Dunkin’ Brands Reports First Quarter 2015 Results

CANTON, Mass., April 23, 2015 (hospitalitybusinessnews.com) — Dunkin‘ Brands Group, Inc., the parent company of Dunkin‘ Donuts (DD) and Baskin-Robbins (BR), today reported results for the first quarter ended March 28, 2015.

“This was a really strong quarter and we are delighted with the performance of our product and marketing programs given the severe weather that we experienced in many of the markets where our restaurants are located.  Our Dunkin’ Donuts U.S. franchisees got the year off to a strong start by demonstrating great flexibility and resiliency in dealing with the challenging circumstances,” said Dunkin‘ Brands Chairman and Chief Executive Officer Nigel Travis. “Enhancing the relevance and differentiation of our brands around the world with a focus on beverages is a key priority for Dunkin‘ Brands.  We recently took another major step forward with this priority with our agreement with The J.M. Smucker Company and Keurig to make Dunkin‘ K-Cup® packs available at thousands of additional retail outlets nationwide, as well as online. We expect that this will not only increase the overall consumption of Dunkin‘ Donuts coffee but it will help us continue to build our brand relevance with new and existing customers as we expand our restaurant footprint across the U.S.”

“We’re proud to report another year of compelling returns for the cohort of new restaurant openings in 2014. On average restaurants opened last year are projected to exceed 20 percent cash-on-cash returns to the franchisee, which is particularly impressive considering headwinds from a challenging sales environment and rising commodity and labor costs,” said Paul Carbone, Chief Financial Officer, Dunkin‘ Brands Group, Inc.  “Restaurants in new markets such as Colorado and California are seeing both strong cash-on-cash returns as well as higher-than-expected beverage sales, a key driver of restaurant profitability.”

 

FIRST QUARTER 2015 KEY FINANCIAL HIGHLIGHTS

($ in millions, except per share data)

Three months ended

Increase (Decrease)

Amounts and percentages may not recalculate due to rounding

March 28,
2015

March 29,
2014

$ / #

%

Franchisee reported sales

$

2,311.1

2,175.5

135.6

6.2

%

Systemwide sales growth

6.2

%

4.3

%

Comparable store sales growth (decline):

DD U.S. comparable store sales growth

2.7

%

1.2

%

BR U.S. comparable store sales growth

8.0

%

0.5

%

DD International comparable store sales growth (decline)

1.7

%

(2.4)

%

BR International comparable store sales growth

0.3

%

1.4

%

Development data:

Consolidated global net POD development

79

96

(17)

(17.7)

%

DD global PODs at period end

11,367

10,901

466

4.3

%

BR global PODs at period end

7,574

7,353

221

3.0

%

Consolidated global PODs at period end

18,941

18,254

687

3.8

%

Financial data:

Revenues

$

185.9

171.9

14.0

8.1

%

Operating income

83.7

69.1

14.6

21.2

%

Operating income margin

45.0

%

40.2

%

Adjusted operating income1

$

87.6

75.6

12.0

15.8

%

Adjusted operating income margin1

47.1

%

44.0

%

Net income

$

25.6

23.0

2.7

11.7

%

Adjusted net income1

40.3

35.6

4.7

13.1

%

Earnings per share:

Common–basic

0.26

0.22

0.04

18.2

%

Common–diluted

0.25

0.21

0.04

19.0

%

Diluted adjusted earnings per share1

0.40

0.33

0.07

21.2

%

Weighted average number of common shares – diluted (in millions)

101.5

108.0

(6.5)

(6.0)

%

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 other non-recurring, infrequent, or unusual charges, 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. Please refer to “Non-GAAP Measures and Statistical Data” and “Dunkin’ Brands Group, Inc. Non-GAAP Reconciliations” for further detail.

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 54 weeks or more).

