Dunkin’ Brands: Reports Third Quarter 2017 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the third quarter ended September 30, 2017.

«This past quarter, we demonstrated real progress in the execution of our multi-year plan to transform Dunkin’ Donuts U.S. into a beverage-led, on-the-go brand. Despite the impact on comparable store sales as a result of the storms, we are encouraged that our morning sales grew at a greater rate than our full-day sales, a direct result of our breakfast value offers and a.m. product innovation», said Nigel Travis, Dunkin’ Brands Chairman and CEO. «We also ran our first national ‘Sip. Peel. Win.’ on-cup promotion, which helped drive our hot coffee category; increased membership in our Perks Loyalty program by 39 percent year-over-year; and celebrated the one-year anniversary of our on-the-go mobile ordering, which now makes up about three percent of our transactions».

«Our third quarter financial performance included approximately eight percent revenue growth and greater than 11 percent operating income growth, although the latter was offset by an increase in tax expense related to our recent debt refinancing deal that impacted net income», said Kate Jaspon, Chief Financial Officer, Dunkin’ Brands Group, Inc. «Also, strong cash flow generation from our 100-percent franchised business model, coupled with the net proceeds from our recent debt refinancing, enables us to continue to return cash to shareholders through our new repurchase authorization while opportunistically investing in our Dunkin’ Donuts U.S. business».

Third Quarter 2017 Key Financial Highlights

(USD in millions, except per share data) Three months ended Increase (Decrease)
Amounts and percentages may not recalculate due to rounding 2017-09-30 2016-09-24 USD / # %
Financial data:
Revenues USD 224.2 207.1 17.1 8.2 %
Operating income 122.0 109.4 12.7 11.6 %
Operating income margin 54.4 % 52.8 %
Adjusted operating income1 USD 127.9 114.8 13.1 11.5 %
Adjusted operating income margin1 57.1 % 55.4 %
Net income2 USD 52.2 52.7 (0.5) (0.9) %
Adjusted net income1, 2 55.8 56.0 (0.2) (0.3) %
Earnings per share:
Common–basic2 0.58 0.58 %
Common–diluted2 0.57 0.57 %
Diluted adjusted earnings per share1, 2 0.61 0.60 0.01 1.7 %
Weighted average number of common shares – diluted (in millions)2 91.4 92.6 (1.1) (1.2) %
Systemwide sales3 USD 2’914.8 2’821.0 93.9 3.3 %
Comparable store sales growth (decline):
DD U.S. 0.6 % 2.0 %
BR U.S. (0.4) % (0.9) %
DD International 1.3 % (1.4) %
BR International (4.3) % (2.9) %
Development data:
Consolidated global net POD development4 137 115 22 19.1 %
DD global PODs at period end 12’435 12’008 427 3.6 %
BR global PODs at period end 7’944 7’776 168 2.2 %
Consolidated global PODs at period end 20’379 19’784 595 3.0 %
  1. Adjusted operating income, adjusted operating income margin, and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, impairment of our equity method investments, and certain other items, net of the tax impact of such adjustments in the case of adjusted net income. Diluted adjusted earnings per share is a non-GAAP measure calculated using adjusted net income.
  2. In the first quarter of 2017, the Company adopted Accounting Standards Update No. 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting(ASU 2016-09), as issued by the Financial Accounting Standards Board. As required by the updated accounting standard, excess tax benefits or deficiencies are now recorded to the provision for income taxes in the consolidated statements of operations, on a prospective basis, instead of additional paid-in capital in the consolidated balance sheets. See «Adoption of New Accounting Standard» for further detail.
  3. Systemwide sales include sales at franchisee- and company-operated restaurants, including joint ventures. While we do not record sales by franchisees, licensees, or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.
  4. Consolidated global net POD development for the three months ended September 24, 2016 reflects the previously-announced closing of 5 self-serve coffee stations within Speedway locations.

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).

Dunkin’ Donuts U.S. comparable store sales growth in the third quarter was driven by increased average ticket offset by a decline in traffic. Breakfast sandwich sales increased driven by value messaging around wake-up wraps. Beverage sales were driven by increases in hot coffee and espresso offset by frozen beverage declines. The Company estimates that weather resulted in approximately 50 basis points of negative impact to comparable stores sales primarily attributed to the hurricanes that hit the U.S. in the third quarter.

