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Dunkin’ Brands Reports Q4 and Fiscal Year 2018 Results

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

Fiscal year 2018 highlights include

  • Dunkin’ U.S. comparable store sales growth of 0.6 percent
  • Baskin-Robbins U.S. comparable store sales decline of 0.6 percent
  • Added 392 net new restaurants worldwide, including 278 net new Dunkin’ locations in the U.S.
  • Revenues increased 3.6 percent
  • Diluted EPS of USD 2.71, a decrease of 7.8 percent driven by the impact of tax reform in the prior year
  • Diluted adjusted EPS increased 40.1 percent to USD 2.90

Fourth quarter highlights include

  • Flat Dunkin’ U.S. comparable store sales
  • Baskin-Robbins U.S. comparable store sales decline of 3.7 percent
  • Added 148 net new Dunkin’ and Baskin-Robbins locations globally, including 106 net new Dunkin’ locations in the U.S.
  • Revenues increased 1.5 percent
  • Diluted EPS of USD 0.64, a decrease of 56.5 percent driven by the impact of tax reform in the prior year
  • Diluted adjusted EPS increased by 41.7 percent to USD 0.68

«In 2018 we made substantial progress with our Blueprint for Growth designed to evolve Dunkin’ U.S. into a beverage-led, on-the-go brand. Along with making an unprecedented investment into the business, we implemented a deliberate sequencing of strategic initiatives including simplifying our menu nationwide, making our first foray into national value, debuting our NextGen new store design, unveiling our new Dunkin’ brand identity, and successfully relaunching our espresso beverages served at the speed of Dunkin’,» said David Hoffmann, Dunkin’ Brands Chief Executive Officer and President of Dunkin’ U.S. «While we did not drive consistent traffic momentum for the full year, we laid the foundation for future growth and, most importantly, along with our franchisees, are unified and well-positioned to capitalize in 2019 on our brand promise of ‘great coffee, fast.’»

«We are pleased to have delivered our revenue, operating income, and earnings per share targets for 2018,» said Kate Jaspon, Dunkin’ Brands Chief Financial Officer. «We also achieved our Dunkin’ U.S. net development goal for the year, including delivering more than double the expected number of NextGen restaurants and exceeding our first-year sales goals for new restaurants. Additionally, we announced this morning that the Board of Directors increased our quarterly dividend by nearly 8 percent over the prior quarter.»

Fiscal Year 2018 Key Financial Highlights

(Unaudited, USD in millions, except per share data) Fiscal year ended Increase (Decrease)
Amounts and%ages may not recalculate due to rounding December 29, 2018 December 30, 2017(1) USD / # %
Financial data:
Revenues USD 1,321.6 1,275.6 46.1 3.6 %
Operating income 411.8 391.0 20.8 5.3 %
Operating income margin 31.2 % 30.7 %
Adjusted operating income(2) USD 434.6 411.1 23.5 5.7 %
Adjusted operating income margin(2) 32.9 % 32.2 %
Net income USD 229.9 271.2 (41.3) (15.2) %
Adjusted net income(2) 246.3 190.6 55.7 29.2 %
Earnings per share:
Common–basic 2.75 2.99 (0.24) (8.0) %
Common–diluted 2.71 2.94 (0.23) (7.8) %
Diluted adjusted earnings per share(2) 2.90 2.07 0.83 40.1 %
Weighted average number of common shares – diluted (in millions) 85.0 92.2 (7.3) (7.9) %
Systemwide sales(3) USD 11,634.0 11,146.6 487.4 4.4 %
Comparable store sales growth (decline):
Dunkin’ U.S. 0.6 % 0.6 %
BR U.S. (0.6) % 0.0 %
Dunkin’ International 2.2 % 0.3 %
BR International 3.8 % (0.1) %
Development data:
Consolidated global net POD development 392 440 (48) (10.9) %
Dunkin’ global PODs at period end 12,871 12,538 333 2.7 %
BR global PODs at period end 8,041 7,982 59 0.7 %
Consolidated global PODs at period end 20,912 20,520 392 1.9 %

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Fourth Quarter 2018 Key Financial Highlights

(Unaudited, USD in millions, except per share data) Three months ended Increase (Decrease)
Amounts and%ages may not recalculate due to rounding December 29, 2018 December 30, 2017(1) USD / # %
Financial data:
Revenues USD 319.6 314.9 4.7 1.5 %
Operating income 96.6 92.2 4.4 4.8 %
Operating income margin 30.2 % 29.3 %
Adjusted operating income(2) USD 102.2 95.6 6.6 6.9 %
Adjusted operating income margin(2) 32.0 % 30.3 %
Net income USD 53.2 134.7 (81.5) (60.5) %
Adjusted net income(2) 57.3 44.1 13.2 29.8 %
Earnings per share:
Common–basic 0.64 1.49 (0.85) (57.0) %
Common–diluted 0.64 1.47 (0.83) (56.5) %
Diluted adjusted earnings per share(2) 0.68 0.48 0.20 41.7 %
Weighted average number of common shares – diluted (in millions) 83.7 91.8 (8.0) (8.7) %
Systemwide sales(3) USD 2,876.2 2,799.2 77.0 2.8 %
Comparable store sales growth (decline):
Dunkin’ U.S. 0.0 % 0.8 %
BR U.S. (3.7) % 5.1 %
Dunkin’ International 1.1 % 1.6 %
BR International 1.5 % 3.0 %
Development data:
Consolidated global net POD development 148 141 7 5.0 %
Dunkin’ global PODs at period end 12,871 12,538 333 2.7 %
BR global PODs at period end 8,041 7,982 59 0.7 %
Consolidated global PODs at period end 20,912 20,520 392 1.9 %

