Dunkin’ Brands: Reports First Quarter 2018 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, announced its results for the three months ended 31 March 2018. First quarter highlights include:

• Dunkin’ Donuts completed the roll out of menu simplification across 100 percent of the U.S. system
• Dunkin’ Donuts U.S. comparable store sales decline of 0.5 percent
• Baskin-Robbins U.S. comparable store sales decline of 1.0 percent
• Added 71 net new Dunkin’ Donuts and Baskin-Robbins locations globally including 56 net new Dunkin’ Donuts in the U.S.
• Revenues increased 1.7 percent
• Diluted EPS increased by USD 0.09 to USD 0.57
• Diluted adjusted EPS increased by USD 0.11 to USD 0.62
• Company entered into USD 650 million accelerated share repurchase agreement

«In the first quarter of 2018, we made great headway with numerous strategic growth initiatives, including opening 56 net new Dunkin’ Donuts in the U.S., continuing our trend as one of the nation’s fastest growing retail brands by unit count; the unveiling of our next-generation Dunkin’ Donuts store design; and surpassing USD 220 million in retail sales of CPG products across both brands», said Nigel Travis, Chairman and Chief Executive Officer, Dunkin’ Brands Group, Inc. «These accomplishments were achieved against a tough backdrop of intense competitive activity and adverse weather, which, along with the national roll-out of menu simplification, negatively impacted Dunkin’ Donuts U.S. comparable store sales. Going forward we believe we have the right plans in place, as well as the full alignment of our franchisees, to position ourselves for growth both now and for the long-term».

«We are pleased with the progress we made in the first quarter with our plan to transform Dunkin’ Donuts U.S. into a beverage-led, on-the-go brand», said Dave Hoffmann, President of Dunkin’ Donuts U.S. «Not only did we complete the national roll out of menu simplification, which should improve customer service and franchisees’ profitability, but we also had record-breaking breakfast sandwich sales, saw an improvement in our afternoon traffic as a result of our PM beverage break offers, conducted successful value menu tests leading to a national launch in April, and drove flavored coffee and espresso sales with our innovative Girl Scout partnership».

«We are pleased to have entered into a USD 650 million accelerated share repurchase program during the first quarter», said Kate Jaspon, Dunkin’ Brands Chief Financial Officer. «The accelerated share repurchase illustrates our continued commitment to utilize our strong balance sheet to return capital to shareholders».

First quarter 2018 key financial highlights

(Unaudited, USD in millions, except per share data)	Three months ended				Increase (Decrease)
Amounts and percentages may not recalculate due to rounding	March 31, 2018		April 1, 2017(1)		USD / #	%
Financial data:
Revenues	USD	301.3	296.4		5.0	1.7%
Operating income	89.8		86.8		3.1	3.5%
Operating income margin	29.8%		29.3%
Adjusted operating income(2)	USD	95.7	92.1		3.6	3.9%
Adjusted operating income margin(2)	31.8%		31.1%
Net income	USD	50.2	44.3		5.9	13.2%
Adjusted net income(2)	54.4		47.5		6.9	14.4%
Earnings per share:
Common–basic	0.58		0.48		0.10	20.8%
Common–diluted	0.57		0.48		0.09	18.8%
Diluted adjusted earnings per share(2)	0.62		0.51		0.11	21.6%
Weighted average number of common shares – diluted (in millions)	87.9		93.1		(5.2)	(5.6)%
Systemwide sales(3)	USD	2’660.0	2’529.9		130.0	5.1%
Comparable store sales growth (decline):
DD U.S.	(0.5)%		–
BR U.S.	(1.0)%		(2.4)%
DD International	2.1%		(0.2)%
BR International	10.0%		(2.0)%
Development data:
Consolidated global net POD development	71		29		42	144.8%
DD global PODs at period end	12’598		12’287		311	2.5%
BR global PODs at period end	7’993		7’822		171	2.2%
Consolidated global PODs at period end	20’591		20’109		482	2.4%

(1)Prior period amounts have been restated to reflect the adoption of new revenue recognition guidance. See «Adoption of New Accounting Standard» for further detail.

(2)Adjusted operating income, adjusted operating income margin, and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, and certain other items, net of the tax impact of such adjustments in the case of adjusted net income. Diluted adjusted earnings per share is a non-GAAP measure calculated using adjusted net income. See «Non-GAAP Measures and Statistical Data» and «Dunkin’ Brands Group, Inc. Non-GAAP Reconciliations» for further detail.

(3)Systemwide sales include sales at franchisee-operated restaurants, including joint ventures. While we do not record sales by franchisees, licensees, or joint ventures as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe systemwide sales information aids in understanding how we derive royalty revenue and in evaluating our performance relative to competitors.

Global systemwide sales growth of 5.1 percent in the first quarter was primarily attributable to global store development and Baskin-Robbins International comparable store sales growth.

