Dunkin’ Brands Reports First Quarter 2016 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the first quarter ended March 26, 2016. «We are encouraged by the first quarter Dunkin’ Donuts U.S. comparable store sales performance which was driven by growth in beverages and breakfast sandwiches, along with price and favorable weather», said Dunkin’ Brands Chairman and Chief Executive Officer Nigel Travis. «Admittedly we are still in the early days of our five-part plan to drive positive Dunkin’ Donuts same-store sales, but as evidenced by the first quarter results we are beginning to make progress with our strategy which includes driving coffee innovation and culture; faster-to-market product innovation; targeted value offerings and smart pricing; increased use of digital technologies and an improved restaurant experience».

«During the first quarter we continued to expand the national presence of the Dunkin’ Donuts brand through the addition of 69 net new restaurants in the U.S. as well as through the continued growth in sales of Dunkin’ K-Cup pods in the retail channel», said Paul Carbone, Chief Financial Officer, Dunkin’ Brands Group Inc. «As we approach the first anniversary of the launch of Dunkin’ K-Cup pods into the retail channel, we expect thatDunkin’ Donuts K-Cup pods will be one of the most successful new grocery products in recent history and we have now exceeded the half-billion dollar annual retail sales threshold for Dunkin’ Donuts coffee products in total».

First Quarter 2016 Key Financial Highlights

	Q1/2016			Q1/2015				USD / #		Change
Systemwide sales	USD	2’418.6		2’317.6			101.0		4.4	%
Comparable store sales growth (decline):
DD U.S.	2.0		%	2.7	%
BR U.S.	5.0		%	8.6	%
DD International	(2.3)		%	1.7	%
BR International	(8.2)		%	0.3	%
Development data:
Consolidated global net POD development	114			79			35		44.3	%
DD global PODs at period end	11’833			11’367			466		4.1	%
BR global PODs at period end	7’638			7’574			64		0.8	%
Consolidated global PODs at period end	19’471			18’941			530		2.8	%
Financial data:
Revenues	USD	189.8		185.9			3.9		2.1	%
Operating income	85.3			83.7			1.6		1.9	%
Operating income margin	45.0		%	45.0	%
Adjusted operating income	USD	91.2		87.6			3.6		4.2	%
Adjusted operating income margin	48.1		%	47.1	%
Net income	USD	37.2		25.6			11.5		45.0	%
Adjusted net income	40.7			40.3			0.4		1.0	%
Earnings per share:
Common-basic	0.41			0.26			0.15		57.7	%
Common-diluted	0.40			0.25			0.15		60.0	%
Diluted adjusted earnings per share	0.44			0.40			0.04		10.0	%
Weighted average number of common shares – diluted in millions	92.6			101.5			(8.9)		(8.8)	%

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Global systemwide sales growth in the first 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 first quarter was driven by increased average ticket and 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 limited-time-offer GranDDe Burrito and the return of the Chicken Apple Sausage breakfast sandwich. The in-restaurant K-Cup and packaged coffee categories had a negative 80 basis point impact on first quarter comparable store sales. We estimate that weather resulted in approximately 90 basis points of positive impact in the quarter.

Baskin-Robbins U.S. comparable store sales growth was driven by increased sales of cups and cones, beverages, desserts, sundaes, and cakes. Comparable store sales growth was driven primarily by traffic. We estimate that weather resulted in approximately 300 basis points of positive impact in the quarter.

In the first quarter, Dunkin’ Brands franchisees and licensees opened 114 net new restaurants around the globe. This included 69 net new Dunkin’ Donuts U.S. locations (including the closing of 2 Speedway self-serve coffee stations), 42 net new Baskin-Robbins International locations, 14 net new Dunkin’ Donuts International locations, and 11 net closures for Baskin-Robbins U.S. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 90 restaurants and Baskin-Robbins U.S. franchisees remodeled 35 restaurants during the quarter.

Revenues for the first quarter increased 2.1 percent compared to the prior year period due primarily to increased royalty income as a result of systemwide sales growth and an increase in sales of ice cream and other products. These increases in revenues were offset by a decrease in other revenues due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015.

Operating income and adjusted operating income for the first quarter increased 1.6 million USD, or 1.9 percent, and 3.6 million USD, or 4.2 percent, respectively, from the prior year period primarily as a result of the increase in royalty income, as well as an increase in franchise income and a gain recognized in connection with the sale of real estate, offset by the decrease in other revenues due primarily to a one-time upfront license fee recognized in connection with the Dunkin’ K-Cup® pod licensing agreement in the first quarter of 2015. Operating income in the prior year period was also favorably impacted by a reduction in legal reserves.