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Global systemwide sales growth of 2.8 percent in the fourth quarter was primarily attributable to global store development.

Dunkin’ U.S. comparable store sales were flat in the fourth quarter as an increase in average ticket was offset by a decrease in traffic. The increase in average ticket was driven by strategic pricing increases coupled with beneficial mix shift to premium priced Cold Beverages, Espresso, and Breakfast Sandwiches.

Baskin-Robbins U.S. comparable store sales declined 3.7 percent in the fourth quarter as a decrease in traffic was partially offset by an increase in average ticket. Unfavorable weather impact of more than 400 basis points significantly affected all product categories in the fourth quarter. The increase in average ticket was driven by strategic pricing increases coupled with beneficial mix shift to Beverages, Cakes, and Take Home Quarts.

In the fourth quarter, Dunkin’ Brands franchisees and licensees opened 148 net new restaurants globally. This included 106 net new Dunkin’ U.S. locations, 25 net new Baskin-Robbins International locations, and 25 net new Dunkin’ International locations, offset by net closures of 8 Baskin-Robbins U.S. locations. Additionally, Dunkin’ U.S. franchisees remodeled 45 restaurants and Baskin-Robbins U.S. franchisees remodeled 33 restaurants during the quarter.

Revenues for the fourth quarter increased USD 4.7 million, or 1.5 percent, compared to the prior year period due primarily to increased royalty income as a result of systemwide sales growth, as well as an increase in advertising fees and related income, offset by decreases in sales of ice cream and other products and franchise fees.

Operating income for the fourth quarter increased USD 4.4 million, or 4.8 percent, from the prior year period primarily as a result of increases in royalty income and rental margin. These increases were offset by an increase in general and administrative expenses due primarily to a reduction of legal reserves in the prior year period, as well as the decrease in franchise fees.

Adjusted operating income for the fourth quarter increased USD 6.6 million, or 6.9 percent, from the prior year period primarily as a result of increases in royalty income and rental margin, as well as a decrease in general and administrative expenses. These increases in adjusted operating income were offset by the decrease in franchise fees.

Net income for the fourth quarter decreased by USD 81.5 million, or 60.5 percent, driven primarily by income tax expense of USD 13.3 million in the current period compared to a net benefit from income taxes of USD 77.8 million in the prior year period. This decrease in net income was offset by a USD 7.0 million loss on debt extinguishment and refinancing transactions recognized in conjunction with the refinancing transaction completed in the prior year period, and the increase in operating income. The net benefit from income taxes in the prior year period included a USD 96.8 million net tax benefit due to the enactment of the Tax Cuts and Jobs Act, consisting primarily of the re-measurement of our deferred tax liabilities using the lower enacted corporate tax rate. Income tax expense for the current period was favorably impacted by a lower corporate tax rate effective in fiscal year 2018 due to the enactment of the Tax Act, as well as excess tax benefits from share-based compensation of USD 3.2 million in the current year period compared to USD 0.5 million in the prior year period.

Adjusted net income for the fourth quarter increased USD 13.2 million, or 29.8 percent, compared to the prior year period primarily as a result of the increase in adjusted operating income, as well as a decrease in income tax expense. The decrease in income tax expense was driven by a lower corporate tax rate effective in fiscal year 2018 due to the enactment of the Tax Act, as well as excess tax benefits from share-based compensation of USD 3.2 million in the current year period compared to USD 0.5 million in the prior year period.

Diluted earnings per share for the fourth quarter decreased by 56.5 percent to USD 0.64 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 for the fourth quarter increased 41.7 percent to USD 0.68 compared to the prior year period as a result of the increase in adjusted net income as well as the 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 fourth 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 0.04 and USD 0.01 for the fourth quarter of fiscal years 2018 and 2017, respectively.

Fourth Quarter 2018 Segment Results

Dunkin’ U.S. fourth quarter revenues of USD 152.2 million represented an increase of 2.3 percent compared to the prior year period. The increase was primarily a result of an increase in royalty income driven by systemwide sales growth, offset by a decrease in franchise fees due primarily to franchisee incentives provided in fiscal year 2018 as part of the investments in the Dunkin’ U.S. Blueprint for Growth that are being recognized over the remaining term of each respective franchise agreement.

