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Dunkin' Brands reports Q3 results

Dunkin' Brands Group third quarter results boast some healthy growth indicators.

October 22, 2015

Dunkin' Brands Group Inc., the parent company of Dunkin' Donuts and Baskin-Robbins, today reported results for the third quarter ended Sept. 26, 2015.

Highlights include:

• Dunkin' Donuts U.S. comparable store sales growth of 1.1 percent.
• Baskin-Robbins U.S. comparable store sales growth of 7.5 percent.
• Added 90 net new restaurants worldwide, including 68 net new Dunkin' Donuts in the U.S., which reflects the closing of 31 Speedway self-serve coffee stations
• Revenues increased 8.9 percent
• Diluted EPS decreased 7.7 percent to $0.48
• Diluted adjusted EPS increased 6.1 percent to $0.52

"Our overall financial performance in the third quarter, including the strong growth in our revenue, operating income and adjusted earnings per share, demonstrates the benefits and resiliency of our asset-light franchise business model, and the solid Dunkin' Donuts U.S. net restaurant growth shows the continued demand for the brand. While we were disappointed with our third quarter Dunkin' Donuts U.S. comparable store sales, we remain on track to deliver our full-year targets, and we are working closely with our franchisees to regain transaction momentum through great products, exceptional guest service, and innovative marketing," said Nigel Travis, Dunkin' Brands chairman and CEO.

"Dunkin' Brands is a business with tremendous long-term growth potential. At our recent investor day, we provided targets for our growth expectations for the next five years which included mid-to-high single digit revenue growth, 10 percent plus adjusted operating income growth and up to 15 percent adjusted earnings per share growth," said Paul Carbone, Dunkin' Brands Group CFO.

Global systemwide sales growth in the third quarter was primarily attributable to global store development and Dunkin' Donuts U.S. comparable store sales growth (which includes stores open 78 weeks or more), according to a company press release.

Dunkin' Donuts U.S. comparable store sales growth in the third quarter was driven by increased average ticket. Growth was driven by strong beverage sales, led by total coffee, including iced coffee and espresso-based beverages, and frozen beverages, which was driven by the launch of blended beverages; and donut category growth driven by the Reese’s peanut butter dquare and pumpkin cheesecake squares. The in-restaurant K-Cup and packaged coffee categories had a negative impact on third quarter comparable store sales. Traffic declined approximately 70 basis points in the quarter, the release stated

Baskin-Robbins U.S. comparable store sales growth was driven by increased sales of cups and cones, beverages, desserts, and sundaes and increased sales of cakes, stimulated by strong year-over-year growth of online cake ordering. Comparable store sales growth was driven primarily by traffic.

In the third quarter, Dunkin' Brands franchisees and licensees opened 90 net new restaurants around the globe. This included 68 net new Dunkin' Donuts U.S. locations, 40 net new Dunkin' Donuts International locations, two net closures for Baskin-Robbins U.S., and 16 net closures for Baskin-Robbins International. The Dunkin' Donuts U.S. net store growth number reflects the previously-announced closing of 31 self-serve coffee stations within Speedway locations.  Additionally, Dunkin' Donuts U.S. franchisees remodeled 116 restaurants and Baskin-Robbins U.S. franchisees remodeled 32 restaurants during the quarter.

Revenues for the third quarter increased 8.9 percent compared to the prior year period due primarily to increased royalty income as a result of systemwide sales growth, an increase in sales at company-operated restaurants due to a net increase in the number of company-operated restaurants, increased sales of ice cream and other products, and licensing fees earned from the sale of Dunkin' K-Cup pods.

Operating income and adjusted operating income for the third quarter increased $7.3 million, or 7.9 percent, and $6.5 million, or 6.6 percent, respectively, from the prior year period primarily as a result of the increases in royalty income, ice cream margin due primarily to the increase in sales, and licensing fees earned from the sale of Dunkin' K-Cup pods. The increases in revenues were offset by an increase in general and administrative expenses driven primarily by an increase in personnel costs and bad debt expense.

Net income for the third quarter decreased by $8.5 million, or 15.5 percent, compared to the prior year period primarily as a result of additional interest expense of $8.1 million, driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed in January 2015, and an increase in income tax expense of $7.5 million as the prior year period was favorably impacted by the settlement of certain tax audits. These decreases were offset by the $7.3 million increase in operating income.