Dunkin‘ Donuts U.S. comparable store sales growth in the first quarter was driven by increased average ticket and higher traffic resulting from our focus on operational excellence and product and marketing innovation. Product and marketing innovations resulted in strong beverage sales growth, led by Iced Coffee, Dark Roast Coffee and the continued acceleration of sales of Hot and Iced Espresso beverages; continued breakfast sandwich momentum across core and limited time offer sandwiches including the addition of Steak as a permanent menu item; and donut category growth driven by the Croissant Donut and the return of the heart-shaped donut limited time offer. The K-Cup and packaged coffee categories had a significant negative impact on first quarter comparable store sales. Traffic growth, while positive, was significantly disrupted by severe weather in the first quarter. We estimate weather resulted in approximately 60 basis points of negative impact in the quarter. On a two-year comparable store sales basis we estimate that weather contributed approximately 260 basis points of negative impact.

Baskin-Robbins U.S. comparable store sales growth was driven by increased sales of Cups & Cones, Desserts, Beverages, and Sundaes as a result of news on flavors and increased sales of cakes, stimulated by online cake ordering.

In the first quarter, Dunkin‘ Brands franchisees and licensees opened 79 net new restaurants around the globe. This included 78 net new Dunkin‘ Donuts U.S. locations, 22 net new Baskin-Robbins International locations, 21 net closures for Dunkin‘ Donuts International, and zero net new Baskin-Robbins U.S. locations. Additionally, Dunkin‘ Donuts U.S. franchisees remodeled 95 restaurants during the quarter.

Revenues for the first quarter increased 8.1 percent compared to the prior year period due primarily to revenue recognized in connection with the Dunkin‘ K-Cup® pack licensing agreement and increased royalty income as a result of systemwide sales growth, offset by a decrease in sales of ice cream products.

Operating income and adjusted operating income for the first quarter increased $14.6 million, or 21.2 percent, and $12.0 million, or 15.8 percent, respectively, from the prior year period primarily as a result of the revenue recognized in connection with the Dunkin‘ K-Cup® pack licensing agreement and increased royalty income. The increases in revenues were offset by a decrease in ice cream margin and, in comparison to the prior period, were also negatively impacted by gains recognized in connection with the sale of real estate. Additionally, operating income for the first quarter was favorably impacted by a reduction in legal reserves for the Bertico litigation and related matters of $2.8 million.

Net income for the first quarter increased by $2.7 million, or 11.7 percent, compared to the prior year period primarily as a result of the $14.6 million increase in operating income, offset by a $6.8 million increase in loss on debt extinguishment and refinancing transactions and a $4.2 million increase in interest expense driven by additional borrowings incurred in conjunction with a refinancing transaction completed during the first quarter.

Adjusted net income for the first quarter increased by $4.7 million, or 13.1 percent, compared to the first quarter of 2014 primarily as a result of the $12.0 million increase in adjusted operating income, offset by increases in interest expense and income tax expense.

Diluted adjusted earnings per share increased by 21.2 percent to $0.40 for the first quarter of 2015 compared to the prior year period as a result of the increase in adjusted net income and a decrease in shares outstanding. 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. We estimate that advance payments related to the Dunkin‘ K-Cup® pack licensing deal contributed $0.04 to diluted adjusted earnings per share in the first quarter.

 

FIRST QUARTER 2015 SEGMENT RESULTS

Amounts and percentages may not recalculate due to rounding

Three months ended

Increase (Decrease)

Dunkin’ Donuts U.S.

March 28,
2015

March 29,
2014

$ / #

%

($ in thousands except as otherwise noted)

Comparable store sales growth

2.7

%

1.2

%

Systemwide sales growth

8.0

%

5.8

%

Franchisee reported sales (in millions)

$

1,744.4

1,614.8

129.6

8.0

%

Revenues:

Royalty income

$

95,007

87,637

7,370

8.4

%

Franchise fees

8,264

7,000

1,264

18.1

%

Rental income

22,681

21,446

1,235

5.8

%

Sales at company-owned restaurants

6,558

6,316

242

3.8

%

Other revenues

1,357

2,820

(1,463)

