Dunkin’ Brands: Reports First Quarter 2019 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the first quarter ended March 30, 2019. First quarter highlights include:

• Dunkin’ U.S. comparable store sales growth of 2.4 percent
• Baskin-Robbins U.S. comparable store sales decline of 2.8 percent
• Added 34 net new Dunkin’ locations in the U.S.; total of 8 net new Dunkin’ and Baskin-Robbins locations globally
• Revenues increased 5.9 percent
• Diluted EPS increased by 10.5 percent to USD 0.63
• Diluted adjusted EPS increased by 8.1 percent to USD 0.67

«While we are still in the early innings of the implementation of our Blueprint for Growth, Dunkin’ U.S. delivered a strong first quarter, including 5.5 percent systemwide sales growth and a 2.4 percent increase in comparable store sales, which was the largest quarterly comparable store sales increase in four years. This solid performance, across both morning and afternoon, was driven by consistent, compelling national value promotions and continued beverage sales momentum. In particular, the relaunch of our highly successful handcrafted espresso platform, without impacting our trademark speed of service, has demonstrated our ability to deliver on the commitment of ‘great coffee fast,’» said David Hoffmann, Dunkin’ Brands Chief Executive Officer and President of Dunkin’ U.S. «Going forward, the collaboration we have with our franchisees and licensees will remain our number one asset, and we will continue to work together to modernize our brands and deliver healthy growth.»

«Our first quarter financial performance included approximately 6 percent revenue growth and double-digit operating income growth,» said Kate Jaspon, Chief Financial Officer, Dunkin’ Brands Group, Inc. «We completed a USD 1.7 billionplacement of securitized debt on April 30 that replaced our 2015 notes and were pleased to maintain our overall blended fixed interest rate across all of the outstanding securitized debt under four percent. The refinancing provides strong fixed rates as well as flexibility to navigate future market environments.»

First Quarter 2019 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	2019-03-30			2018-03-31			USD / #		%
Financial data:
Revenues	USD	319.1		301.3			17.7		5.9	%
Operating income	101.4			89.8			11.5		12.8	%
Operating income margin	31.8		%	29.8	%
Adjusted operating income(1)	USD	106.3		95.7			10.6		11.1	%
Adjusted operating income margin(1)	33.3		%	31.8	%
Net income	USD	52.3		50.2			2.2		4.3	%
Adjusted net income(1)	55.9			54.4			1.5		2.8	%
Earnings per share:
Common-basic	0.63			0.58			0.05		8.6	%
Common-diluted	0.63			0.57			0.06		10.5	%
Diluted adjusted earnings per share(1)	0.67			0.62			0.05		8.1	%
Weighted average number of common shares – diluted (in millions)	83.4			87.9			(4.4)		(5.1)	%
Systemwide sales(2)	USD	2,768.2		2,660.0			108.2		4.1	%
Comparable store sales growth (decline):
Dunkin’ U.S.	2.4		%	(0.5)	%
BR U.S.	(2.8)		%	(1.0)	%
Dunkin’ International	2.9		%	2.1	%
BR International	(2.0)		%	10.0	%
Development data:
Consolidated global net POD development	8			71			(63)		(88.7)	%
Dunkin’ global PODs at period end	12,900			12,598			302		2.4	%
BR global PODs at period end	8,020			7,993			27		0.3	%
Consolidated global PODs at period end	20,920			20,591			329		1.6	%

(1) 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.
(2) 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 4.1 percent in the first quarter was primarily attributable to global store development, Dunkin’ U.S. comparable store sales growth, and Dunkin’ International comparable store sales growth.

Dunkin’ U.S. comparable store sales grew 2.4 percent in the first quarter as an increase in average ticket was partially offset by a decrease in traffic. The increase in average ticket was driven by strategic pricing increases coupled with favorable mix shift to premium priced espresso and frozen beverages, as well as our Go2s value breakfast sandwich platform.

Baskin-Robbins U.S. comparable store sales declined 2.8 percent in the first quarter as a decrease in traffic was partially offset by an increase in average ticket. Unfavorable weather impact of more than 300 basis points significantly affected all product categories in the first quarter. The increase in average ticket was driven by strategic pricing increases coupled with favorable mix shift to beverages, take home quarts, and desserts.

