) reported mixed results in the first fiscal quarter of 2014, as
comparable store sales growth in the U.S. declined to 1.2 %
compared to the 1.7% achieved during the same period last year.
This was mainly due to the adverse weather conditions in North
America. The decline in comparable store sales was more than offset
by a significantly higher 6.2% increase in total revenues to $172
million, due to the increased sales of ice cream products as well
as increased royalty income. Additionally, net income dropped 3.5%
to $23 million, primarily due to a $13.7 million loss on
debt extinguishment and refinancing transactions, as well as an
increase in income tax expenses
In the first quarter, the company initiated two unique
strategies to drive revenue figures. One of the initiatives is the
launch of online cake ordering and enhanced cake designs by
Baskin Robbins in the U.S. The company's main strategic focus
is to drive the cake sales by taking this initiative to a global
level and to mitigate the impact of weather for any such situations
in the future. The other initiative is the launch of Dunkin'
Donuts perks loyalty program, to attract more guests as well as to
maintain the loyalty of existing customers. The company has set up
a target of 2.5 million members in the program by the end of year
The company reaffirmed its performance guidance for the 2014
fiscal year and expects to generate a net income of $1.79
to $1.83 per share, an increase of 17% to 20% over the previous
year figure. ((
, First quarter SEC filing, April 2014))
We have a $48.6 estimate for Dunkin' Brands
, which is approximately 6.5% above the current market
price. In addition to the Dunkin' Donuts brand, the company
also runs the Baskin-Robbins brand.
See full analysis for Dunkin' Brands
Slower Comparable Store Sales Growth
Same-store revenues of Dunkin' Donuts' stores in the U.S.
increased by only 1.2%, much lower than the company's yearly
anticipated target of 3-4%. In 2013, the corresponding figure was
3.4%. Moreover, comparable store sales for Dunkin' Donuts
International declined compared to the positive growth seen
in the prior year period. Comparable sales or same-store
sales is an important measure to gauge a restaurant's performance
since it only includes restaurants that are open for more than a
year and excludes the effect of currency fluctuation.
The prominent factor leading to a decline in the traffic growth
was the severely harsh weather in the North-eastern region of the
U.S.,where most of the Dunkin ' Donuts' restaurants are located.
Moreover, freezing winter presented challenges for ice-cream
industry. It is estimated that weather contributed approximately
200 basis points of negative impact in the first quarter.
Additionally, major markets that saw little to no weather impact
delivered very strong results. The increased average receipt
ticket resulting from customers buying more items per transaction
as well as premium-priced items were the major driving factors
for whatever little growth that has been witnessed.
The introduction of new breakfast items in the menu as well as
the improving weather may push the comparable store sales growth to
around 3.5% for Q2.
As Dunkin' Donuts and Baskin-Robbins are almost entirely
franchised brands, the company generates higher margins than
non-franchised brands. Whenever the comparable store sales' figure
slows down, there is a concern that operating margins might also
get dragged lower. Surprisingly, Dunkin' Donuts U.S managed to
improve operating margins by 190 basis points over the same period
last year to reach 71.7 % in the first quarter. Similarly, Dunkin'
Donuts international witnessed an increase in its operating margin
by 11.4 percentage points over the same period last year to
The company's franchises saw an average EBITDA of around 12%,
which is slightly up from the 2012 figure, as cost of goods sold
have come down. Additionally, the first quarter saw an increase in
the sales of high-margin products, like differentiated beverages
and breakfast sandwiches. This drove profitability across the
system, particularly in the western emerging markets.
Dunkin' Brands Keen On Store Expansion
In the first quarter, Dunkin' Brands added 69 net new
Dunkin' Donuts U.S. locations, which leaves them slightly slow in
pace to achieve the estimated target of 380-410 stores for the
fiscal year 2014. Most of the U.S stores are concentrated in the
eastern part of the U.S and don't have a big presence in the west
part of the U.S. However, the plans to expand in western markets
are on the charts. Adding new assets to the company will help them
generate more revenues for the upcoming quarters.
The company also added 52 net new Baskin-Robbins outlets in
international locations, 1 net new Baskin-Robbins outlet in the
U.S., and 26 net closures for Dunkin' Donuts International
stores. Comparable store sales growth for Baskin Robbins
International is largely driven by the performance of the
stores in Japan,and similarly, for Dunkin' Donuts
International, the sales are highly affected by the company's
performance in Korea. The company has decided to target high GDP
countries, mainly due to the brands' tremendous reception in
Germany in the first quarter.
By region, 30% of the first quarter's net development was
in the core market, 32% in established markets, 22% in emerging
markets, and 16% in western markets. Furthermore, Dunkin'
Donuts U.S. franchises remodeled 94 restaurants during the first
The food and beverage industry usually witnesses a slow pace in
store expansions in the U.S. during the first trimester of the
calender year. As is evident from the seasonality trend, the
company gains momentum in later half of the year. So it is expected
to see a total of around 150 Dunkin' Donuts U.S restaurants set up
by the end of Q2. The company expects to open its first traditional
Dunkin' Donuts restaurant in California by the end of the fourth
fiscal quarter of 2014, ahead of its original expected date. The
company is keen to expand, owing to the fact that the new
store openings delivered 25% unlevered cash and cash returns to its
franchises and this is the fourth year in a row that new stores
achieved this target. In the long term, the company's plan is to
double the count of U.S, stores to 15,000 in the next 18-20
The economic uncertainty, increased competition in breakfast as
well as coffee categories and the legislative impact from issues
such as minimum wage and healthcare are the major issues faced by
quick service restaurants in this industry. Dunkin' Brands, and
every other major food chains for that matter, are looking forward
to revamping their breakfast menu for the upcoming quarters. The
company has around 9% share in the breakfast market, much behind
the McDonalds Corp. (NYSE : MCD). Over the last couple of years,
Dunkin' Brands have gained reputation, due to their operational
quality and consistent effort towards customer satisfaction.
The introduction of more drive-through locations, coupled with
breakfast-menu optimization will aid the company to grab larger pie
of the market share in the future and to widen their store
revenues. The company's newly launched initiatives and their
expansion in developing countries will certainly widen the
company's operating margins in Q2.
See more at Trefis
|View interactive institutional research
(Powered by Trefis)
Get Trefis Technology