Dunkin’s Top Line Suffers In Q3 As It Witnesses A Decline In Comps Due To Refranchising
After showing lukewarm growth in Q2’16, Dunkin’ Brands (NASDAQ: DNKN) reported a slight fall in revenues in its September quarter earnings. The weakness in the top line was expected as the restaurant industry struggles amidst a deceleration in traffic and decline in comparable sales. However, it was exacerbated by the conversion of the company’s stores to franchisees. In terms of bottom line, Dunkin’ saw a 15% y-o-y growth in its EPS, supported by the company’s share buyback program, fiscal discipline the company had been practicing to curtail its expenses, and the gains recognized from the sale of its company operated restaurants.
The weakness in Dunkin’s top line for consecutive quarters can be accounted for not only through declining comps in the restaurant industry, but also the conversion of its remaining company operated restaurants into franchisees. While Dunkin’ U.S. comp store sales growth came in strong from higher sales of beverage and breakfast sandwiches (which are competing very well with McDonald’s All Day Breakfast), Baskin’s U.S. comps were negative in the quarter, likely due to declining traffic and waning popularity of the Warm Cookie and Donut Ice Cream Sandwich. Moreover, the company’s international segments continued to be weighed down by sales declines in Middle East and declining franchisee renewals and openings.
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However, in terms of revenues, a decline was seen in all segments, except Baskin’ U.S. This is explained by the loss in revenues from conversion of all company operated restaurants into franchisees. Although, the effect was slightly offset by increased royalty income, it wasn’t enough in the face of declining renewals and store openings.
The company has successfully adopted a 100% franchisee model, selling and converting all its restaurants into franchisees. It expects to open approximately 430 new Dunkin’ outlets and 5-10 Baskin’ outlets in the U.S. by the end of 2016, while internationally the store openings will be limited to 200 for both the brands. Furthermore, it expects its full year revenues to come in lower than earlier anticipated due to the general softening in the industry and re-franchising. After revising the annual revenue growth guidance from 4% – 6% to 3% – 5% in Q2’16, it now forecasts revenues growth to be even lower at 2% y-o-y.
Going forward, the company hopes to engage its customers though its loyalty program DD Perks, driving user growth, while focusing on its five-part plan of driving its coffee leadership, fastest market product innovation, targeted value offerings and everyday smart pricing, increased use of digital technologies, and an improved restaurant experience. In line with this strategy, Dunkin’ has recently tied up with Salesforce to drive customer adaptability through personalized, one-to-one customer experience across an integrated digital platform.
Have more questions on Dunkin’ Brands (DNKN)? See the links below.
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- Dunkin’ Brands’ Q2 FY’16 Earnings Preview: Product And Digital Innovation To Support Earnings
- Dunkin’ Brands To Enjoy Robust Revenue Growth In 2016, Despite International Segments Struggling in First Quarter
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- Dunkin’ Brands’ FY 2015 Earnings Review: Dunkin’ Donuts US & K-Cups Drive Revenue Growth, Baskin-Robbins International Struggles
- Dunkin’ Brands’ Q1 FY’16 Earnings Preview: All Eyes On Comp Sales Growth Of International Segments
- What’s Dunkin’ Brands’ Fundamental Value Based On Expected 2016 Results? (Updated After Q1 2016 )
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