Strong sales of the Dunkin’ Donuts’ American stores buoyed the third quarter profits of Dunkin’ Brands (NASDAQ:DNKN). Total revenues for the quarter jumped 8.5% to $186.3 million, while operating income rose 17% to $82.2 million. The company’s net income stood at $40.2 million or 38 cents a share, up from 26 cents a share in the previous year quarter. However, for the full year, the management now expects the earnings to be in the lower range of its previous guidance of $1.50-$1.53 per share. This is primarily due to write-down charges related to Dunkin’ Donuts’ joint venture in Spain. 
We have a $43 price estimate for Dunkin Brands, which is about 10% lower than the current market price. However, we are in the process of revising our estimates in order to incorporate the latest earnings.
Dunkin’ Donuts’ American operations contribute almost 80% to the stock price as per our estimates. In addition to Dunkin’ Donuts, the company also operates the Baskin-Robbins brand.
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Same-Store Sales Better Than Expected
Dunkin’ Donuts comparable sales in the U.S. rose 4.2%, helped by higher sales in the afternoon segment. Introduction of the limited time offerings such as the Pretzel Roll Roast Beef Sandwich and incremental sales of Chicken and Tuna Salad Wraps as well as Chicken Sandwiches buoyed overall sales. At the moment, Dunkin’ Donuts generates only 40% of the sales after 11am, but the management is trying to generate additional sales during the afternoon.  The company is also remodeling its existing restaurants to incorporate cushion seatings and TVs in order to attract more customers during the daytime.
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. We expect the same-store sales to rise at an average annual rate of 3.5-4% in the long run. There is an opportunity for the restaurant chain to grow its sales during the second half of the day. Moreover, most of the restaurant addition will occur in the Western part of the country, where it has a relatively low presence. Most of Dunkin’s American stores are presently located in the Eastern part of the country, particularly in the Northeast. Thus, the sales from the new restaurants will not cannibalize the sales of the existing ones.
Strong franchisee sales resulted in higher royalty fees, which improved the segment’s operating margins by 100 basis points to 74.7%. Due to the franchising nature of the business, Dunkin’ Donuts enjoys high margins.
Dunkin’ Expansion Continues
During the quarter, Dunkin’ Donuts opened 81 new stores in the U.S., to take its total tally to 7,528 stores. In the first nine months of the year, the company has so far added 222 new stores. In the long run, Dunkin’ plans to double the number of outlets in the U.S. to 15,000 within the next twenty years. The expansion drive includes an additional 5,000 stores in the Western half of the country. We anticipate the company to add 300-350 stores annually in the next few years.
Mixed Results For Baskin-Robbins International
While the Baskin-Robbins brand has struggled in the U.S. over the last few years, it has performed relatively well in the international markets. During the quarter, revenues for the segment grew 10.5% (year-over-year) to $32.5 million, helped by higher sales of ice cream products to its franchisees.
On the other hand, operating margins declined 280 basis points to 51.3%, primarily due to the yen devaluation which resulted in lower royalty income in terms of dollars.
Baskin-Robbins opened 73 net stores during the third quarter. As of September 2013, Baskin-Robbins had 4,674 stores internationally. We expect the chain to add 250-300 stores annually since there is an ample opportunity to expand in markets such as China, the Middle East, the U.K. and Vietnam, where it has a strong brand name but a limited presence.Notes:
- DNKN 8-k [↩]
- Dunkin’ Donuts Upgrades Stores to Be More Like Starbucks, June 13, 2013, bloomberg.com [↩]