Dunkin’ Brands: Reports Third Quarter 2018 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the third quarter ended September 29, 2018.

«For the third quarter 2018, we delivered positive comparable store sales for all four of our business segments. Dunkin’ U.S. comparable store sales growth was led by strong beverage sales, coupled with new product innovation, and the Dunkin’ Run snacking platform which delivered our highest afternoon comparable store sales growth in more than two years», said David Hoffmann, Dunkin’ Brands Chief Executive Officer and President Dunkin’ U.S. «Additionally, our new simplified branding for Dunkin’ and our recently announced plans to transform the espresso experience at Dunkin’ demonstrate our commitment to our beverage-led strategy and, importantly, we have strong alignment with our franchisees around the world, as evidenced by their record attendance at our 2018 Global Convention».

«Earlier this year we announced that we would be investing approximately USD 100 million into Dunkin’ U.S., a substantial amount of which will be in equipment to support our multi-year plan to expand our beverage portfolio beyond traditional drip coffee, including new espresso equipment. We, along with our franchisees, who are significantly investing in this new program, are excited to introduce the new Dunkin’ espresso to America in the fourth quarter», said Kate Jaspon, Dunkin’ Brands Chief Financial Officer. «We are also pleased to have completed our previously announced USD 650 million accelerated share repurchase program during the third quarter, demonstrating our continued commitment to utilizing our strong balance sheet to return capital to shareholders».

Third quarter 2018 key financial highlights

Global systemwide sales growth of 5.2 percent in the third quarter was primarily attributable to global store development, Dunkin’ U.S. comparable store sales growth, and Baskin-Robbins International comparable store sales growth.

Dunkin’ U.S. comparable store sales grew 1.3 percent in the third quarter as an increase in average ticket was partially offset by a decrease in traffic. Growth was driven primarily by iced coffee, both traditional and cold brew, as well as frozen beverages and breakfast sandwiches.

Baskin-Robbins U.S. comparable store sales grew 1.8 percent during the third quarter as an increase in average ticket was partially offset by a decrease in traffic. Growth was driven by beverages including shakes and smoothies, as well as the take-home category.

In the third quarter, Dunkin’ Brands franchisees and licensees opened 77 net new restaurants globally. This included 52 net new Dunkin’ U.S. locations, 16 net new Baskin-Robbins International locations, and 12 net new Dunkin’ International locations, offset by net closures of 3 Baskin-Robbins U.S. locations. Additionally, Dunkin’ U.S. franchisees remodeled 31 restaurants and Baskin-Robbins U.S. franchisees remodeled 6 restaurants during the quarter.

Revenues for the third quarter increased USD 19.9 million, or 6.0 percent, compared to the prior year period due primarily to increased advertising fees and related income, as well as an increase in royalty income as a result of systemwide sales growth.

Operating income and adjusted operating income for the third quarter increased USD 6.3 million, or 6.0 percent, and USD 5.7 million, or 5.2 percent, respectively, from the prior year period primarily as a result of the increase in royalty income, offset by an increase in general and administrative expenses due primarily to expenses incurred in connection with our 2018 Global Convention held in the third quarter of fiscal year 2018.

Net income and adjusted net income for the third quarter increased by USD 24.9 million, or 60.5 percent, and USD 25.2 million, or 56.3 percent, respectively, compared to the prior year period primarily as a result of a decrease in income tax expense and the increases in operating income and adjusted operating income, respectively, offset by an increase in net interest expense. Income tax expense for the third quarter of 2017 was unfavorably impacted by an USD 8.9 million write-down of foreign tax credit carryforwards, whereas income tax expense for the third quarter of 2018 was favorably impacted by excess tax benefits from share-based compensation of USD 7.4 million. The decrease in income tax expense was also driven by a lower tax rate due to the enactment of the Tax Cuts and Jobs Act in the fourth quarter of fiscal year 2017. The increase in net interest expense was driven by additional borrowings incurred in conjunction with the refinancing transaction completed during the fourth quarter of fiscal year 2017.

Diluted earnings per share and diluted adjusted earnings per share for the third quarter increased by 75.6 percent to USD 0.79and 69.4 percent to USD 0.83, respectively, compared to the prior year period as a result of the increases in net income and adjusted net income, respectively, as well as a decrease in shares outstanding. The decrease in shares outstanding from the prior year period was due primarily to the repurchase of shares since the beginning of the third quarter of fiscal year 2017, offset by the exercise of stock options. Excluding the impact of recognized excess tax benefits, both diluted earnings per share and diluted adjusted earnings per share would have been lower by approximately USD 0.09 and USD 0.01for the third quarter of fiscal years 2018 and 2017, respectively.

Third quarter 2018 segment results

Dunkin’ U.S.

Dunkin’ U.S. third quarter revenues of USD 157.3 million represented an increase of 4.0 percent compared to the prior year period. The increase was primarily a result of an increase in royalty income driven by systemwide sales growth.

Dunkin’ U.S. segment profit in the third quarter increased to USD 121.7 million, an increase of USD 6.3 million over the prior year period, driven primarily by the increase in royalty income and an increase in rental margin due primarily to the timing of expenses incurred to record lease-related liabilities. These increases were offset by an increase in general and administrative expenses, due primarily to expenses incurred in the third quarter of fiscal year 2018 to support our Blueprint for Growth initiatives.

