Shares of Dunkin' Brands Group, Inc. DNKN declined 3.6% yesterday, despite better-than-expected third-quarter 2015 results. Sluggish comparable store sales (comps) in the Dunkin Donuts U.S. as well as international division hurt investors’ confidence.
Earnings and Revenue Discussion
The company's adjusted earnings of 52 cents per share beat the Zacks Consensus Estimate of 51 cents by 1.82% and increased 6.1% year over year from 49 cents, mainly due to higher revenues.
The restaurateur's revenues increased 8.9% year over year to $209.8 million. The improvement was driven primarily by higher royalty income as a result of system-wide sales growth; increase in sales at company-operated restaurants due to higher net company-operated restaurants; increased sales of ice cream and other products, and licensing fees earned from the sale of Dunkin' K-Cup pods. Further, revenues beat the Zacks Consensus Estimate of $204 million by 2.8%.
Inside the Headline Numbers
Dunkin' Brands operates through its Dunkin’ Donuts and Baskin-Robbins brands.
System-wide comps increased 2.8%, comparing unfavorably with 5.7% improvement in the year-ago quarter and 5.2% growth in the prior quarter.
Dunkin’ Donuts
Comps increased 1.1% in the Dunkin Donuts U.S. division, compared with 2% growth in the prior-year period. The sluggish comps were primarily due to a 70 basis points decline in traffic. Further, the declining in-restaurant K-Cup and packaged coffee sales had a negative impact on third-quarter comps. Comps growth in the reported quarter compared unfavorably with 2.9% growth in the prior quarter.
Though comps at Dunkin’ Donuts International division were better than a 2.9% decline in the prior-year quarter and a 0.1% decline in the prior quarter, it just grew 0.8%. Sales growth in the Middle East and Asia. Partially offset by negatively impacted by the Middle East respiratory syndrome coronavirus outbreak (MERS) in South Korea and a decline in sales in South America.
Baskin Robbins
Comps increased 7.5% in the Baskin Robbins U.S. division, better than 6% growth last year, driven primarily by increased traffic. Further, comps growth increased from the prior quarter’s growth of 3.4%.
However, at Baskin Robbins International division, comps declined 2.4%, worse than 1.5% drop in the prior-year quarter. Poor performance in South Korea as a result of the MERS outbreak resulted in the decline. Comps decline was marginally better than a decline of 2.5% in the prior quarter.
Store Update
In the third quarter, Dunkin' Brands franchisees and licensees opened 90 restaurants worldwide. This includes 68 Dunkin' Donuts U.S. locations, 40 Dunkin' Donuts International outlets, 2 store closures under Baskin-Robbins U.S. and 16 under Baskin-Robbins International. The Dunkin' Donuts U.S. net store growth number reflects the previously-announced closing of 31 self-serve coffee stations within Speedway locations. Additionally, Dunkin' Donuts U.S. franchisees remodeled 116 restaurants and Baskin-Robbins U.S. franchisees refurbished 32 outlets during the quarter.
Guidance for 2015
Dunkin’ Brands continues to expect adjusted earnings per share in the range of $1.87–$1.91 in 2015. The company maintained the revenue growth guidance in the range of 6–8% and adjusted operating income growth range of 7–8%.
Dunkin' Donuts continues to expect its U.S. comparable store sales growth in the range of 1% to 3%. However, Baskin-Robbins U.S. comps growth is likely to be within 3% to 5%, up from 1% to 3%.
Our Take
A major share of Dunkin’ Brands revenues comes from the breakfast segment, where companies like McDonald's Corp. MCD, Starbucks Corporation SBUX and Yum! Brands, Inc.’s YUM Taco Bell also operate. Such a crowded breakfast segment hurt Dunkin’ Brands’ top line to some extent. However, the company has been working to expand its doughnut-and-coffee brand in the U.S. and improve international performance.
Also, we are encouraged by the company’s efforts to drive traffic by speeding up service at its shops and redesigning prep stations to cater to the busy morning hours. Further, menu innovation and addition of healthier items will perk up sales in the coming quarters.
Dunkin’ Brands currently has a Zacks Rank #3 (Hold).
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