulted in lower interest expense this quarter (on a y-o-y basis). [1]

Dunkin-Donuts Comp Sales Slow Down

Comparable sales growth for Dunkin’ Donuts U.S. slowed down to 4% from 7.2% in the first quarter. However, the figure was generally in line with our expectations as we estimate the average revenue per outlet to rise at an annual rate of 4% in the long run. But comparable sales were also helped by the continued expansion of Dunkin’ branded K-cups coffee packs in Dunkin’ Donuts outlets. Excluding the effect of K-Cups, the comparable sales figure would have been a lowly 2.5%. And this is a cause for concern.

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Margins remained stable for Dunkin Donuts. Margins for Dunkin Donuts U.S. are generally high since all of the company stores in the country are franchised. Moreover, margins are not directly affected by a short-term volatility in input costs. Dunkin’ Donuts U.S. contributes more than 77% to Dunkin’ Brands’ valuation, as per our estimates.

Baskin-Robbins Performance Improves

Baskin-Robbins performed surprisingly well, posting comparable sales growth of 5.5% for the quarter. From 2007 to 2010, Baskin-Robbins outlets in the U.S. have witnessed negative comparable sales growth which has forced the the company to close down under-performing stores in the U.S. However, given the recent strong performance, the company now expects to close only 40 to 50 Baskin-Robbins outlets in the U.S. against the previous forecast of 60 to 80 closures.

We have a $35 price estimate for Dunkin’ Brands, and we are in the process of revising our estimates to incorporate Q2 earnings.

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