Dunkin’ International

Dunkin’ International third quarter systemwide sales increased 2.9 percent from the prior year period driven by sales growth in the Middle East, offset by a sales decline in Asia. Sales in Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 5 percent.

Dunkin’ International third quarter revenues of USD 6.3 million represented an increase of 27.3 percent from the prior year period. The increase in revenues was primarily a result of an increase in royalty income driven by systemwide sales growth, as well as an increase in franchise fees due primarily to recognition of deferred revenue upon the closure of restaurants.

Segment profit for Dunkin’ International increased USD 3.4 million to USD 4.5 million in the third quarter primarily as a result of the increase in revenues, as well as a decrease in general and administrative expenses.

Baskin-Robbins U.S.

Baskin-Robbins U.S. third quarter revenues increased 2.7 percent from the prior year period to USD 13.7 million due primarily to increases in sales of ice cream and other products, franchise fees, and royalty income.

Segment profit for Baskin-Robbins U.S. increased to USD 10.2 million in the third quarter, an increase of 1.5 percent, primarily as a result of the increases in franchise fees and royalty income, offset by an increase in general and administrative expenses.

Baskin-Robbins International

Baskin-Robbins International systemwide sales increased 11.3 percent in the third quarter compared to the prior year period driven by sales growth in South Korea, the Middle East, and Japan, offset by a sales decline in Asia. Sales in South Koreawere positively impacted by favorable foreign exchange rates, while all other regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 12 percent.

Baskin-Robbins International third quarter revenues of USD 31.2 million represented an increase of 7.6 percent from the prior year period due primarily to an increase in sales of ice cream and other products. Systemwide sales and sales of ice cream products are not directly correlated within a given period due to certain licensees sourcing their own ice cream products, the lag between shipment of products to licensees and retail sales at franchised restaurants, and the overall timing of deliveries between fiscal quarters.

Third quarter segment profit increased 3.8 percent from the prior year period to USD 12.0 million primarily as a result of an increase in net income from our South Korea joint venture and a decrease in general and administrative expenses, offset by a decrease in net margin on ice cream driven primarily by an increase in commodity costs, as well as a decrease in net income from our Japan joint venture.

U.S. Advertising Funds

U.S. Advertising Funds third quarter revenues of USD 118.2 million represented an increase of 3.8 percent compared to the prior year period driven primarily by Dunkin’ U.S. systemwide sales growth. Expenses for the U.S. Advertising Funds were equivalent to revenues in each period, resulting in no segment profit.

Company updates

  • The Company today announced that the Board of Directors declared a cash dividend of USD 0.3475 per share, payable on December 5, 2018, to shareholders of record as of the close of business on November 26, 2018.
  • During the third quarter, the Company completed its repurchases under the two accelerated share repurchase agreements that it entered into in February 2018 for a total USD 650 million. At settlement, in August 2018, the Company received an additional 1.7 million shares. Under the agreements, the Company repurchased a total of approximately 10.2 million shares at a weighted average cost per share of USD 63.91. The Company’s shares outstanding as of September 29, 2018 were 82,441,928.

Fiscal year 2018 targets

As described below, the Company is reiterating and updating certain of its 2018 performance targets.

  • The Company continues to expect approximately one percent comparable store sales growth for Dunkin’ U.S. and low-single digit comparable sales growth for Baskin-Robbins U.S.
  • The Company continues to expect Dunkin’ U.S. franchisees to add greater than 275 net new restaurants.
  • The Company now expects low-to-mid-single digit percent growth in other revenue (previously it expected high-single digit percent growth).
  • The Company continues to expect low-to-mid single digit percent revenue growth.
  • The Company continues to expect ice cream margin dollars to be flat compared to 2017 from a profit dollar standpoint.
  • The Company continues to expect a low-single digit percent reduction to general and administrative expense.
  • The Company continues to expect mid-single digit percent operating and adjusted operating income growth.
  • The Company continues to expect full-year weighted-average shares outstanding of approximately 85 million. It now expects to have an effective tax rate of 23 percent, which is inclusive of the impact of the excess tax benefit recognized in the third quarter. This guidance excludes any potential future impact from material excess tax benefits in the fourth quarter of 2018.
  • The Company now expects GAAP diluted earnings per share of USD 2.60 to USD 2.64 (previously it expected USD 2.48 to USD 2.56) and diluted adjusted earnings per share of USD 2.80 to USD 2.82 (previously it expected USD 2.68 to USD 2.72).
  • The Company continues to expect capital expenditures to be approximately USD 45 to USD 50 million.

Adoption of new accounting standard

In May 2014, the Financial Accounting Standards Board issued new guidance for revenue recognition related to contracts with customers, except for contracts within the scope of other standards, which supersedes nearly all existing revenue recognition guidance. The new guidance was effective for the Company beginning in fiscal year 2018. The Company adopted this new guidance in fiscal year 2018 using the full retrospective transition method, which results in restating each prior reporting period presented in the year of adoption, including the three and nine months ended September 30, 2017, included herein. As a result of adopting this new guidance in the first quarter of fiscal year 2018, we identified an additional operating segment consisting of the Dunkin’ U.S. and Baskin-Robbins U.S. advertising funds. Additional information regarding the Company’s adoption of the new revenue recognition guidance and the impact to historical financial results is contained in Exhibit 99.2 to the Company’s filing on Form 8-K, filed with the Securities and Exchange Commission on February 6, 2018.

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