Baskin-Robbins U.S. comparable store sales were negative during the third quarter driven by a decline in traffic offset by increased average ticket. Sales of sundaes, desserts, and beverages decreased during the third quarter, offset by increases in take home sales. The Company estimates that weather resulted in approximately 120 basis points of negative impact to comparable stores sales primarily attributed to the cool and wet weather in the eastern part of the country and the hurricanes that hit the U.S. in the third quarter.

In the third quarter, Dunkin’ Brands franchisees and licensees opened 137 net new restaurants around the globe. This included 67 net new Dunkin’ Donuts U.S. locations, 41 net new Baskin-Robbins International locations, 18 net new Dunkin’ Donuts International locations, and 11 net new Baskin-Robbins U.S. locations. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 88 restaurants and Baskin-Robbins U.S. franchisees remodeled 24 restaurants during the quarter. The consolidated global restaurant count at the end of the third quarter was 20’379.

Revenues for the third quarter increased USD 17.1 million, or 8.2 percent, compared to the prior year period due primarily to increased franchise fees driven by additional renewal income, as well as increased royalty income as a result of systemwide sales growth. Also contributing to the increase in revenues was an increase in other revenues driven by license fees related to Dunkin’ Donuts K-Cup® pods and ready-to-drink bottled iced coffee, as well as increased transfer fee income.

Operating income and adjusted operating income for the third quarter increased USD 12.7 million, or 11.6 percent, and USD 13.1 million, or 11.5 percent, respectively, from the prior year period primarily as a result of the increase in revenues. The increase in revenues was offset by an increase in general and administrative expenses, as well as gains recognized in connection with the sale of company-operated restaurants in the prior year period.

Net income and adjusted net income for the third quarter decreased by USD 0.5 million, or 0.9 percent, and USD 0.2 million, or 0.3 percent, respectively, compared to the prior year period. These decreases were primarily a result of an increase in income tax expense. Income tax expense for the third quarter of 2017 included an USD 8.9 million write-down of foreign tax credit carryforwards primarily resulting from expected incremental interest expense from the debt refinancing transaction that closed in October 2017 negatively impacting the realizability of such carryforwards. This increase in income tax expense was offset by the increases in operating income and adjusted operating income.

Diluted earnings per share for the third quarter remained flat to the prior year period at USD 0.57 as the decrease in net income was offset by a decrease in shares outstanding. Diluted adjusted earnings per share for the third quarter increased by 1.7 percent to USD 0.61 compared to the prior year period as a result of a decrease in shares outstanding, offset by the decrease in adjusted net income. The decrease in shares outstanding from the prior year period was due primarily to repurchases of shares since the third quarter of 2016, offset by the exercise of stock options and the new accounting standard adopted in the first quarter of 2017. Excluding the impact of recognized excess tax benefits, diluted earnings per share and diluted adjusted earnings per share would have been each USD 0.01 lower.

Third Quarter 2017 Segment Results

Amounts and percentages may not recalculate due to rounding Three months ended Increase (Decrease)
Dunkin’ Donuts U.S. 2017-09-30 2016-09-24 USD / # %
(USD in thousands except as otherwise noted)
Revenues:
Royalty income USD 118’831 113’281 5’550 4.9 %
Franchise fees 16’635 9’852 6’783 68.8 %
Rental income 26’786 25’972 814 3.1 %
Sales at company-operated restaurants 1’611 (1’611) (100.0) %
Other revenues 2’854 1’709 1’145 67.0 %
Total revenues USD 165’106 152’425 12’681 8.3 %
Segment profit USD 129’719 119’434 10’285 8.6 %
Comparable store sales growth 0.6 % 2.0 %
Systemwide sales (in millions)1 USD 2’166.3 2’075.3 91.0 4.4 %
Points of distribution 9’015 8’629 386 4.5 %
Gross openings 103 97 6 6.2 %
Net openings2 67 56 11 19.6 %
  1. Systemwide sales include sales at franchisee- and company-operated restaurants, including joint ventures. We do not record sales by franchisees, licensees, or joint ventures as revenue and such sales are not included in our consolidated financial statements.
  2. Net openings for the three months ended September 24, 2016 reflect the previously-announced closing of 5 self-serve coffee stations within Speedway locations.

Dunkin’ Donuts U.S. third quarter revenues of USD 165.1 million represented an increase of 8.3 percent compared to the prior year period. The increase was due primarily to increased franchise fees driven by additional renewal income, increased royalty income driven by systemwide sales growth, and increased other revenues driven by transfer fee income. The increases in revenues were offset by a decline in sales at company-operated restaurants as a result of fact that there were no company-operated points of distribution in the third quarter of 2017.