In the first quarter, Dunkin’ Brands franchisees and licensees opened 8 net new restaurants globally. This included 34 net new Dunkin’ U.S. locations, offset by net closures of 18 Baskin-Robbins International locations, 5 Dunkin’ International locations, and 3 Baskin-Robbins U.S. locations. Additionally, Dunkin’ U.S. franchisees remodeled 33 restaurants and Baskin-Robbins U.S. franchisees remodeled 8 restaurants during the quarter.

Revenues for the first quarter increased USD 17.7 million, or 5.9 percent, compared to the prior year period due primarily to increases in royalty income and advertising fees as a result of systemwide sales growth, as well as an increase in rental income. The increase in rental income resulted from the adoption of a new lease accounting standard in the first quarter of fiscal year 2019, which requires gross presentation of certain lease costs that the Company passes through to franchisees.

Operating income and adjusted operating income for the first quarter increased USD 11.5 million, or 12.8 percent, and USD 10.6 million, or 11.1 percent, respectively, from the prior year period primarily as a result of the increase in royalty income and a reduction in general and administrative expenses due primarily to a decrease in personnel costs.

Net income and adjusted net income for the first quarter increased by USD 2.2 million, or 4.3 percent, and USD 1.5 million, or 2.8 percent, respectively, compared to the prior year period primarily as a result of the increases in operating income and adjusted operating income, respectively, offset by an increase in income tax expense primarily driven by excess tax benefits from share-based compensation of USD 1.2 million compared to USD 7.6 million in the prior year period and the increase in income in the current period.

Diluted earnings per share and diluted adjusted earnings per share for the first quarter increased by 10.5 percent to USD 0.63 and 8.1 percent to USD 0.67, 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 beginning of the first quarter of fiscal year 2018, offset by the exercise of stock options. Excluding the impact of recognized excess tax benefits, both diluted earnings per share and diluted adjusted earnings per share would have been lower by approximately USD 0.01 and USD 0.09 for the first quarter of fiscal years 2019 and 2018, respectively.

First Quarter 2019 Segment Results

Dunkin’ U.S. first quarter revenues of USD 149.7 million represented an increase of 7.0 percent compared to the prior year period. The increase was primarily a result of an increase in royalty income driven by systemwide sales growth, as well as an increase in rental income, offset by a decrease in franchise fees due primarily to franchisee incentives provided in fiscal year 2018 as part of the investments in the Dunkin’ U.S. Blueprint for Growth that are being recognized over the remaining term of each respective franchise agreement. The increase in rental income resulted from the adoption of the new lease accounting standard in the first quarter of fiscal year 2019. Dunkin’ U.S. segment profit in the first quarter increased to USD 111.0 million, an increase of USD 6.0 million over the prior year period, driven primarily by the increase in royalty income and a decrease in general and administrative expenses due primarily to a decrease in personnel costs, offset by the decrease in franchise fees.

Dunkin’ International first quarter systemwide sales increased 4.6 percent from the prior year period driven by sales growth in the Middle East. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 9 percent. Dunkin’ International first quarter revenues of USD 6.9 million represented an increase of 27.7 percent from the prior year period. The increase in revenues was primarily a result of an increase in royalty income driven by a recovery of prior period royalties, as well as an increase in franchise fees due primarily to additional deferred revenue recognized in the current period upon closure of restaurants. Segment profit for Dunkin’ International increased USD 1.6 million to USD 4.8 million in the first quarter primarily as a result of the increase in revenues and a decrease in net loss from our South Korea joint venture.

Baskin-Robbins U.S. first quarter revenues decreased 2.2 percent from the prior year period to USD 10.3 million due primarily to a decrease in royalty income driven by a systemwide sales decline, as well as a decrease in other revenues, offset by an increase in rental income. The increase in rental income resulted from the adoption of the new lease accounting standard in the first quarter of fiscal year 2019. Segment profit for Baskin-Robbins U.S. decreased to USD 6.3 million in the first quarter, a decrease of 12.6 percent, primarily as a result of the decreases in royalty income and other revenues, as well as an increase in general and administrative expenses.

