Dunkin’ Brands Reports Second Quarter 2019 Results

Canton / MA. (db) Dunkin’ Brands Group Inc., parent company of Dunkin’ Donuts and Baskin-Robbins, reported results for the second quarter ended June 29, 2019. «Continuing the momentum established earlier in the year, our second quarter performance was highlighted by double-digit sales growth of espresso, our national value platforms, and terrific consumer reception to our latest menu innovation, our better-for-you Power Platform. We’re attracting a new consumer with both espresso and our Power Platform and will continue to bring more on-trend innovation to fuel guests throughout the day,» said David Hoffmann, Dunkin’ Brands Chief Executive Officer and President of Dunkin’ U.S.

«Additionally, as a result of a highly-collaborative process with our franchisees, the Next Generation restaurant design, with nearly 300 already in the marketplace, is now the standard image for all new builds and remodels. This new store design takes our commitment to serving «great coffee, fast» to the next level through an optimized mobile order pick-up experience, iced beverage tap system, and drive-thru enhancements that make it even easier to use Dunkin’ on-the-go. We are pleased with the progress we are making against our Dunkin’ U.S. Blueprint for Growth, largely driven by our strong franchisee/franchisor relationship, which continues to be our number one asset.»

«The investment our system made in espresso equipment and training in 2018 continued to deliver strong returns. Espresso, a critical component of our beverage-led strategy, is now our fastest growing category with sales for the second quarter up more than 40 percent versus the prior year period,» said Kate Jaspon, Chief Financial Officer, Dunkin’ Brands Group. «The introduction of Dunkin’ Handcrafted Signature Lattes was a key contributor to total espresso growth and helped drive our second quarter performance, including 1.7 percent growth in Dunkin’ U.S. comparable store sales, and nearly 8 percent operating income growth for Dunkin’ Brands.»

Second 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	2019-06-29			2018-06-30			USD | #		%
Financial data:
Revenues	$	359.3		350.6			8.7		2.5	%
Operating income	122.7			113.9			8.8		7.7	%
Operating income margin	34.1		%	32.5	%
Adjusted operating income(1)	$	127.3		119.8			7.5		6.2	%
Adjusted operating income margin(1)	35.4		%	34.2	%
Net income	$	59.6		60.5			(0.9)		(1.4)	%
Adjusted net income(1)	72.4			64.8			7.6		11.7	%
Earnings per share:
Common-basic	0.72			0.73			(0.01)		(1.4)	%
Common-diluted	0.71			0.72			(0.01)		(1.4)	%
Diluted adjusted earnings per share(1)	0.86			0.77			0.09		11.7	%
Weighted-average number of common shares – diluted (in millions)	83.7			84.1			(0.4)		(0.5)	%
Systemwide sales(2)	$	3,144.6		3,030.0			114.6		3.8	%
Comparable store sales growth (decline):
Dunkin’ U.S.	1.7		%	1.4	%
BR U.S.	(1.4)		%	(0.4)	%
Dunkin’ International	5.6		%	4.0	%
BR International	3.2		%	(2.5)	%
Development data:
Consolidated global net POD development	109			96			13		13.5	%
Dunkin’ global PODs at period end	12,957			12,676			281		2.2	%
BR global PODs at period end	8,072			8,011			61		0.8	%
Consolidated global PODs at period end	21,029			20,687			342		1.7	%

(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 3.8 percent in the second 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 1.7 percent in the second 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 cold brew beverages, as well as continued adoption of our Go2s value platform, which had an average ticket of nearly USD 9.

Baskin-Robbins U.S. comparable store sales declined 1.4 percent in the second quarter as a decrease in traffic was partially offset by an increase in average ticket. The increase in average ticket was driven by strategic pricing increases.

In the second quarter, Dunkin’ Brands franchisees and licensees opened 109 net new restaurants globally. This included 46 net new Dunkin’ U.S. locations, 43 Baskin-Robbins International locations, 11 Dunkin’ International locations, and 9 Baskin-Robbins U.S. locations. Additionally, Dunkin’ U.S. franchisees remodeled 30 restaurants and Baskin-Robbins U.S. franchisees remodeled 12 restaurants during the quarter.

Revenues for the second quarter increased USD 8.7 million, or 2.5 percent, compared to the prior year period due primarily to an increase in royalty income as a result of Dunkin’ U.S. systemwide sales growth, as well as an increase in rental income, offset by a decrease in advertising fees and related income. The increase in rental income resulted from the adoption of the 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. See “Adoption of New Accounting Standard” for further detail. The decrease in advertising fees and related income was due primarily to a decrease in gift card program service fees, offset by an increase in advertising fees as a result of systemwide sales growth.

Operating income and adjusted operating income for the second quarter increased USD 8.8 million, or 7.7 percent, and USD 7.5 million, or 6.2 percent, respectively, from the prior year period primarily as a result of the increase in royalty income, as well as other operating income in the current quarter compared to other operating loss in the prior year period.

Net income for the second quarter decreased by USD 0.9 million, or 1.4 percent, compared to the prior year period primarily as a result of a USD 13.1 million loss on debt extinguishment recorded in the current period, offset by the increase in operating income, an increase in interest income earned on our cash balances, and a decrease in income tax expense as a result of the decrease in income in the current period. The loss on debt extinguishment was due to the write-off of debt issuance costs in conjunction with a refinancing transaction completed during the second quarter.

Adjusted net income for the second quarter increased by USD 7.6 million, or 11.7 percent, compared to the prior year period primarily as a result of the increases in adjusted operating income and interest income, offset by an increase in income tax expense.

Diluted earnings per share for the second quarter decreased by 1.4 percent to USD 0.71 compared to the prior year period as a result of the decrease in net income. Diluted adjusted earnings per share increased by 11.7 percent to USD 0.86 compared to the prior year period as a result of the increase in adjusted net income. 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 0.02 for each of the second quarters of fiscal years 2019 and 2018.

Company Updates

• The Company announced that the Board of Directors declared a cash dividend of USD 0.3750 per share, payable on September 12, 2019, to shareholders of record as of the close of business on September 3, 2019.
• During the second quarter, the Company repurchased 132,899 shares of common stock in the open market at a weighted-average cost per share of USD 75.25. The Company’s shares outstanding as of June 29, 2019 were 82,755,494.

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 now expects flat to slightly negative comparable store sales growth for 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 now expects its full-year effective tax rate to be approximately 27 percent (previously approximately 28 percent) and now expects net interest expense to be approximately USD 119 million (previously USD 122 million). The tax guidance excludes any potential future impact from material excess tax benefits in the second half of 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 2.71 to USD 2.78 (previously USD 2.63 to USD 2.72) and diluted adjusted earnings per share of USD 3.02 to USD 3.05 (previously 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 and six months ended June 30, 2018. 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 388.8 million and USD 435.1 million, respectively, as of the first day of fiscal year 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 and USD 9.4 million for the three and six months ended June 29, 2019, respectively, 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 for the three and six months ended June 30, 2018 includes USD 0.6 million and USD 1.4 million, respectively, of 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 Form 10-Q, filed with the Securities and Exchange Commission on May 8, 2019.