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Dunkin' Brands Group Inc. (NASDAQ:DNKN)
Q4 2018 Earnings Conference Call
Feb. 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance, please press *0 on your touchtone telephone, and as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Stacey Caravella, Senior Director of Investor Relations. Please go ahead.

Stacey Caravella -- Senior Director, Investor Relations

Thank you, operator, and good morning, everyone. Speaking on today's call will be Dunkin' Brands Chief Executive Officer Dave Hoffmann and Dunkin' Brands Chief Financial Officer Kate Jaspon. Today's call is being webcast live and recorded for replay. Before I turn the call over today, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our website, investor.dunkinbrands.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Lastly, we're providing tentative dates for the release of our quarterly earnings results in 2019. We will release Q1 earnings results on May second, Q2 on August first, and Q3 on October 31st. Now, I'll turn the call over to Dave.

David Hoffmann -- Chief Executive Officer and President

Thanks, Stacey, and good morning, everyone. 2018 was a foundational year for both Dunkin' and Baskin Robbins. Together with our franchisee and licensee partners, we achieved many significant milestones that will unlock healthy growth and modernize our brands for the next generation of consumers. While our journey toward transformation is all about deliberate sequencing of key initiatives, we had an incredibly productive 2018, and I remain confident in our ability to deliver long-term growth.

Progress last year included a comprehensive menu simplification effort for Dunkin', transformational next-generation restaurant designs for both brands globally, investing alongside our franchisees at an unprecedented level into the Dunkin' U.S. business, securing our digital future through our card-free acquisition, our first foray into national value with the launch of the Dunkin' Go2s platform, hiring new creative agencies and unveiling our new Dunkin' brand identity, an entirely new handcrafted espresso experience in more than 9,000 Dunkin' U.S. restaurants, $900 million plus in retail sales of consumer-packaged goods, and holding our first global franchisee and supplier convention in nearly a decade, all while transitioning our great leadership team. I am incredibly proud of all we accomplished in 2018 and the foundation we laid to make 2019 and beyond a success.

From a financial standpoint, we achieved nearly 4% revenue growth, nearly 6% adjusted operating income growth, and $2.90 of adjusted earnings per share. Our franchisees opened 392 net new restaurants around the globe, including 278 Dunkin' locations in the U.S., 90% of which were outside of our core Northeast markets. We more than doubled our initial target of 50 next-generation Dunkin' restaurants, ending the year with 130 new and remodeled next-gens across the country. We also recently unveiled our first Moments restaurant, the new store design for Baskin Robbins U.S., in Fresno, California. And, outside of the U.S., our franchisees and licensees built or remodeled more than 200 Dunkin' locations across our international markets in the new coffee-forward image as well.

As we continue to transform our brands, the collaboration we have with our franchisees is our No. 1 asset. We are iterating together to produce customer-notable change in our restaurants that drives meaningful top- and bottom-line results. In fact, QSR magazine named Dunkin' the most transformational brand of 2018.

Looking first to our Dunkin' U.S. business, Q4 systemwide sales grew more than 3% and comparable store sales were flat. Although comparable store sales were disappointing, overall sales accelerated out of the quarter. Throughout the early fall season, we were ramping up for the biggest product relaunch in our recent brand history, espresso. To hit our end-of-year timing, we installed new machines in 9,000-plus restaurants at a rapid pace. We trained more than 100,000 crew members on both the equipment and the new product builds. We developed a robust marketing plan that covered everything from new recipes to a new cup design. We intentionally kept the marketing calendar light during installations to ensure we were ready for Thanksgiving week, when espresso national media hit the airwaves.

Let me be extremely clear. The launch of new, handcrafted espresso beverages at Dunkin' was critical enough to the success of the blueprint to warrant nearly all of our attention in Q4. We believe having a compelling espresso offering sets us up for long-term success by strengthening our beverage portfolio.

Since launching in late November, espresso has driven incremental rooftop sales and traffic and grown 200 basis points as a percent of overall sales mix. Espresso drives a premium basket compared to drip coffee transactions and skews toward younger consumers. The $2.00 p.m. break promotion is building great traction and is improving to be a strong platform to drive the afternoon business. We've also seen no material impact to speed of service in the restaurants, which has been critical.

Espresso is a cornerstone of the blueprint for growth, and focusing wholeheartedly on it in Q4 was a deliberate investment in our future as a beverage-led, on-the-go brand. This strategy may have impacted short-term sales, but we new it was the right thing to do for our franchisees, crews, and our customers.

Introducing quality products like espresso is a key element of the Dunkin' U.S. blueprint for growth. The blueprint is built on four key pillars: Menu innovation, restaurant excellence, brand relevance, and unparalleled convenience. A year ago, we simplified our menu. We called it "short-term pain for long-term gain," and it enabled us to make room for successful product innovation on platforms such as espresso, frozen beverages, afternoon snacking, and now in Q1, the better-for-you power breakfast sandwich.

However, we know that menu innovation on its own isn't enough to make us successful. We have to combine menu innovation with value in order to drive traffic into our restaurants. As I said earlier, collaboration with our franchisees is our biggest asset, and we are on a journey with them to formulate our national value strategy. Value at Dunkin' is about getting the construct right, not only for our consumers, but for our franchisees as well. In Q2, we ran our first national value platform Go2s on our favorite breakfast sandwiches, and it was hugely successful at driving sales and transactions. We went off of it in Q3 to test different national value iterations, but beginning in January, we were back with a similar Go2s platform as well as an afternoon beverage break offer. We clearly learned that compelling value programs drive trial and traffic, and we are focused on doing more of these in 2019.