Dunkin’ Donuts U.S. segment profit in the third quarter increased to USD 129.7 million, an increase of USD 10.3 million over the prior year period, driven primarily by the increases in franchise fees, royalty income, and other revenues, as well as lease-related liabilities recorded in the prior year period as a result of lease terminations. The increases in segment profit were offset by an increase in general and administrative expenses, as well as gains recognized in connection with the sale of company-operated restaurants in the prior year period.

Amounts and percentages may not recalculate due to rounding Three months ended Increase (Decrease)
Dunkin’ Donuts International 2017-09-30 2016-09-24 USD / # %
(USD in thousands except as otherwise noted)
Revenues:
Royalty income USD 4’442 4’125 317 7.7 %
Franchise fees 704 323 381 118.0 %
Other revenues 11 1 10 1’000.0 %
Total revenues USD 5’157 4’449 708 15.9 %
Segment profit USD 1’439 705 734 104.1 %
Comparable store sales growth (decline) 1.3 % (1.4) %
Systemwide sales (in millions)1 USD 189.3 177.5 11.8 6.7 %
Points of distribution 3’420 3’379 41 1.2 %
Gross openings 102 83 19 22.9 %
Net openings 18 11 7 63.6 %

1 Systemwide sales include sales at franchisee- and company-operated restaurants, including joint ventures. We do not record sales by franchisees, licensees, or joint ventures as revenue and such sales are not included in our consolidated financial statements.

Dunkin’ Donuts International third quarter systemwide sales increased 6.7 percent from the prior year period driven primarily by sales growth in Southeast Asia, the Middle East, South America, Europe, and China, offset by a sales decline in South Korea. Sales in Europe were positively impacted by foreign exchange rates, while sales in Southeast Asia were negatively impacted by foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 7 percent.

Dunkin’ Donuts International third quarter revenues of USD 5.2 million represented an increase of 15.9 percent from the prior year period. The increase in revenues was due primarily to increased franchise fees and royalty income.

Segment profit for Dunkin’ Donuts International increased USD 0.7 million to USD 1.4 million in the third quarter primarily as a result of the increase in revenues, as well as a decrease in general and administrative expenses, offset by a decrease in net income from our South Korea joint venture.

Amounts and percentages may not recalculate due to rounding Three months ended Increase (Decrease)
Baskin-Robbins U.S. 2017-09-30 2016-09-24 USD / # %
(USD in thousands except as otherwise noted)
Revenues:
Royalty income USD 8’501 8’499 2 0.0 %
Franchise fees 557 273 284 104.0 %
Rental income 798 787 11 1.4 %
Sales of ice cream and other products 771 805 (34) (4.2) %
Other revenues 3’124 3’417 (293) (8.6) %
Total revenues USD 13’751 13’781 (30) (0.2) %
Segment profit USD 10’466 11’085 (619) (5.6) %
Comparable store sales decline (0.4) % (0.9) %
Systemwide sales (in millions)1 USD 177.0 178.2 (1.2) (0.7) %
Points of distribution 2’562 2’533 29 1.1 %
Gross openings 26 14 12 85.7 %
Net openings 11 3 8 266.7 %

1 Systemwide sales include sales at franchisee- and company-operated restaurants, including joint ventures. We do not record sales by franchisees, licensees, or joint ventures as revenue and such sales are not included in our consolidated financial statements.

Baskin-Robbins U.S. third quarter revenues decreased 0.2 percent from the prior year period to USD 13.8 million due primarily to a decrease in other revenues driven by a decrease in licensing income, offset by an increase in franchise fees.

Segment profit for Baskin-Robbins U.S. decreased 5.6 percent to USD 10.5 million in the third quarter over the prior year period primarily due to an increase in general and administrative expenses.

Amounts and percentages may not recalculate due to rounding Three months ended Increase (Decrease)
Baskin-Robbins International 2017-09-30 2016-09-24 USD / # %
(USD in thousands except as otherwise noted)
Revenues:
Royalty income USD 1’966 2’081 (115) (5.5) %
Franchise fees 173 205 (32) (15.6) %
Rental income 129 121 8 6.6 %
Sales of ice cream and other products 26’512 25’340 1’172 4.6 %
Other revenues 30 157 (127) (80.9) %
Total revenues USD 28’810 27’904 906 3.2 %
Segment profit USD 11’420 11’154 266 2.4 %
Comparable store sales decline (4.3) % (2.9) %
Systemwide sales (in millions)1 USD 382.2 390.0 (7.8) (2.0) %
Points of distribution 5’382 5’243 139 2.7 %
Gross openings 95 116 (21) (18.1) %
Net openings 41 45 (4) (8.9) %

1 Systemwide sales include sales at franchisee- and company-operated restaurants, including joint ventures. We do not record sales by franchisees, licensees, or joint ventures as revenue and such sales are not included in our consolidated financial statements.