(51.9)

%

Total revenues

$

133,867

125,219

8,648

6.9

%

Segment profit

$

93,406

89,832

3,574

4.0

%

Points of distribution

8,160

7,746

414

5.3

%

Gross openings

101

87

14

16.1

%

Net openings

78

69

9

13.0

%

Dunkin‘ Donuts U.S. first quarter revenues of $133.9 million represented an increase of 6.9 percent year-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 increases in franchise fees and rental income. The increase in franchise fees was driven by additional gross openings while the increase in rental income was due primarily to an increase in average rent per lease and an increase in the number of leases. These increases in revenues were offset by a decrease in other revenues due primarily to a decrease in gains from refranchising transactions.

Dunkin‘ Donuts U.S. segment profit in the first quarter increased $3.6 million over the prior year period to $93.4 million, which was driven primarily by revenue growth, offset by a decrease in other operating revenue as the prior year period included income recognized in connection with the sale of real estate.

 

Amounts and percentages may not recalculate due to rounding

Three months ended

Increase (Decrease)

Dunkin’ Donuts International

March 28,
2015

March 29,
2014

$ / #

%

($ in thousands except as otherwise noted)

Comparable store sales growth (decline)

1.7

%

(2.4)

%

Systemwide sales growth (decline)

(0.3)

%

0.4

%

Franchisee reported sales (in millions)

$

168.2

168.7

(0.5)

(0.3)

%

Revenues:

Royalty income

$

3,791

3,695

96

2.6

%

Franchise fees

523

559

(36)

(6.4)

%

Rental income

8

35

(27)

(77.1)

%

Other revenues

2,256

(4)

2,260

n/m

Total revenues

$

6,578

4,285

2,293

53.5

%

Segment profit

$

4,300

2,857

1,443

50.5

%

Points of distribution

3,207

3,155

52

1.6

%

Gross openings

83

66

17

25.8

%

Net closings

(21)

(26)

5

19.2

%

Dunkin‘ Donuts International first quarter systemwide sales decreased 0.3 percent from the prior year period. A decline in sales in South Korea was offset by sales growth in Asia and the Middle East. Sales in Europe, South America, and South Korea were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 5 percent.

Dunkin‘ Donuts International first quarter revenues of $6.6 million represented an increase of 53.5% over the prior period. The increase in revenues was primarily a result of a settlement reached with a master licensee resulting in the recovery of prior period royalty income and franchise fees.

Segment profit for Dunkin‘ Donuts International increased $1.4 million to $4.3 million in the first quarter primarily as a result revenue growth offset by increases in general and administrative expenses.

Amounts and percentages may not recalculate due to rounding

Three months ended

Increase (Decrease)

Baskin-Robbins U.S.

March 28,
2015

March 29,
2014

$ / #

%

($ in thousands except as otherwise noted)

Comparable store sales growth

8.0

%

0.5

%

Systemwide sales growth

8.9

%

2.2

%

Franchisee reported sales (in millions)

$

119.7

109.8

9.8

8.9

%

Revenues:

Royalty income

$

5,916

5,524

392

7.1

%

Franchise fees

220

175

45

25.7

%

Rental income

799

826

(27)

(3.3)

%

Sales of ice cream products

882

936

(54)

(5.8)

%

Other revenues

2,055

1,660

395

23.8

%

Total revenues

$

9,872

9,121

751

8.2

%

Segment profit

$

5,969

4,868

1,101

22.6

%

Points of distribution

2,484

2,468

16

0.6

%

Gross openings

13

18

(5)

(27.8)

%

Net openings

1

(1)

(100.0)

%

Baskin-Robbins U.S. first quarter revenue increased 8.2 percent from the prior year period to $9.9 million due primarily to increased royalty income, as well as other revenues driven by an increase in licensing income from the sale of ice cream.

