Dunkin’ Brands’ Revenue Hurt by Fewer Restaurant Openings

Teams up with The Coca-Cola Company to launch bottled coffee drinks in 2017

d1Dunkin’ Brands Group Inc. (NASDAQ: DNKN) announced its Q3 FY16 financial results on October 20th, 2016.

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 U.S., Dunkin’ Donuts International, Baskin-Robbins International, and Baskin-Robbins U.S.

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. As of August 11th, 2016, Dunkin’ operated about 11,900 Dunkin’ Donuts restaurants and 7,600 Baskin-Robbins restaurants. It also leases franchised restaurants in the U.S., and has offices in Brazil, China, Dubai, and the U.K. Read more about Dunkin’ Brands’ financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Dunkin’ Brands reported a 1.3% decline in revenue to $207.1 million, hurt by fewer restaurant openings and slower sales at established Baskin-Robbins outlets in the U.S. Restaurants in the U.S. are facing intense competition from upstart chains and meal-kit sellers, as well as facing headwinds from lower grocery prices, which are encouraging customers to cook more at home. The Company also reported lower revenues due to sale of Dunkin’s remaining company-operated stores, in a move to become 100% franchised, offset by higher license fees related to the Dunkin’ K-Cup® pod licensing agreement. Total system-wide sales, which include sales at franchisee- and company-operated restaurants, including joint ventures, grew 6.3% to $2.82 billion.d2

During Q3 FY16, same-store sales at Dunkin’ Donuts in the U.S. grew 2%, driven by increased average ticket offset by a decline in traffic. Growth was driven by strong beverage sales, led by iced coffee, including Cold Brew, and hot and iced espresso-based beverages, as well as breakfast sandwiches, led by the Maple Sausage and the Belgian Waffle breakfast sandwiches.

During Q3 FY16, domestic same-store Baskin-Robbins sales declined 0.9% during the reporting quarter driven by a decline in traffic offset by increased average ticket. Growth in sales of cups and cones led by Warm Cookie and Donut Ice Cream Sandwiches was more than offset by declines in beverages and sundaes.

d3During the reporting quarter, the Company’s operating income and adjusted operating income grew 9.6% to $9.6 million, and 8.3% to $8.8 million, respectively, from the prior year’s period, primarily as a result of the increase in royalty income, as well as gains recognized in connection with the sale of company-operated restaurants and a reduction in general and administrative expenses driven primarily by a decrease in bad debt expense, offset by the decrease in franchise fees.

Overall, for Q3 FY16, profit rose to $52.7 million, or $0.57 per share, compared to $46.2 million, or $0.48 per share, in the year-ago quarter. On an adjusted basis, EPS rose to $0.60 from $0.52 in the year-ago period.

Another milestone achieved by the Company was surpassing five million members in its DD Perks® rewards program, one of the fastest growing loyalty programs in the quick-service-restaurant industry.

Segmental highlights

Dunkin’ Donuts U.S.: During Q3 FY16, this segment’s revenues fell 1.3% Y-o-Y to $152.4 million, due to a decline in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants, as well as lower franchise fees due to declines in renewal income and gross openings, and a decline in other revenues. These decreases were offset by higher royalty income due to an increase in system-wide sales of 2%.

Dunkin’ Donuts International: During Q3 FY16, this segment’s system-wide sales jumped 8.1% from the prior year’s period driven primarily by sales growth in the Middle East, Europe, South America, Asia, and South Korea. Sales in South Korea were positively impacted by favorable foreign exchange rates. On a constant currency basis, system-wide sales increased by approximately 7%. On the other hand, revenues fell by 3.8% to $4.4 million due to a decline in franchise fees, offset by an increase in royalty income.

Baskin-Robbins U.S.: During Q3 FY16, this segment’s revenue grew 1.5% from the prior year’s period to $13.8 million due primarily to increases in rental income, sales of ice cream and other products, and franchise fees, offset by a decrease in other revenues driven by a decrease in licensing income. On the other hand, same-store sales declined 0.9%, during the reporting quarter, driven by a decline in traffic offset by increased average ticket.