Baskin-Robbins International systemwide sales decreased 2.0 percent in the third quarter compared to the prior year period driven by a sales decline in Japan and South Korea, offset by sales growth in the Middle East and Southeast Asia. Sales in Japan were significantly negatively impacted by foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 1 percent.

Baskin-Robbins International third quarter revenues increased 3.2 percent from the prior year period to USD 28.8 million due primarily to an increase in sales of ice cream products to our licensees in the Middle East, offset by decreases in royalty income and other revenues. Systemwide sales and sales of ice cream products are not directly correlated within a given period due to the lag between shipment of products to licensees and retail sales at franchised restaurants, as well as the overall timing of deliveries between fiscal quarters.

Third quarter segment profit for Baskin-Robbins International increased 2.4 percent from the prior year period to USD 11.4 millionas a result of an increase in net income from our Japan joint venture, as well as an increase in net margin on ice cream driven primarily by an increase in sales volume, offset by the decreases in royalty income and other revenues.

Company Updates

  • The Company today announced that the Board of Directors declared a cash dividend of USD 0.3225 per share, payable on December 6, 2017, to shareholders of record as of the close of business on November 27, 2017.
  • During the third quarter, the Company repurchased approximately 514’000 shares of common stock in the open market at a weighted average cost per share of USD 52.90. The Company’s shares outstanding as of September 30, 2017 were 90’263’851.
  • The Company announced today that its Board of Directors authorized a new share repurchase program for up to an aggregate of USD 650 million of its outstanding common stock. The authorization is valid for a period of two years and replaces the Company’s existing share repurchase program.
  • On October 23, 2017, the Company completed its previously announced debt recapitalization transaction, with the placement by its special purpose subsidiary of a new series of USD 1.55 billion of securitized notes, consisting of USD 1.4 billion of senior secured notes with anticipated repayment dates of seven years ( USD 600 million) and ten years ( USD 800 million), and a new variable funding note facility ( USD 150 million), which replaces the Company’s existing variable funding note facility. The proceeds from the placement of the new notes were used to prepay and retire a portion of the Company’s outstanding fixed rate notes and to pay transaction fees, and the balance will be used for general corporate purposes, which may include a return of capital to shareholders. The Company’s new annualized net interest expense is approximately USD 126 million, based on a blended rate of 3.925 percent, on USD 3.1 billion in securitized debt.

Fiscal Year 2017 Targets

As described below, the Company is updating and reiterating certain targets regarding its 2017 performance:

  • The Company continues to expect low single digit comparable store sales growth for Dunkin’ Donuts U.S. The Company continues to expect slightly negative comparable store sales for Baskin-Robbins U.S.
  • As a result of the two major hurricanes that made landfall in the U.S. during the third quarter, the Company now expects Dunkin’ Donuts U.S. franchisees to add approximately 300 to 320 net new restaurants. Previously it expected approximately 330 to 350 net new restaurants for Dunkin’ Donuts U.S. Approximately 30 restaurants that had been scheduled to open in 2017 will now open in 2018.
  • The Company continues to expect Baskin-Robbins U.S. franchisees to add approximately 10 net new restaurants.
  • Internationally, the Company continues to expect franchisees and licensees to add between 50 and 100 net new restaurants across the two brands.
  • The Company continues to expect low-to-mid single digit revenue growth on both a 52- and 53-week basis (fiscal year 2016 was a 53-week year).
  • The Company continues to expect mid-to-high single digit GAAP operating income growth and adjusted operating income growth on both a 52- and 53-week basis.
  • The Company now expects GAAP diluted earnings per share of USD 2.17 to USD 2.25 and diluted adjusted earnings per share of USD 2.40 to USD 2.43. This guidance excludes any potential future impact from material excess tax benefits in the fourth quarter of 2017.
  • The Company now expects full-year weighted-average shares outstanding of approximately 92 million and a 39 percent effective tax rate, which excludes any potential future impact from material excess tax benefits in the fourth quarter of 2017. The USD 8.9 million write-down of foreign tax credit carryforwards recognized in the third quarter increased the expected full-year effective tax rate by approximately 250 basis points.
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