Dunkin’ U.S. segment profit in the fourth quarter increased to USD 119.8 million, an increase of USD 7.9 million over the prior year period, driven primarily by the increase in royalty income, a decrease in general and administrative expenses, and an increase in rental margin due to expenses incurred in the prior year period to record lease-related liabilities. These increases were offset by the decrease in franchise fees.

Dunkin’ International fourth quarter systemwide sales increased 3.5 percent from the prior year period driven by sales growth in the Middle East, Europe, and Latin America, offset by sales declines in South Korea and Asia. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 6 percent.

Dunkin’ International fourth quarter revenues of USD 5.5 million represented an increase of 0.9 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 other revenues, offset by a decrease in franchise fees primarily due to additional deferred revenue recognized in the prior year period upon closure of restaurants and the recognition of franchisee incentives in the current year period.

Segment profit for Dunkin’ International increased USD 1.2 million to USD 3.1 million in the fourth quarter primarily as a result of a decrease in general and administrative expenses and net income in the current period compared to net loss in the prior year period from our South Korea joint venture.

Baskin-Robbins U.S. fourth quarter revenues decreased 9.2 percent from the prior year period to USD 9.1 million due primarily to decreases in sales of ice cream and other products, other revenues, and royalty income.

Segment profit for Baskin-Robbins U.S. decreased USD 1.0 million to USD 3.9 million in the fourth quarter, primarily as a result of an increase in general and administrative expenses, the decreases in other revenues and royalty income, as well as a decrease in net margin on ice cream driven primarily by a decrease in sales volume.

Baskin-Robbins International systemwide sales increased 1.1 percent in the fourth quarter compared to the prior year period driven by sales growth in South Korea and Japan, offset by a sales decline in the Middle East. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 3 percent.

Baskin-Robbins International fourth quarter revenues of USD 24.3 million represented a decrease of 5.1 percent from the prior year period due primarily to a decrease in sales of ice cream and other products. Systemwide sales and sales of ice cream and other 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.

Fourth quarter segment profit decreased USD 2.0 million from the prior year period to USD 5.2 million primarily as a result of an increase in general and administrative expenses due primarily to consulting fees, as well as a decrease in net margin on ice cream driven primarily by an increase in commodity costs. Offsetting these decreases in segment profit was an increase in net income from our South Korea and Japan joint ventures.

U.S. Advertising Funds fourth quarter revenues of USD 113.1 million represented an increase of 2.4 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 0.3750 per share, payable on March 20, 2019, to shareholders of record as of the close of business on March 11, 2019. This represents an 8 percent increase over the prior quarter’s dividend.
  • During the fourth quarter, the Company repurchased 458,465 shares of common stock in the open market at a weighted average cost per share of USD 65.44. The Company’s shares outstanding as of December 29, 2018 were 82,560,596.

Long-term Targets*

The Company introduces the following 3-year targets:

  • The Company expects low single digit percent comparable store sales growth for Dunkin’ U.S.
  • The Company expects Dunkin’ U.S. franchisees to open between 200 and 250 net new units annually.
  • The Company expects low-to-mid single digit percent revenue growth.
  • The Company expects low single digit percent general and administrative expense growth (2020 and beyond).
  • The Company expects mid-to-high single digit percent operating and adjusted operating income growth.

*These targets replace all prior long-term targets. The Company is no longer providing long-term targets for Baskin-Robbins U.S. comparable store sales and net unit development.

Fiscal Year 2019 Targets

The Company introduces the following fiscal year 2019 performance targets:

  • The Company expects low-single digit comparable store sales growth for Dunkin’ U.S. and Baskin-Robbins U.S.
  • The Company expects to be at the low end of the range of 200 and 250 net new Dunkin’ U.S. units. It expects new Dunkin’ U.S. restaurants opened in 2019 will contribute greater than USD 130 million in systemwide sales in 2019.
  • The Company expects Baskin-Robbins U.S. franchisees to close approximately ten net units.
  • The Company expects low-to-mid single digit percent revenue growth.
  • The Company expects low-to-mid single digit percent other revenue growth driven by consumer packaged goods.
  • The Company expects ice cream margin dollars to be flat compared to 2018 from a profit dollar standpoint.
  • The Company expects net income of equity method investments (JV net income) to be flat compared to 2018.
  • The Company expects a mid-single digit percent reduction to general and administrative expenses.
  • The Company expects mid-to-high single digit percent operating and adjusted operating income growth.
  • The Company expects its full-year effective tax rate to be approximately 28 percent and net interest expense to be USD 122 million. The tax guidance excludes any potential future impact from material excess tax benefits in 2019.
  • The Company expects full-year weighted-average shares outstanding of approximately 84 million.
  • The Company expects GAAP diluted earnings per share of USD 2.74 to USD 2.83 and adjusted earnings per share of USD 2.94 to USD 2.99.
  • The Company expects capital expenditures to be approximately USD 40 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 months and fiscal year ended December 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.