Net income for the first quarter increased by 11.5 million USD, or 45.0 percent, compared to the prior year period primarily as a result of the 20.6 million USD loss on debt extinguishment and refinancing transactions recorded in the prior year period, as well as the 1.6 million USD increase in operating income, offset by a 7.9 million USD increase in income tax expense and additional interest expense of 2.7 million USD, driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed in January 2015.

Adjusted net income for the first quarter increased by 0.4 million USD, or 1.0 percent, compared to the prior year period primarily as a result of the 3.6 million USD increase in adjusted operating income, offset by increases in interest expense and income tax expense.

Diluted earnings per share increased by 60.0 percent to 0.40 USD for the first quarter compared to the prior year period as a result of the increase in net income, as well as a decrease in shares outstanding. Diluted adjusted earnings per share increased by 10.0 percent to 0.44 USD for the first quarter compared to the prior year period as a result of the decrease in shares outstanding, as well as the increase in adjusted net income. The decrease in shares outstanding from the prior year period is due primarily to the repurchase of shares, offset by the exercise of stock options.

First 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.		Q1/2016				Q1/2015			USD / #		Change
(USD in thousands except as otherwise noted)
Comparable store sales growth		2.0		%		2.7	%
Systemwide sales (in millions)		USD	1’865.3			1’750.8			114.5		6.5	%
Revenues:
Royalty income		USD	101’523			95’007			6’516		6.9	%
Franchise fees		7’068				8’264			(1’196)		(14.5)	%
Rental income		22’385				22’681			(296)		(1.3)	%
Sales at company-operated restaurants		5’670				6’558			(888)		(13.5)	%
Other revenues		2’167				1’357			810		59.7	%
Total revenues		USD	138’813			133’867			4’946		3.7	%
Segment profit		USD	100’444			93’714			6’730		7.2	%
Points of distribution		8’500				8’160			340		4.2	%
Gross openings		93				101			(8)		(7.9)	%
Net openings		69				78			(9)		(11.5)	%

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Dunkin’ Donuts U.S. first quarter revenues of 138.8 million USD represented an increase of 3.7 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 an increase in transfer fee income. These increases in revenues were offset by a decrease in franchise fees due to a decrease in gross openings and unfavorable development mix, as well as a decrease in renewal income. Also offsetting the increases in revenues was a decrease in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants.

Dunkin’ Donuts U.S. segment profit in the first quarter increased 6.7 million USD over the prior year period to 100.4 million USD, which was driven primarily by growth in royalty income, an increase in other operating income due to a gain recognized in connection with the sale of real estate, and an increase in other revenues. These increases were offset by a decrease in franchise fees and a recovery of bad debt in the prior year period.

Dunkin’ Donuts International		Q1/2016				Q1/2015			USD / #		Change
(USD in thousands except as otherwise noted)
Comparable store sales growth (decline)		(2.3)		%		1.7	%
Systemwide sales (in millions)		USD	167.5			168.2			(0.7)		(0.4)	%
Revenues:
Royalty income		USD	4’240			3’791			449		11.8	%
Franchise fees		2’890				523			2’367		452.6	%
Rental income		—				8			(8)		(100.0)	%
Other revenues		120				2’256			(2’136)		(94.7)	%
Total revenues		USD	7’250			6’578			672		10.2	%
Segment profit		USD	3’758			3’674			84		2.3	%
Points of distribution		3’333				3’207			126		3.9	%
Gross openings		85				83			2		2.4	%
Net openings (closings)		14				(21)			35		n/m

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Dunkin’ Donuts International first quarter systemwide sales decreased 0.4 percent from the prior year period. Sales declines in South Korea were offset by sales growth in Europe and the Middle East. Sales in South Korea, Asia, and South America were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 7 percent.

Dunkin’ Donuts International first quarter revenues of 7.3 million USD represented an increase of 10.2 percent over the prior year period. The increase in revenues were primarily a result of increased franchise fees due to development in new markets, as well as an increase in royalty income, offset by a decline in other revenues due to revenue recorded in the prior year period in connection with a settlement reached with a master licensee.

Segment profit for Dunkin’ Donuts International increased 0.1 million USD to 3.8 million USD in the first quarter primarily as a result of revenue growth, offset by an increase in general and administrative expenses driven primarily by increased personnel costs and an increase in bad debt expense.