Segment profit for Baskin-Robbins U.S. increased $1.1 million in the first quarter, or 22.6 percent, over the prior year period primarily as a result of the increase in revenues, as well as a decrease in general and administrative expenses primarily due to higher expenses that were incurred in the prior year period related to advertising and other brand-building activities.

Amounts and percentages may not recalculate due to rounding

Three months ended

Increase (Decrease)

Baskin-Robbins International

March 28,
2015

March 29,
2014

$ / #

%

($ in thousands except as otherwise noted)

Comparable store sales growth

0.3

%

1.4

%

Systemwide sales decline

(1.2)

%

(1.0)

%

Franchisee reported sales (in millions)

$

278.8

282.1

(3.3)

(1.2)

%

Revenues:

Royalty income

$

1,407

1,743

(336)

(19.3)

%

Franchise fees

197

379

(182)

(48.0)

%

Rental income

118

118

%

Sales of ice cream products

21,660

27,678

(6,018)

(21.7)

%

Other revenues

186

93

93

100.0

%

Total revenues

$

23,568

30,011

(6,443)

(21.5)

%

Segment profit

$

7,971

9,499

(1,528)

(16.1)

%

Points of distribution

5,090

4,885

205

4.2

%

Gross openings

101

95

6

6.3

%

Net openings

22

52

(30)

(57.7)

%

Baskin-Robbins International systemwide sales decreased 1.2 percent in the first quarter compared to the prior year period driven by unfavorable foreign exchange in Japan, and sales declines in Europe, offset by increases in sales in the Middle East and South Korea. On a constant currency basis, systemwide sales increased by approximately 5 percent.

Baskin-Robbins International first quarter revenues decreased 21.5 percent over the prior year period to $23.6 million due primarily to decreases in sales of ice cream products in the Middle East and Australia driven primarily by timing of orders, as well as decreases in royalty income and franchise fees.

First quarter segment profit decreased 16.1 percent over the prior year period to $8.0 million, as a result of a decrease in net margin on ice cream driven by the decrease in sales, as well as the decreases in royalty income and franchise fees, offset by reserves on outstanding receivables recorded in the prior year period.

COMPANY UPDATES

  • The Company today announced that the Board of Directors declared a second quarter cash dividend of $0.265 per share, payable on June 17, 2015 to shareholders of record as of the close of business on June 9, 2015.
  • The Company today announced that John Costello, President, Global Marketing & Innovation, has decided to retire in the middle of 2016. As of May 1, 2015, he will transition to a new, more strategic role focused largely on the evolution of the Company’s brands with special emphasis on Dunkin‘ Brands’ international businesses. The Company will not be replacing Mr. Costello but will instead promote members of the senior marketing leadership team to assume his responsibilities. Scott Hudler, Vice President of Global Consumer Engagement, will begin reporting directly to Nigel Travis and will continue to lead Dunkin‘ Donuts U.S. advertising, media strategy and in-store merchandising support. He will also continue to be responsible for Dunkin‘ Donuts US, Dunkin‘ Donuts International and Baskin-Robbins International advertising and digital media strategies, as well as the Company’s loyalty programs. Chris Fuqua, is being named Vice President, Dunkin‘ Donuts Brand Marketing & Global Consumer Insights & Product Innovation. In addition to overseeing Dunkin‘ Donuts U.S. marketing programs, he will now assume responsibility for Dunkin‘ Donuts U.S. field marketing, and product innovation and consumer insights for Dunkin‘ Donuts and Baskin-Robbins on a global basis.
  • The Company announced on March 24, 2015 that Jack Clare was promoted to the newly created position of Chief Information and Strategy Officer. Mr. Clare, who has served as the Company’s CIO for the past three years, is now a member of the Dunkin‘ Brands Leadership Team and continues to report to Paul Carbone, CFO.
  • The Company announced on January 8, 2015 that it entered into a long-term master franchise agreement in which Golden Cup Pte. Ltd., a joint venture between Jollibee Worldwide Pte Ltd. and Jasmine Asset Holding Ltd., a wholly owned subsidiary of RRJ Capital Master Fund II, L.P., will serve as the franchisee and plans to open and operate more than 1,400 Dunkin‘ Donuts restaurants across China over the next 20 years. This represents the largest development agreement in the Company’s history. The opening of the first restaurant is expected in the fourth quarter of 2015.
  • The Company announced on January 26, 2015 that it completed a refinancing of its senior secured credit facility with the placement by one of its subsidiaries of a $2.6 billion securitized debt facility, resulting in a weighted-average effective interest rate of 3.765 percent per annum, payable quarterly. As a result, the Company expects its 2015 annual interest expense to be approximately $96.5 million.
  • The Company announced on January 26, 2015 that the Board of Directors authorized a new program to repurchase up to an aggregate of $700 million of its outstanding common stock over the next two years. During the first quarter, the Company repurchased approximately 6,950,000 shares of its common stock under the $400 million accelerated share repurchase agreement it entered into in February 2015, which is expected to be completed in June 2015. Additionally, the Company repurchased a total of approximately 1.4 million shares of common stock at a weighted average cost per share of $47.14 from existing stockholders in the open market. The Company’s shares outstanding as of March 28, 2015 were 96,464,574.
  • During the first quarter, the Quebec Court of Appeals (Montreal) ruled to reduce the damages assessed against the Company in relation to the Bertico litigation from approximately C$16.4 million to approximately C$10.9 million, plus costs and interest. As a result, the Company reduced its aggregate legal reserves for the Bertico litigation and related matters by approximately $2.8 million to $19.6 million as of March 28, 2015.

