Dunkin’ Brands Reports Second Quarter 2016 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the second quarter ended June 25, 2016. Second quarter highlights include:

• Dunkin’ Donuts U.S. comparable store sales growth of 0.5 percent
• Baskin-Robbins U.S. comparable store sales growth of 0.6 percent
• Added 198 net new restaurants worldwide, including 73 net new Dunkin’ Donuts in the U.S.
• Revenues increased 2.3 percent
• Diluted EPS increased 22.7 percent to 0.54 USD
• Diluted adjusted EPS increased 14.0 percent to 0.57 USD
• Dunkin’ Donuts K-Cup® pods named one of the top new consumer packaged goods products by IRI Market Advantage

«We are pleased that we were able to grow both operating income and earnings per share at a significantly faster pace than revenue in the second quarter», said Dunkin’ Brands Chairman and Chief Executive Officer Nigel Travis. «As for our five-part plan designed to drive Dunkin’ Donuts U.S. comparable store sales growth, while we are still in the early phases of implementation and have not yet seen an acceleration of top-line sales, we are making significant progress with our initiatives. We are especially delighted with our efforts to continue to build our coffee authority, as evidenced by the second quarter growth in our espresso category and the launch of our Cold Brew coffee, and we continue to improve the guest experience through digital technologies like On-The-Go mobile ordering that enables DD Perks members to order in advance and skip to the front of the line».

«Consistent with our asset light-business model we are selling many of our company-owned stores, the majority of which are in the Dallas market, and as a result, are updating our revenue growth target for 2016 to three to five percent from four to six percent. We’re pleased to have new and existing franchisees taking over this important market and look forward to the next phase of growth in Texas. We anticipate that by the end of the year, we will have fewer than 5 company-owned stores remaining», said Paul Carbone, Chief Financial Officer, Dunkin’ Brands Group, Inc. «While the sale of these stores impacts our revenue growth, we do not anticipate that there will be a material impact to our profits. Therefore, we are reaffirming all of our other targets for our 2016 performance».

Second quarter 2016 key financial highlights

Global systemwide sales growth in the second 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 second quarter was driven by increased average ticket offset by a decline in traffic. Growth was driven by strong beverage sales, led by iced coffee and hot and iced espresso-based beverages, and breakfast sandwiches, led by the GranDDe Burrito and the Bacon Supreme Omelet breakfast sandwich.

Baskin-Robbins U.S. comparable store sales growth was driven by increased average ticket offset by a decline in traffic. Growth was driven by sales of cups and cones led by the new Warm Cookie Ice Cream Sandwich.

In the second quarter, Dunkin’ Brands franchisees and licensees opened 198 net new restaurants around the globe. This included 78 net new Baskin-Robbins International locations, 73 net new Dunkin’ Donuts U.S. locations (including the closing of 9 Speedway self-serve coffee stations), 35 net new Dunkin’ Donuts International locations, and 12 net new Baskin-Robbins U.S. locations. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 107 restaurants and Baskin-Robbins U.S. franchisees remodeled 36 restaurants during the quarter.

Revenues for the second quarter increased 2.3 percent compared to the prior year period due primarily to increased royalty income as a result of systemwide sales growth and an increase in other revenues due primarily to increased license fees recognized in connection with the Dunkin’ K-Cup® pod licensing agreement and an increase in transfer fee income. These increases in revenues were offset by a decrease in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants, as well as a decrease in sales of ice cream and other products. As of June 25, 2016, there were 29 points of distribution that were company-operated.

Operating income and adjusted operating income for the second quarter increased 13.6 million USD, or 14.6 percent, and 8.3 million USD, or 8.1 percent, respectively, from the prior year period primarily as a result of the increases in royalty income and other revenues, offset by a decrease in net margin on ice cream and other products from international markets. Additionally, operating income in the prior year period was unfavorably impacted by costs incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012.

Net income and adjusted net income for the second quarter increased by 7.3 million USD, or 17.2 percent, and 4.1 million USD, or 8.5 percent, respectively, compared to the prior year period primarily as a result of the increases in operating income and adjusted operating income of 13.6 million USD and 8.3 million USD, respectively, offset by an increase in income tax expense.

Diluted earnings per share and diluted adjusted earnings per share increased by 22.7 percent to 0.54 USD and 14.0 percent to 0.57 USD, respectively, for the second quarter 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 second quarter of 2015, offset by the exercise of stock options.

Second quarter 2016 segment results

Beginning in the first quarter of fiscal year 2016, certain segment profit amounts in the tables below have been reclassified as a result of the realignment of our organizational structure to better support our segment operations, including the allocation of previously unallocated costs. Additionally, revenues, segment profit, points of distribution information, and systemwide sales related to restaurants located in Puerto Rico were previously included in the Baskin-Robbins International segment, but are now included in the Baskin-Robbins U.S. segment based on functional responsibility. Prior period amounts in the tables below have been revised to reflect these changes for all periods presented.

Dunkin’ Donuts U.S. second quarter revenues of 153.7 million USD represented an increase of 2.6 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 other revenues driven primarily by increases in transfer fee income and refranchising gains, offset by a decrease in sales at company-operated restaurants due to a net decrease in the number of company-operated restaurants.