Baskin-Robbins U.S.		Q1/2016				Q1/2015			USD / #		Change
(USD in thousands except as otherwise noted)
Comparable store sales growth		5.0		%		8.6	%
Systemwide sales (in millions)		USD	129.9			123.1			6.8		5.6	%
Revenues:
Royalty income		USD	6’223			5’916			307		5.2	%
Franchise fees		346				220			126		57.3	%
Rental income		713				799			(86)		(10.8)	%
Sales of ice cream and other products		571				1’319			(748)		(56.7)	%
Other revenues		2’708				2’055			653		31.8	%
Total revenues		USD	10’561			10’309			252		2.4	%
Segment profit		USD	7’300			6’088			1’212		19.9	%
Points of distribution		2’518				2’526			(8)		(0.3)	%
Gross openings		10				13			(3)		(23.1)	%
Net closings		(11)				(3)			(8)		266.7	%

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Baskin-Robbins U.S. first quarter revenue increased 2.4 percent from the prior year period to 10.6 million USD due primarily to an increase in other revenues, driven by an increase in licensing income, and increases in royalty income and franchise fees, offset by a decrease in sales of ice cream and other products. The fluctuations in licensing income and sales of ice cream and other products can be attributed to a shift in certain franchisees now purchasing ice cream directly from our third-party ice cream manufacturer.

Segment profit for Baskin-Robbins U.S. increased 1.2 million USD in the first quarter, or 19.9 percent, over the prior year period primarily as a result of the increases in other revenues, royalty income, and franchise fees.

Baskin-Robbins International		Q1/2016				Q1/2015			USD / #		Change
(USD in thousands except as otherwise noted)
Comparable store sales (decline) growth		(8.2)		%		0.3	%
Systemwide sales (in millions)		USD	255.9			275.6			(19.7)		(7.1)	%
Revenues:
Royalty income		USD	1’380			1’407			(27)		(1.9)	%
Franchise fees		113				197			(84)		(42.6)	%
Rental income		106				118			(12)		(10.2)	%
Sales of ice cream and other products		25’063				21’222			3’841		18.1	%
Other revenues		172				186			(14)		(7.5)	%
Total revenues		USD	26’834			23’130			3’704		16.0	%
Segment profit		USD	8’384			7’057			1’327		18.8	%
Points of distribution		5’120				5’048			72		1.4	%
Gross openings		115				101			14		13.9	%
Net openings		42				25			17		68.0	%

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Baskin-Robbins International systemwide sales decreased 7.1 percent in the first quarter compared to the prior year period driven by sales declines in South Korea and the Middle East, offset by sales growth in Japan and Europe. Sales in South Korea were also negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales decreased by approximately 3 percent.

Baskin-Robbins International first quarter revenues increased 16.0 percent over the prior year period to 26.8 million USD due primarily to an increase in sales of ice cream and other products to the Middle East. Systemwide sales and sales of ice cream and other 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.

First quarter segment profit increased 18.8 percent from the prior year period to 8.4 million USD as a result of an increase in net margin on ice cream driven primarily by increases in sales volume and pricing, as well as a decrease in bad debt expense. These increases in segment profit were offset by a decrease in net income from our South Korea joint venture.

Company Updates

• The Company today announced that Paul Twohig, President, Dunkin’ Donuts U.S. and Canada, has decided to retire at the end of the first quarter of 2017. The Company plans to name a successor before the end of the year and is currently conducting a search which will consider both internal and external candidates. Twohig will remain in his current position, with responsibility for Dunkin’ Donuts U.S. and Canada operations as well as global franchising and store development for both Dunkin’ Donuts and Baskin-Robbins, until a successor is appointed and after that will remain actively involved with the Company until he retires next year. The Company also announced the promotions of Chris Fuqua to Senior Vice President, Dunkin’ Donuts Brand Marketing, Global Consumer Insights + Product Innovation, and Scott Hudler to Chief Digital Officer.
• The Company today announced that the Board of Directors declared a second quarter cash dividend of 0.30 USD per share, payable on June 8, 2016 to shareholders of record as of the close of business on May 31, 2016.
• During the first quarter, the Company received nearly 500’000 shares upon final settlement of the accelerated share repurchase (“ASR”) agreement that it entered into in October 2015. Under the agreement, the Company repurchased a total of approximately 3.0 million shares at a weighted average cost per share of 41.51 USD. Also during the first quarter, the Company entered into and completed an additional ASR agreement for 30 million USD, resulting in the repurchase of approximately 700’000 shares at a weighted average cost per share of 42.72 USD.

Fiscal Year 2016 Targets

As described below, the Company is reiterating each of its targets regarding 2016 expectations.

• The Company continues to expect 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 continues to expect revenue growth of between 4 and 6 percent; adjusted operating income growth of between 8 and 10 percent; and adjusted earnings per share of 2.20 USD to 2.22 USD on a 53-week basis. The adjusted earnings per share range assumes 94’000’000 shares outstanding and a 38.5 percent tax rate.
• Fiscal year 2016 is a 53-week year for the Company. The target ranges for revenue and adjusted operating income growth are applicable on both a 52- and 53-week basis. The impact of the 53rd week on adjusted earnings per share is approximately 0.03 USD.