FISCAL YEAR 2015 TARGETS

As described below, the Company is reiterating and updating certain targets regarding its 2015 expectations.

  • The Company continues to expect Dunkin‘ Donuts U.S. comparable store sales growth of 1 to 3 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 410 and 440 net new restaurants, for greater than 5 percent net unit growth, and expects Baskin-Robbins U.S. will add between 5 and 10 net new restaurants.
  • Internationally, the Company continues to target opening 200 to 300 net new restaurants across the two brands. It continues to expect net income of equity method investments to be approximately $13 million.
  • Globally, the Company continues to expect to open between 615 and 750 net new restaurants.
  • The Company now expects revenue growth of between 6 and 8 percent (previously it expected 5 to 7 percent revenue growth); adjusted operating income growth of between 7 and 8 percent (previously it expected 6 to 8 percent adjusted operating income growth); and adjusted earnings per share of $1.87 to $1.91 (previously it expected adjusted earnings per share of $1.83 to $1.87). The Company is updating these targets to reflect the financial impact of the agreement with The J.M. Smucker Company and Keurig to make Dunkin‘ K-Cup® packs available at additional retail outlets nationwide net of the financial impact of the profit-sharing agreement it reached with Dunkin‘ Donuts U.S. franchisees.

 

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

Three months ended

March 28,
2015

March 29,
2014

Revenues:

Franchise fees and royalty income

$

115,325

106,712

Rental income

23,627

22,447

Sales of ice cream products

22,591

28,671

Sales at company-owned restaurants

6,558

6,316

Other revenues

17,804

7,802

Total revenues

185,905

171,948

Operating costs and expenses:

Occupancy expenses—franchised restaurants

13,518

13,012

Cost of ice cream products

14,879

19,748

Company-owned restaurant expenses

6,858

6,363

General and administrative expenses, net

58,307

59,714

Depreciation

5,110

4,913

Amortization of other intangible assets

6,200

6,405

Long-lived asset impairment charges

264

123

Total operating costs and expenses

105,136

110,278

Net income of equity method investments

2,947

3,100

Other operating income, net

24

4,327

Operating income

83,740

69,097

Other income (expense):

Interest income

122

69

Interest expense

(22,164)

(17,941)

Loss on debt extinguishment and refinancing transactions

(20,554)

(13,735)

Other gains (losses), net

(545)

27

Total other expense

(43,141)

(31,580)