Dunkin’ Donuts U.S. segment profit in the second quarter increased 7.8 million USD over the prior year period to 116.1 million USD, which was driven primarily by the increases in royalty income and other revenues, as well as an increase in other operating income due primarily to a gain recognized in connection with the sale of company-operated restaurants.

Dunkin’ Donuts International second quarter systemwide sales increased 0.8 percent from the prior year period. Sales growth in Asia and Europe was offset by a decline in South Korea. Sales in South Korea, South America, and Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 5 percent.

Dunkin’ Donuts International second quarter revenues of 5.2 million USD represented a decrease of 3.7 percent from the prior year period. The decrease in revenues was primarily a result of a decline in franchise fees, offset by an increase in other revenues due to an increase in transfer fee income, as well as an increase in royalty income.

Segment profit for Dunkin’ Donuts International decreased 0.6 million USD to 2.0 million USD in the second quarter primarily as a result of a decrease in net income from our South Korea joint venture, as well as the decrease in revenues.

Baskin-Robbins U.S. second quarter revenue decreased 2.9 percent from the prior year period to 13.7 million USD due primarily to a decrease in sales of ice cream and other products, offset by an increase in royalty income and an increase in other revenues driven by an increase in licensing income. A portion of the fluctuations in licensing income and sales of ice cream and other products can be attributed to a shift in certain franchisees that previously purchased ice cream from the Company are now purchasing ice cream directly from our third-party ice cream manufacturer through which we earn a licensing fee.

Segment profit for Baskin-Robbins U.S. increased 1.1 million USD in the second quarter, or 12.0 percent, over the prior year period primarily as a result of a reduction in general and administrative expenses, due primarily to expenses incurred in the prior year period related to brand-building activities and incentive compensation, as well as the increases in other revenues and royalty income.

Baskin-Robbins International systemwide sales increased 1.1 percent in the second quarter compared to the prior year period driven by sales growth in Japan and the Middle East, offset by sales declines in South Korea and Europe. Sales in Japan were positively impacted by favorable foreign exchange rates while sales in South Korea, Europe, and Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 1 percent.

Baskin-Robbins International second quarter revenues decreased 2.1 percent from the prior year period to 34.8 million USD due primarily to a decrease in sales of ice cream products. 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.

Second quarter segment profit decreased 5.8 percent from the prior year period to 11.1 million USD as a result of a decrease in net income from our South Korea joint venture and a decrease in net margin on ice cream driven primarily by a decline in sales volume and an increase in commodity costs, offset by a reduction in bad debt expense and other general and administrative expenses.

Company updates

The Company announced that the Board of Directors declared a third quarter cash dividend of 0.30 USD per share, payable on August 31, 2016 to shareholders of record as of the close of business on August 22, 2016.

Earlier this week the Company announced that in the first year since Dunkin’ K-Cup® pods were made available at retail outlets nationwide through partners The J.M. Smucker Company (NYSE: SJM) and Keurig Green Mountain, Inc. (NASDAQ: GMCR), more than 300 million of Dunkin’ K-Cup Pods were sold with retail sales totaling nearly 220 million USD. IRI Market Advantage, a market research company focused on the consumer packaged goods industry, reported the results and included Dunkin’ K-Cup pods on its list of Rising Stars in Food + Beverage.

Fiscal year 2016 targets

As described below, the Company is reiterating and updating certain targets regarding its 2016 expectations. The Company is now also including GAAP targets for operating income and diluted earnings per share.

• The Company continues to expect Dunkin’ Donuts U.S. comparable store sales growth of 0 to 2 percent and Baskin-Robbins U.S. comparable store sales growth of 1 to 3 percent.
• The Company continues to expect that Dunkin’ Donuts U.S. will add between 430 and 460 net new restaurants, excluding the closure of approximately 30 Speedway self-serve coffee stations. The Company continues to expect Baskin-Robbins U.S. will add between 5 and 10 net new restaurants.
• Internationally, the Company continues to target opening approximately 200 net new restaurants across the two brands. It continues to expect net income of equity method investments to be slightly less than 2015 full-year results.
• The Company now expects revenue growth of between 3 and 5 percent as a result of the sale of company-owned stores in the second quarter as well as anticipated future sales of company-owned stores in 2016.
• The Company expects GAAP operating income growth of between 27 and 30 percent and GAAP diluted earnings per share of 2.02 USD to 2.08 USD on a 53-week basis.
• The Company continues to expect adjusted operating income growth of between 8 and 10 percent and diluted adjusted earnings per share of 2.20 USD to 2.22 USD on a 53-week basis.
• The Company is updating its full-year share count guidance to 93’000’0000 (previously it was 94’000’000). It continues to expect a 38.5 percent tax rate.
• Fiscal year 2016 is a 53-week year for the Company. The target ranges for revenue, GAAP operating income growth, and adjusted operating income growth are applicable on both a 52- and 53-week basis. The impact of the 53rd week on GAAP diluted earnings per share and diluted adjusted earnings per share is approximately 0.03 USD.