Baskin-Robbins International: During Q3 FY16, this segment’s system-wide sales jumped 8.8% compared to the prior year period driven by sales growth in Japan and South Korea. Sales in both Japan and South Korea were positively impacted by favorable foreign exchange rates. On a constant currency basis, system-wide sales rose by around 2%. On the other hand, revenues fell 8.8% Y-o-Y to $27.9 million due to lower sales of ice cream products in the Middle East, partially offset by higher royalty income.

Other highlights

d4Store update: During the reporting quarter, Dunkin’ Brands franchisees and licensees opened 115 net new restaurants globally. This included 56 net new Dunkin’ Donuts U.S. locations (including the closing of 5 Speedway self-serve coffee stations), 45 net new Baskin-Robbins International locations, 11 net new Dunkin’ Donuts International locations, and 3 net new Baskin-Robbins U.S. locations. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 127 restaurants and Baskin-Robbins U.S. franchisees remodeled 18 restaurants during the quarter.

Partnership with Coca-Cola: Dunkin Brands announced on September 29th, 2016, that it has teamed up with The Coca-Cola Company (NYSE: KO) to launch bottled coffee drinks in 2017. The market of bottled iced coffee drinks has been growing steadily in the U.S., surging 8% in 2015, with an estimated value of $2.3 billion in sales. In 2016, this market is expected to grow by about 8%. To tap this market opportunity, Coca-Cola hopes that creating beverages with Dunkin’ coffee may prove to be key in helping both companies compete against their market rivals. Bottled coffee has become popular since 1996, when Starbucks Corporation (NASDAQ: SBUX) launched its first bottled Frappuccino, making it the leader in this market category. After being hit with soda tax, Coca-Cola is looking to expand its products basket to include bottled coffee.

Dunkin’ strengthens customer loyalty using Salesforce: Dunkin’ announced on October 6th, 2016, that it has teamed up with Salesforce.com Inc. (NYSE: CRM) to successfully deploy the Salesforce Customer Success Platform, including Salesforce Platform, Marketing Cloud and Sales Cloud, to strengthen customer loyalty, and empower employees to run their business from their phones. Salesforce Customer Success Platform will enhance customer engagement initiatives on one platform, as well as automate and streamline internal processes so that it can dedicate more time to delivering unmatched customer experiences. Using Marketing Cloud, Dunkin’ Donuts is able to analyze and respond to a customer’s behavior throughout their loyalty journey, from acquisition to onboarding to engagement.

Appointment of David Hoffmann: Dunkin’ Brands announced on September 22nd, 2016, that it has appointed David Hoffmann as president of Dunkin’ Donuts U.S. and Canada, effective October 3rd, 2016. He will report to Nigel Travis, Dunkin’ Brands Chairman and CEO, and will serve on the Dunkin’ Brands Leadership Team.

Development of two 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.

Outlook for Q4 FY16 and full year FY16

Dunkin’ cut its revenue growth forecast for full year FY16 to about 2%, from 3% to 5%, citing weaker-than-expected sales at its Baskin-Robbins outlets outside the U.S. The company, however, backed its profit expectations for FY16 forecast for adjusted EPS of between $2.20 and $2.22. The Company continues to expect Dunkin’ Donuts U.S. comparable store sales growth of 0% to 2%. It now expects Baskin-Robbins U.S. comparable store sales growth to be slightly positive, as compared to previous guidance of 1% to 3%.

The Company now expects Dunkin’ Donuts U.S. net development to be at the low end of the previously-provided range of 430 to 460 net new restaurants, excluding Speedway self-serve coffee station closures. 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.

Stock Performance

d5Dunkin’ Brands’ stock stood at $47.87, falling 0.62%, at the close on Wednesday, October 25th, 2016, having vacillated between an intraday high of $48.14 and a low of $47.74 during the session. The stock’s trading volume was at 1,494,623 for the day. The Company’s market cap was at $4.43 billion as of Wednesday’s close.

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