Income before income taxes

40,599

37,517

Provision for income taxes

15,174

14,689

Net income including noncontrolling interests

25,425

22,828

Net loss attributable to noncontrolling interests

(206)

(128)

Net income attributable to Dunkin’ Brands

$

25,631

22,956

Earnings per share—basic

$

0.26

0.22

Earnings per share—diluted

0.25

0.21

 

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

March 28,
2015

December 27,
2014

Assets

Current assets:

Cash and cash equivalents

$

340,393

208,080

Restricted cash

72,004

Accounts, notes, and other receivables, net

72,685

105,060

Other current assets

126,497

129,478

Total current assets

611,579

442,618

Property and equipment, net

181,069

182,061

Equity method investments

162,410

164,493

Goodwill and other intangible assets, net

2,311,942

2,317,167

Other assets

93,057

71,044

Total assets

$

3,360,057

3,177,383

Liabilities, Redeemable Noncontrolling Interests, and Stockholders’ Equity

Current liabilities:

Current portion of long-term debt

$

25,253

3,852

Accounts payable

11,711

13,814

Other current liabilities

295,963

337,853

Total current liabilities

332,927

355,519

Long-term debt, net

2,476,079

1,807,081

Deferred income taxes, net

534,032

540,339

Other long-term liabilities

101,877

99,494

Total long-term liabilities

3,111,988

2,446,914

Redeemable noncontrolling interests

6,785

6,991

Total stockholders’ equity (deficit)

(91,643)

367,959

Total liabilities, redeemable noncontrolling interests, and stockholders’ equity

$

3,360,057

3,177,383

 

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Three months ended

March 28,
2015

March 29,
2014

Net cash provided by (used in) operating activities

$

(8,980)

1,613

Cash flows from investing activities:

Additions to property and equipment

(6,233)

(4,436)

Proceeds from sale of real estate

6,937

Other, net

(1,499)

(1,418)

Net cash provided by (used in) investing activities

(7,732)

1,083

Cash flows from financing activities:

Proceeds from issuance of long-term debt

2,500,000

Repayment of long-term debt

(1,818,971)

(10,000)

Payment of deferred financing and other debt-related costs

(40,953)

(8,977)

Dividends paid on common stock

(25,688)

(24,520)

Repurchases of common stock, including accelerated share repurchase

(459,821)

(22,040)

Exercise of stock options

1,209

3,411

Change in restricted cash

(6,900)

Other, net

538

4,897

Net cash provided by (used in) financing activities

149,414

(57,229)

Effect of exchange rates on cash and cash equivalents

(389)

20

Increase (decrease) in cash and cash equivalents

132,313

(54,513)

Cash and cash equivalents, beginning of period

208,080

256,933

Cash and cash equivalents, end of period

$

340,393

202,420

 

DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES

Non-GAAP Reconciliations

(In thousands, except per share data)

(Unaudited)

Three months ended

March 28,
2015

March 29,
2014

Operating income

$

83,740

69,097

Operating income margin

45.0

%

40.2

%

Adjustments:

Amortization of other intangible assets

$

6,200

6,405

Long-lived asset impairment charges

264

123

Transaction-related costs(a)

154

Bertico and related litigation(b)

(2,753)

Adjusted operating income

$

87,605

75,625

Adjusted operating income margin

47.1

%

44.0

%

Net income attributable to Dunkin’ Brands

$

25,631

22,956

Adjustments:

Amortization of other intangible assets

6,200

6,405

Long-lived asset impairment charges

264

123

Transaction-related costs(a)

154

Bertico and related litigation(b)

(2,753)

Loss on debt extinguishment and refinancing transactions

20,554

13,735

Tax impact of adjustments(c)

(9,768)

(8,105)

State tax apportionment(d)

514

Adjusted net income

$

40,282

35,628

Adjusted net income

$

40,282

35,628

Weighted average number of common shares – diluted

101,502,438

107,980,160

Diluted adjusted earnings per share

$

0.40

0.33

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