Adjusted net income for the third quarter decreased by $2.0 million, or 3.8 percent, compared to the third quarter of 2014 primarily as a result of increases in interest expense, offset by the $6.5 million increase in adjusted operating income.

Diluted earnings per share decreased by 7.7 percent to 48 cents for the third quarter of 2015 compared to the prior year period as a result of the decrease in net income, offset by a decrease in shares outstanding. Diluted adjusted earnings per share increased by 6.1 percent to 52 cents for the third quarter of 2015 compared to the prior year period as a result of the decrease in shares outstanding, offset by the decrease in adjusted net income. The decrease in shares outstanding from the prior year period is due primarily to the repurchase of shares, offset by the exercise of stock options.

Dunkin' Donuts U.S. third quarter revenues of $154.4 million represented an increase of 8.0 percent over the prior year period. The increase was primarily a result of increased royalty income due to an increase in systemwide sales, as well as an increase in sales at company-operated restaurants driven by a net increase in the number of company-operated restaurants. Also contributing to revenue growth were increases in other revenues, driven primarily by income recognized in connection with the termination of a lease, and franchise fees due primarily to favorable development mix.

Dunkin' Donuts U.S. segment profit in the third quarter increased $6.7 million over the prior year period to $112.9 million, which was driven primarily by growth in royalty income, other revenues and franchise fees. The increases in revenues were offset by an increase in personnel costs and a decrease in other operating income as the prior year period included a gain recognized in connection with the sale of real estate.

Dunkin' Donuts International third quarter systemwide sales decreased 5.0 percent from the prior year period. Sales declines in South Korea and South America were offset by sales growth in the Middle East and Asia. Sales in South Korea, South America, Asia, and Europe were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 7 percent. Comparable store sales growth was negatively impacted as a result of the MERS outbreak in South Korea.

Dunkin' Donuts International third-quarter revenues of $4.6 million represented an increase of 5.8 percent over the prior year period. The increases in revenues were primarily a result of increased franchise fees due to additional gross development, as well as an increase in royalty income, which was negatively impacted by unfavorable foreign exchange rates.

Segment profit for Dunkin' Donuts International decreased $0.3 million to $1.6 million in the third quarter primarily as a result of an increase in general and administrative expenses, offset by revenue growth. A portion of the increase in general and administrative expenses can be attributed to increased personnel costs and other investments in international markets.

Baskin-Robbins U.S. third-quarter revenue increased 3.9 percent from the prior year period to $13.1 million due primarily to an increase in other revenues, driven by an increase in licensing income and an increase in royalty income, offset by a decrease in sales of ice cream and other products.

Segment profit for Baskin-Robbins U.S. increased $0.8 million in the third quarter, or 9.2 percent, over the prior year period primarily as a result of the increases in other revenues and royalty income, offset by an increase in general and administrative expenses due primarily to expenses incurred related to brand-building activities and increased personnel costs.

Baskin-Robbins International systemwide sales decreased 10.2 percent in the third quarter compared to the prior year period driven by sales declines in Japan, South Korea and Puerto Rico, offset by sales growth in the Middle East. Sales in Japan and South Korea were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 2 percent. Comparable store sales growth was negatively impacted as a result of the MERS outbreak in South Korea.

Baskin-Robbins International third quarter revenues increased 7.5 percent over the prior year period to $31.1 million due primarily to an increase in sales of ice cream and other products in the Middle East, offset by a decrease in royalty income, which was negatively impacted by unfavorable foreign exchange rates, and a decrease in franchise fees.

Third-quarter segment profit decreased 17.7 percent from the prior year period to $10.3 million as a result of an increase in bad-debt expense and a decrease in net income of equity method investments driven by unfavorable results from the Japan joint venture compared to the prior year period and the impact of unfavorable foreign exchange rates on net income of  South Korea and Japan joint ventures. Also contributing to the decrease in segment profit were the decreases in royalty income and franchise fees, offset by an increase in net margin on ice cream driven primarily by the increase in sales.

The board of directors declared a fourth=quarter cash dividend of $0.265 per share, payable on Dec. 2 to shareholders of record as of the close of business on Nov. 23.

During the third quarter, the company repurchased approximately 126,000 shares of common stock in the open market at a weighted average cost per share of $48.79. The company's shares outstanding as of Sept. 26 were 95,163,689.