Higher Comparable Sales Lift Dunkin’ Brands Profits

by Trefis Team
Dunkin' Brands
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Strong comparable sales of Dunkin’ Donuts in the U.S. helped lift Dunkin’ Brands‘ (NASDAQ:DNKN) profits in Q2 2013. During the quarter, total revenues rose 5.9% to $182.5 million, helped by new store openings and higher sales of existing stores in the U.S. The company’s net income more than doubled to $40.8 million, or 38 cents a share. Besides Dunkin’ Donuts, the company also owns the Baskin-Robbins brand. [1]

Dunkin’ Donuts American Sales Accelerate

Dunkin’ Donuts’ same-store sales in the U.S. accelerated to 4% in the second quarter from 1.7% in the first quarter. Sales were negatively impacted by harsh weather conditions in the Northeast, one of Dunkin’s core markets, in the first quarter, and so we were expecting sales to improve this time around.

A greater proportion of sales in the afternoon from new additions such as Chicken and Tuna Salad Wraps and new Chicken Sandwiches boosted sales. Dunkin’ is taking the afternoon segment seriously. Since the restaurant chain generates only about 40% of its sales after 11 am, the management is naturally keen to grow its afternoon sales. Moreover, some of the newer openings will feature sofas and televisions so that diners can relax and enjoy their food. Dunkin’ Donuts is usually seen as a breakfast place, but the company hopes to change that notion with the help of these new additions.

Comparable sales, or same-store sales, 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.

Dunkin’ Donuts’ American operations contribute almost 80% to the stock price as per our estimates. Although Dunkin’ Donuts has a significant presence outside the U.S, the international stores don’t enjoy the same royalty rates as the American stores and therefore their contribution to the company’s valuation is low.

Expansion On Track

The company continued to maintain its previous guidance of opening 330 to 360 new Dunkin’ stores in the U.S. this year. Through the first half, the company has added 141 new restaurants. Overall, the bigger picture for the brand is to double the number of stores in the U.S. to 15,000 in the next 20 years.

One thing that cheered the market was the company’s announcement that it had signed agreements with four franchisees to open 45 restaurants in California beginning 2015. Currently, the restaurant chain has no presence in the state.

See full analysis for Dunkin’ Brands

Margins Widen

On an adjusted basis, company-wide operating margins widened to 50% from 45.8% in the previous year primarily because of higher revenues and lower expenses such as general and administrative expenses.

However, for Dunkin’ Donuts’ American stores, reported operating margins fell to 67.7% vs 73.3% in the previous year quarter primarily due a one-time expense of $7.5 million related to a volume guarantee with the franchisee-owned supply chain cooperative. Since almost all of the Dunkin’ Donuts stores in the U.S. are franchised, the company boasts of extremely high margins.

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