Dunkin’ Brands’ Revenue Driven by Franchise Income

Dunkin’s 100% franchised business model included over 12,200 Dunkin’ Donuts restaurants

Dunkin’ Brands Group Inc. (NASDAQ: DNKN) announced its Q4 FY16 and full-year FY16 financial results on February 09th, 2017.

Headquartered in Canton, Massachusetts, the Company develops, franchises, and licenses quick service restaurants under the Dunkin’ Donuts and Baskin-Robbins brands worldwide. The company operates through four segments: Dunkin’ Donuts US, Dunkin’ Donuts International, Baskin-Robbins International, and Baskin-Robbins US.

Its restaurants offer hot and cold coffee, baked goods, donuts, bagels, muffins, breakfast sandwiches, hard-serve ice cream, soft serve ice cream, frozen yogurt and shakes. At the end of Q4 FY16, Dunkin’ Brands’ 100% franchised business model included more than 12,200 Dunkin’ Donuts restaurants and more than 7,800 Baskin-Robbins restaurants. It also leases franchised restaurants in the US, and has offices in Brazil, China, Dubai, and the UK. Read more about Dunkin’ Brands’ financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Dunkin’ revenues grew 5.8% to $11.9 million driven by increased royalty income due to the extra week during the quarter, as well as an increase in franchise fees due to additional renewal income. These increases were offset by lower sales at company-operated restaurants due to a net decrease in the number of company-operated restaurants. All remaining company-operated points of distribution were sold during the reporting quarter. Revenues for Q4 FY16 grew 1.5% on a 13-week basis. Global system-wide sales growth in Q4 FY16 was primarily attributable to global store development and Dunkin’ Donuts US comparable store sales growth.

During Q4 FY16, same-store sales Dunkin’ Donuts US comparable store sales growth was driven by increased average ticket offset by a decline in traffic. Growth was driven by beverage sales, led by Cold Brew; breakfast sandwich sales, led by the Sweet Black Pepper Bacon breakfast sandwich; as well as donut sales.

Baskin-Robbins US comparable store sales were negative during the reporting quarter due to a decline in traffic, offset by higher average ticket. Increased average ticket was driven by cups and cones, due equally to scoops and the new Warm Cookie Sandwich platform. Sales of desserts were also up, driven by both the new Polar Pizza platform and increases in online ordering.

During Q4 FY16, Dunkin’ Brands franchisees and licensees opened 296 net new restaurants globally. Operating income and adjusted operating income jumped to $70.4 million, or 161.9%, and $15.3 million, or 14.8%, respectively, from the prior year’s same period primarily as a result of the increases in royalty income and franchise fees, as well as gains recognized in connection with the sale of company-operated restaurants, offset by an increase in general and administrative expenses. Operating income and adjusted operating income for the fourth quarter increased 147.9% and 8.9%, respectively, from the prior year’s comparable period on a 13-week basis.

During Q4 FY16, net income jumped by $65.1 million to $56.1 million compared to Q4 FY15, primarily as a result of the impairment of its Japan joint venture recorded in the prior year’s same period, as well as other increases in operating income, which were offset by increases in income tax expense and interest expense. Net income for Q4 FY16 increased $62.5million to $53.6 million on a 13-week basis. Diluted EPS increased by $0.71 to $0.61, and diluted adjusted earnings per share increased $0.12, or 23.1%, to $0.64, compared to the prior year’s same period as a result of the increases in net income and adjusted net income, respectively, as well as a decrease in shares outstanding. On a 13-week basis, diluted earnings per share for the fourth quarter increased $0.68 to $0.58, and diluted adjusted earnings per share increased $0.09, or 17.3%, to $0.61 compared to the prior year’s comparable period.

Nigel Travis, Dunkin’ Brands Chairman and CEO, stated:

“This past year was one of significant achievement for Dunkin’ Donuts US. We began executing against a six-part strategy to drive growth by positioning Dunkin’ as a to-go, coffee beverages brand, and while much work remains, we made considerable progress with our plan, in particular with utilizing digital technology to drive customer loyalty and store traffic. We now have more than 6 million Perks members, have launched On-The-Go ordering nationally, have grown mobile payments by nearly 70%, and had nearly $1 billion in system-wide sales on the Dunkin’ Gift Card, the backbone of our digital ecosystem, as a form of payment.”

He further added:

“Between retail sales of Dunkin’ bottled iced coffee, K-Cups, bagged coffee and in-restaurant system-wide sales of ready-brewed coffee, we expect consumers to drink nearly 5 billion cups of Dunkin’ Donuts coffee globally in 2017.”

FY16 financial highlights

During FY16, Dunkin’ revenues grew 2.2% to $828.9 million, or 1.1% on a 52-week basis. System-wide sales grew 6.6% to $10.84 billion from $10.16 billion in the prior year. Dunkin’ Donuts US reported comparable store sales growth of 1.6% during the year, while Baskin-Robbins US clocked comparable store sales growth of 0.7%.

During the reporting year, operating income grew 29.8% to $414.7 million, while operating margin grew to 50% from 39.4%. As a result, net income jumped 86% to $195.6 million, or $2.11 per diluted share, from $105.2 million, or $1.08 per diluted share, in the prior year. During the year, the Company added 723 net new restaurants worldwide, including 397 net new Dunkin’ Donuts in the US.

Segmental highlights

Dunkin’ Donuts US: During Q4 FY16, this segment’s revenues grew 6.5% Y-o-Y to $163.1 million due to higher royalty income driven by the extra week in the quarter, as well as an increase in franchise fees due to an increase in renewal income. These increases in revenues were offset by a decline in sales at Company-operated restaurants driven by a net decrease in the number of Company-operated restaurants. All remaining Company-operated points of distribution were sold during Q4 FY16.

