Dunkin’ Brands: Reports First Quarter 2015 Results

Canton / MA. (db) Dunkin´ Brands Group Inc., the parent company of Dunkin´ Donuts (DD) and Baskin-Robbins (BR), announced its results for the first quarter 2015, ended March 28, 2015. First quarter highlights include: Dunkin´ Donuts U.S. comparable store sales growth of 2.7 percent; Baskin-Robbins U.S. comparable store sales growth of 8.0 percent; Added 79 net new restaurants worldwide including 78 net new Dunkin´ Donuts in the U.S.; Revenue increased 8.1 percent; Adjusted operating income increased 15.8 percent; adjusted operating income margin of 47.1 percent; Diluted adjusted EPS increased 21.2 percent to 0.40 USD.

«This was a really strong quarter and we are delighted with the performance of our product and marketing programs given the severe weather that we experienced in many of the markets where our restaurants are located. Our Dunkin´ Donuts U.S. franchisees got the year off to a strong start by demonstrating great flexibility and resiliency in dealing with the challenging circumstances», said Dunkin´ Brands Chairman and Chief Executive Officer Nigel Travis. «Enhancing the relevance and differentiation of our brands around the world with a focus on beverages is a key priority for Dunkin´ Brands. We recently took another major step forward with this priority with our agreement with The J.M. Smucker Company and Keurig to make Dunkin´ «K-Cup» packs available at thousands of additional retail outlets nationwide, as well as online. We expect that this will not only increase the overall consumption of Dunkin´ Donuts coffee but it will help us continue to build our brand relevance with new and existing customers as we expand our restaurant footprint across the U.S.».

«We are proud to report another year of compelling returns for the cohort of new restaurant openings in 2014. On average restaurants opened last year are projected to exceed 20 percent cash-on-cash returns to the franchisee, which is particularly impressive considering headwinds from a challenging sales environment and rising commodity and labor costs», said Paul Carbone, Chief Financial Officer, Dunkin´ Brands Group Inc. «Restaurants in new markets such as Colorado and California are seeing both strong cash-on-cash returns as well as higher-than-expected beverage sales, a key driver of restaurant profitability».

Key Financial Highlights

Global systemwide sales growth in the first quarter was primarily attributable to global store development and Dunkin´ Donuts U.S. comparable store sales growth (which includes stores open 54 weeks or more).

Dunkin´ Donuts U.S. comparable store sales growth in the first quarter was driven by increased average ticket and higher traffic resulting from our focus on operational excellence and product and marketing innovation. Product and marketing innovations resulted in strong beverage sales growth, led by Iced Coffee, Dark Roast Coffee and the continued acceleration of sales of Hot and Iced Espresso beverages; continued breakfast sandwich momentum across core and limited time offer sandwiches including the addition of Steak as a permanent menu item; and doughnut category growth driven by the Croissant Donut and the return of the heart-shaped doughnut limited time offer. The K-Cup and packaged coffee categories had a significant negative impact on first quarter comparable store sales. Traffic growth, while positive, was significantly disrupted by severe weather in the first quarter. We estimate weather resulted in approximately 60 basis points of negative impact in the quarter. On a two-year comparable store sales basis we estimate that weather contributed approximately 260 basis points of negative impact.

Baskin-Robbins U.S. comparable store sales growth was driven by increased sales of Cups + Cones, Desserts, Beverages, and Sundaes as a result of news on flavors and increased sales of cakes, stimulated by online cake ordering.

In the first quarter, Dunkin´ Brands franchisees and licensees opened 79 net new restaurants around the globe. This included 78 net new Dunkin´ Donuts U.S. locations, 22 net new Baskin-Robbins International locations, 21 net closures for Dunkin´ Donuts International, and zero net new Baskin-Robbins U.S. locations. Additionally, Dunkin´ Donuts U.S. franchisees remodelled 95 restaurants during the quarter.

Revenues for the first quarter increased 8.1 percent compared to the prior year period due primarily to revenue recognized in connection with the Dunkin´ «K-Cup» pack licensing agreement and increased royalty income as a result of systemwide sales growth, offset by a decrease in sales of ice cream products.

Operating income and adjusted operating income for the first quarter increased 14.6 million USD, or 21.2 percent, and 12.0 million USD, or 15.8 percent, respectively, from the prior year period primarily as a result of the revenue recognized in connection with the Dunkin´ «K-Cup» pack licensing agreement and increased royalty income. The increases in revenues were offset by a decrease in ice cream margin and, in comparison to the prior period, were also negatively impacted by gains recognized in connection with the sale of real estate. Additionally, operating income for the first quarter was favourably impacted by a reduction in legal reserves for the Bertico litigation and related matters of 2.8 million USD.

Net income for the first quarter increased by 2.7 million USD, or 11.7 percent, compared to the prior year period primarily as a result of the 14.6 million USD increase in operating income, offset by a 6.8 million USD increase in loss on debt extinguishment and refinancing transactions and a 4.2 million USD increase in interest expense driven by additional borrowings incurred in conjunction with a refinancing transaction completed during the first quarter.

Adjusted net income for the first quarter increased by 4.7 million USD, or 13.1 percent, compared to the first quarter of 2014 primarily as a result of the 12.0 million USD increase in adjusted operating income, offset by increases in interest expense and income tax expense.

Diluted adjusted earnings per share increased by 21.2 percent to 0.40 USD for the first quarter of 2015 compared to the prior year period as a result of the increase in adjusted net income and a decrease in shares outstanding. 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. We estimate that advance payments related to the Dunkin´ «K-Cup» pack licensing deal contributed 0.04 USD to diluted adjusted earnings per share in the first quarter.

Fiscal Year 2015 Targets

The Company continues to expect Dunkin´ Donuts U.S. comparable store sales growth of one to three percent and Baskin-Robbins U.S. comparable store sales growth of one to three percent.

The Company continues to expect that Dunkin´ Donuts U.S. will add between 410 and 440 net new restaurants, for greater than five percent net unit growth, and expects Baskin-Robbins U.S. will add between five and ten net new restaurants.

Internationally, the Company continues to target opening 200 to 300 net new restaurants across the two brands. It continues to expect net income of equity method investments to be approximately 13 million USD.

Globally, the Company continues to expect to open between 615 and 750 net new restaurants.

The Company now expects revenue growth of between six and eight percent (previously it expected five to seven percent revenue growth); adjusted operating income growth of between seven and eight percent (previously it expected six to eight percent adjusted operating income growth); and adjusted earnings per share of 1.87 USD to 1.91 USD (previously it expected adjusted earnings per share of 1.83 USD to 1.87 USD). The Company is updating these targets to reflect the financial impact of the agreement with The J.M. Smucker Company and Keurig to make Dunkin´ «K-Cup» packs available at additional retail outlets nationwide net of the financial impact of the profit-sharing agreement it reached with Dunkin´ Donuts U.S. franchisees.

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