Baskin-Robbins International systemwide sales decreased 2.0 percent in the first quarter compared to the prior year period driven by a sales decline in Japan, offset by sales growth in South Korea. Sales across all regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 2 percent. Baskin-Robbins International first quarter revenues of USD 25.6 million represented a decrease of 1.2 percent from the prior year period due primarily to a decrease in sales of ice cream and other products, offset by increases in royalty income, franchise fees, and rental income. Systemwide sales and sales of ice cream products are not directly correlated within a given period due to certain licensees sourcing their own ice cream products, the lag between shipment of products to licensees and retail sales at franchised restaurants, and the overall timing of deliveries between fiscal quarters. The increase in franchise fees was due primarily to additional deferred revenue recognized in the current period upon closure of restaurants. First quarter segment profit increased 4.9 percent from the prior year period to USD 7.8 million primarily as a result of the increases in royalty income and franchise fees, as well as an increase in net income from our South Korea joint venture, offset by an increase in net loss from our Japan joint venture and a decrease in net margin on ice cream driven primarily by a decrease in sales volume.

Company Updates

• The Company announced that the Board of Directors declared a cash dividend of USD 0.375 per share, payable on June 12, 2019, to shareholders of record as of the close of business on June 3, 2019.
• On April 30, 2019, the Company completed its previously announced debt refinancing transaction, with the placement by its special purpose subsidiary of a new series of USD 1.85 billion of securitized notes, consisting of USD 1.7 billion of senior secured notes with anticipated repayment dates of 4.75 years (USD 600 million), 7 years (USD 400 million), and 10 years (USD 700 million) and a new variable funding note facility (USD 150 million), which replaces the Company’s existing variable funding note facility. The proceeds from the placement of the new notes were used to prepay and retire all of the outstanding notes issued in 2015, and to pay transaction fees. The Company’s new annualized net interest expense is approximately USD 122 million, based on a blended rate of 3.978 percent, on USD 3.1 billion in securitized debt.

Fiscal Year 2019 Targets

As described below, the Company is reiterating and updating certain of its 2019 performance targets.

• The Company continues to expect low-single digit comparable store sales growth for Dunkin’ U.S. and Baskin-Robbins U.S.
• The Company continues to expect to be at the low end of the range of 200 to 250 net new Dunkin’ U.S. units. It expects new Dunkin’ U.S. restaurants opened in 2019 will contribute at least USD 130 million in systemwide sales in 2019.
• The Company continues to expect Baskin-Robbins U.S. franchisees to close approximately ten net units.
• The Company continues to expect low-to-mid single digit percent revenue growth.
• The Company continues to expect low-to-mid single digit percent other revenue growth driven by consumer packaged goods.
• The Company continues to expect ice cream margin dollars to be flat compared to 2018 from a profit dollar standpoint.
• The Company continues to expect net income of equity method investments (JV net income) to be flat compared to 2018.
• The Company continues to expect a mid-single digit percent reduction to general and administrative expenses.
• The Company continues to expect mid-to-high single digit percent operating and adjusted operating income growth.
• The Company continues to expect its full-year effective tax rate to be approximately 28 percent and net interest expense to be approximately USD 122 million. The tax guidance excludes any potential future impact from material excess tax benefits in 2019.
• The Company continues to expect full-year weighted-average shares outstanding of approximately 84 million.
• The Company now expects GAAP diluted earnings per share of USD 2.63 to USD 2.72 (previously USD 2.74 to USD 2.83) and continues to expect diluted adjusted earnings per share of USD 2.94 to USD 2.99.
• The Company continues to expect capital expenditures to be approximately USD 40 million.

Adoption of New Accounting Standard

In February 2016, the Financial Accounting Standards Board issued new guidance for lease accounting, which replaces existing lease accounting guidance. The Company adopted this new guidance in fiscal year 2019 using the modified retrospective transition method, and elected the option to not restate comparative periods in the year of adoption, including amounts as of December 29, 2018 and for the three months ended March 31, 2018 included herein. As a result of adopting this new guidance in the first quarter of fiscal year 2019, the Company recognized operating lease assets and liabilities of USD 380.2 million and USD 426.4 million, respectively, as of March 30, 2019. The adoption of this new guidance also resulted in the recognition of additional rental income and occupancy expenses-franchised restaurants of USD 4.7 million in the first quarter of fiscal year 2019 related to certain lease costs that the Company passes through to franchisees. Additionally, amortization of certain lease intangible assets, previously recorded within amortization of other intangible assets, is now recorded as part of the amortization of operating lease assets within occupancy expenses-franchised restaurants. Amortization of other intangible assets in the first quarter of 2018 includes USD 0.7 millionof amortization expense related to these lease intangible assets. Additional information regarding the Company’s adoption of the new lease accounting guidance is contained in our most recent annual report on Form 10-K, filed with the Securities and Exchange Commission on February 27, 2019.