During Q4 FY16, Dunkin’ Donuts US segment’s profit increased to $131.0 million, an increase of $15.2 million over the prior year’s same period, driven primarily by the increase in royalty income and a gain recognized in connection with the sale of Company-operated restaurants, as well as the increase in franchise fees. These increases in the segment’s profit were offset by an increase in general and administrative expenses.

Dunkin’ Donuts International: During Q4 FY16, this segment’s system-wide sales increased 8.6% from Q4 FY15, driven by sales growth in the Middle East, Asia, South Korea, and South America. On a constant currency basis, system-wide sales increased by approximately 9%. Revenues fell 5.7% to $6.0 million due to a decline in franchise fees, but were offset by an increase in royalty income. The segment’s profit increased $0.2 million to $3.2 million in Q4 FY16 as a result of a reduction in general and administrative expenses driven by a recovery of bad debt related to its Spain joint venture, offset by a decrease in net income from the South Korea joint venture and a decrease in revenues.

Baskin-Robbins US: During Q4 FY16, this segment’s revenue grew 3.7% to $9.4 million driven by an increase in other revenues as well as an increase in royalty income, both of which were driven by the extra week in the reporting quarter. These increases in revenues were offset by a decrease in sales of ice cream and other products. The segment’s profit for Baskin-Robbins US increased 33.4% to $5.1 million, primarily as a result of a reduction in general and administrative expenses as well as the increases in other revenues and royalty income.

Baskin-Robbins International: During Q4 FY16, this segment’s system-wide sales jumped 6.5% compared to the prior year’s same period driven by sales growth in Japan and South Korea, offset by declines in the Middle East and Europe. On a constant currency basis, system-wide sales increased by approximately 3%. Revenues grew 6% to $29.4 million due to an increase in sales of ice cream products to licensees in Asia and the Middle East. The segment’s profit grew 4.6% to $8.4 million as a result of an increase in net income from the Japan joint venture, as well as an increase in net margin on ice cream driven by the increase in sales volume. These increases in segment profit were offset by a decrease in net income from the South Korea joint venture and an increase in general and administrative expenses.

Other highlights

Store update: During Q4 FY16, Dunkin’ Brands franchisees and licensees opened 296 net new restaurants around the globe. This included 199 net new Dunkin’ Donuts US locations (including the closing of 2 Speedway self-serve coffee stations), 41 net new Baskin-Robbins International locations, 51 net new Dunkin’ Donuts International locations, and 5 net new Baskin-Robbins US locations. Additionally, Dunkin’ Donuts US franchisees remodeled 151 restaurants and Baskin-Robbins US franchisees remodeled 63 restaurants during the quarter.

Increase in dividends: The Company’s Board of Directors declared a cash dividend of $0.3225 per share, payable on March 22nd, 2017, to shareholders of record as of the close of business on March 13th, 2017. This represents a 7.5% increase over the prior quarter’s dividend.

Development of new restaurants: Dunkin’ Brands announced on September 27th, 2016, that it has signed a multi-unit store development agreement with franchise group, Finely Grounded Inc. to develop two Dunkin’ Donuts restaurants in Phoenix, Arizona, over the next several years. The first restaurant under the agreement is planned to open in 2017.

On December 08th, 2016, Dunkin’ Brands signed multi-unit store development agreements with four existing franchise groups to develop approximately 65 new restaurants in Dallas-Fort Worth and the surrounding area. The four franchise groups and their development plans throughout Dallas-Fort Worth include:

  • Quality Brand Dallas LLC plans to develop 35 new Dunkin’ Donuts restaurants, including several multi-brand units with Baskin-Robbins, in Wise, Rockwall and Hunt Counties. This group has also acquired 10 existing locations in the Dallas-Fort Worth area.
  • Anju Donuts of South Dallas plans to develop 15 new Dunkin’ Donuts restaurants, including several multi-brand units with Baskin-Robbins, in Palo Pinto, Parker, Hood, and Johnson Counties. They have also acquired eight existing restaurants in the Dallas-Fort Worth market.
  • Dallascious Donuts, plans to develop 10 new Dunkin’ Donuts restaurants, including three multi-brand units with Baskin-Robbins, in Cooke and Grayson Counties, and have also acquired 10 existing locations in the market.
  • WF Donuts LLC plans to develop at least five new Dunkin’ Donuts restaurants, including two multi-brand locations with Baskin-Robbins, in Kaufman, Ellis, Navarro and Hill Counties.

Outlook for FY17

Dunkin’ expects low single digit comparable store sales growth for Dunkin’ Donuts US and Baskin-Robbins US. The Company expects Dunkin’ Donuts US franchisees to add approximately 385 net new restaurants. It expects Baskin-Robbins US franchisees to add approximately 10 net new restaurants. Internationally, the Company expects franchisees and licensees to add approximately 200 net new restaurants across the two brands. The Company expects low-to-mid single digit revenue growth on both a 52- and 53-week basis in FY17.

Dunkin’ expects mid-to-high single digit GAAP operating income and adjusted operating income growth on both a 52- and 53-week basis. GAAP diluted EPS is expected to range between $2.16 and $2.24 and diluted adjusted EPS between $2.34 and $2.37. The Company expects full-year weighted-average shares outstanding of approximately 93 million and a 38.5% effective tax rate.

Stock Performance

Dunkin’ Brands’ stock stood at $54.93, falling 0.15%, at the close on Tuesday, February 21st, 2017, having vacillated between an intraday high of $55.47 and a low of $54.40 during the session. The stock’s trading volume was at 2,267,248 for the day. The Company’s market cap was at $5.03 billion as of Tuesday’s close.

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