Dunkin’ Donuts U.S. comparable store sales in the first quarter declined 0.5 percent as an increase in average ticket was offset by a decline in traffic. From a category standpoint, beverage sales growth was driven by the introduction of Girl Scout cookie-inspired coffee flavors and afternoon break value offers which helped grow total espresso and iced coffee sales. Breakfast sandwich sales were driven by successful value menu tests.

Baskin-Robbins U.S. comparable store sales declined 1.0 percent during the first quarter as an increase in average ticket was offset by a decline in traffic. Beverage sales were up during the quarter driven by shakes, smoothies and Cappuccino Blast.

In the first quarter, Dunkin’ Brands franchisees and licensees opened 71 net new restaurants globally. This included 56 net new Dunkin’ Donuts U.S. locations, 6 net new Baskin-Robbins U.S. locations, 5 net new Baskin-Robbins International locations and 4 net new Dunkin’ Donuts International locations. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 55 restaurants and Baskin-Robbins U.S. franchisees remodeled 26 restaurants during the quarter.

Revenues for the first quarter increased USD 5.0 million, or 1.7 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 a decrease in sales of ice cream and other products.

Operating income and adjusted operating income for the first quarter increased USD 3.1 million, or 3.5 percent, and USD 3.6 million, or 3.9 percent, respectively, from the prior year period primarily as a result of the increase in royalty income and a reduction of general and administrative expenses. These increases in operating income and adjusted operating income were offset by a decrease in net income from our South Korea joint venture, a decrease in net margin on ice cream due primarily to an increase in commodity costs, and a gain recognized in connection with the sale of real estate in the prior year period.

Net income and adjusted net income for the first quarter increased by USD 5.9 million, or 13.2 percent, and USD 6.9 million, or 14.4 percent, respectively, compared to the prior year period primarily as a result of a decrease in income tax expense and the increases in operating income and adjusted operating income. The decrease in income tax expense was driven by a lower tax rate due to the enactment of the Tax Cuts and Jobs Act in the fourth quarter of fiscal year 2017 and excess tax benefits from share-based compensation of USD 7.6 million compared to USD 6.1 million in the prior year period. The increases in net income and adjusted net income were offset by an increase in net interest expense driven by additional borrowings incurred in conjunction with the refinancing transaction completed during the fourth quarter of fiscal year 2017.

Diluted earnings per share and diluted adjusted earnings per share for the first quarter increased by 18.8 percent to USD 0.57 and 21.6 percent to USD 0.62, respectively, 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 first quarter of fiscal year 2017, offset by the exercise of stock options. Excluding the impact of recognized excess tax benefits, diluted earnings per share and diluted adjusted earnings per share for the first quarter of fiscal years 2018 and 2017 would have been lower by approximately USD 0.09 and USD 0.06, respectively.

Company Updates

• The Company announced that the Board of Directors declared a cash dividend of USD 0.3475 per share, payable on June 6, 2018, to shareholders of record as of the close of business on May 29, 2018.

Fiscal Year 2018 Targets

As described below, the Company is updating and reiterating certain targets regarding its 2018 performance. The 2018 guidance does not include any impact from the USD 100 million investment in the Blueprint for Dunkin’ Donuts U.S. Growth that the Company previously announced:

• The Company continues to expect approximately one percent comparable store sales growth for Dunkin’ Donuts U.S.
• The Company continues to expect Dunkin’ Donuts U.S. franchisees to add greater than 275 net new restaurants. In addition, the Company continues to expect to open approximately 50 NextGen restaurants, including both new and remodeled stores.
• The Company continues to expect low-to-mid single digit revenue growth.
• The Company continues to expect high-single digit percent other revenue growth driven by consumer packaged goods.
• The Company continues to expect mid-to-high single digit operating and adjusted operating income growth.
• The Company continues to expect ice cream margin dollars to be flat compared to 2017 from a profit dollar standpoint.
• The Company continues to expect a five percent reduction to G+A expense.
• The Company now expects full-year weighted-average shares outstanding of approximately 85 million and an effective tax rate of 25 percent, which is inclusive of the share repurchase entered in the first quarter and impact of the excess tax benefit recognized. The USD 7.6 million excess tax benefit recognized in the first quarter reduced the expected full-year effective tax rate by approximately 300 basis points. This guidance excludes any potential future impact from material excess tax benefits in subsequent quarters of 2018.
• The Company now expects GAAP diluted earnings per share of USD 2.49 to USD 2.58 (previously it expected USD 2.20 to USD 2.29) and diluted adjusted earnings per share of USD 2.69 to USD 2.74 (previously it expected USD 2.40 to USD 2.45), which reflects the impact from the above revised share count and full-year effective tax rate and excludes any impact of the USD 100 million investment in the Blueprint for Dunkin’ Donuts U.S. Growth.

The foregoing non-GAAP forward-looking financial measures are reconciled from the respective measures determined under GAAP in the attached tables «Dunkin’ Brands Group, Inc. and Subsidiaries Non-GAAP Reconciliations».

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 ended April 1, 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’ Donuts 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.