The second pillar of the blueprint is restaurant excellence. Last year, we embarked on a significant undertaking to simplify our menu and improve speed and order accuracy. Our efforts produced encouraging results, with guest feedback indicating improvements in speed, order accuracy, and overall satisfaction, and many of our markets posted the lowest number of consumer complaints in several years.

Menu simplification wasn't just about providing a better experience for our guests. It was a direct investment in our people working behind the counter. In 2019, we will continue to focus on simplifying restaurant operations with new equipment and technology to make Dunkin' a great place to work and help our franchisees run more efficient and profitable restaurants.

The third pillar of our blueprint is a focus on brand relevance. When we unveiled our new brand name in September, it drove nearly 3 billion media impressions, and in January, our guests began to see the new branding come to life with bright, bold in-store packaging that featured one word: "Dunkin'." But, brand relevance isn't just about our logo or new packaging. It's also about improving in the areas that matter most to our consumers, such as sustainability and corporate citizenship. Last year, we made several big announcements on this front. They included the removal of artificial dyes from our donuts, a five-year agreement with World Coffee Research to support coffee sustainability, and a commitment to transition out of our Styrofoam cups by 2020.

Our journey to become more modern and relevant is about meeting the needs of our evolving consumers. A big part of that is baked into the fourth pillar of our blueprint, which is focused on providing great coffee fast to consumers everywhere, or as we like to call it, "super convenience." We are thrilled to announce that we're partnering with Grubhub for a delivery pilot that integrates directly with our POS or cash register system. Grubhub is No. 1 in the delivery space, and we're excited to add them to our list of high-quality partners. We're starting with a small alpha pilot and will look to expand to a larger-market test in the near future.

We're also making the Dunkin' app more convenient to use. We completed two app refreshes last year and will continue to simplify the on-the-go ordering process. There is tremendous power still to be tapped from our digital platform, with mobile orders at 3% of transactions. And, with the card-free acquisition, we can be faster to market and more flexible with our digital initiatives. We will conduct a multi-tender test this year to give our guests even more options for how they use Dunkin'.

Super convenience extends beyond our restaurants and into consumers' homes as well. Our CPG, or channel, business delivered 5% retail sales growth in 2018 as we signed four new licensing deals and added more than 20 new SKUs. We eclipsed $900 million in retail sales for the full year and were awarded the Nielsen Breakthrough Innovation Award for Dunkin' K-Cups. We're proud to be a leader in the retail space and to be able to grow our brand relevance through channel as well.

Finally, we are making Dunkin' increasingly convenient to our guests through restaurant expansion. We achieved our net development target for 2018, including more than doubling the number of next-gen restaurants that we expected our franchisees to build or remodel. In our press release this morning, we provided new long-term targets. This included a new expectation that Dunkin' U.S. franchisees will open between 200-250 net new units annually over the next three years. For 2019, we expect to be at the low end of this range.

Let me explain the factors that went into this new guidance. Dunkin' continues to be one of the top developers in the retail QSR space in terms of net new units, along with significant white space opportunity in the U.S., but we are becoming even more rigorous on our development criteria as we focus on quality restaurant development versus quantity. As evidence that this rigor is paying off, we achieved the top end of our 2018 new first-year sales target, with new restaurants opened last year contributing more than $150 million to systemwide sales.

Additionally, the 2017 cohort of new store openings in our top 10 developing markets continues to track comfortably between 20-25% cash-on-cash returns. As a reminder, all of these top 10 markets are outside of the core Northeast, in states such as California, Florida, Georgia, and Tennessee. We will likely share final results with Q1 earnings in May, but the key takeaway is this: The blueprint is working in newer markets as well as the core markets.

We also saw increased closures in 2018, a trend we expect to continue as we remain focused on optimizing our footprint. The types of restaurants we are closing include self-serve and other non-traditional locations that don't provide the full Dunkin' experience. While non-traditional sites will continue to play an important strategic role for Dunkin', we are going to be more selective in the types of units we pursue.

As I said earlier, 90% of our 2018 net development was outside of our core Northeast markets. This will continue to be true in our core markets. We will focus on remodels and relocations. Our franchisees are appropriately cautious about committing to build and remodel multiple restaurants before the new image has been in the system for some time. However, I am confident in the strong results we are seeing out of the 130 next-gens.

Right now, with this team and our world-class franchisees, we have what it takes to succeed in 2018. 2018 was clearly a foundational year for the implementation of our blueprint for growth. 2019 will be about building on this foundation to modernize the Dunkin' experience and deliver great coffee fast to consumers everywhere. I am fully confident in our plan, our people, and our future together.

All right, let me pivot now on to Baskin. Our goal is to make enjoying Baskin a more accessible part of everyday life by focusing on growing delivery as well as sales of our take-home packaged ice cream. We continue to grow our partnership with Door Dash, with delivery now available in over 70% of our Baskin Robbins stores in the U.S. This represents a 40% increase in coverage year over year, and as I mentioned earlier, we recently opened a new store concept in Fresno, California. We're about to open our second Moments store in Texas in the next few weeks. The store design offers a more modern experience, showcasing our high-quality products in a more premium way. It's an environment that invites guests to create memorable moments with friends and family that matter. The unveiling of our next-generation store is a key milestone in Baskin Robbins' nearly 75-year history, and we're excited to initiate a national rollout of the new store design later on this year.

All right. Finally, moving on to international. During the quarter, we continued to stabilize our international business and focused on driving traffic through value offerings, seasonal product innovation, and digital technologies. Last month, we celebrated the opening of the 400th Dunkin' store in Saudi Arabia along with the franchisee who pioneered the brand's first location in Saudi more than 30 years ago. For 2019, our international strategy is focused on enhancing the in-store experience, establishing a strong delivery infrastructure, and growing in CPG and channel. In addition, we will accelerate the rollout of Dunkin' International's new store design in 2019, which now is up to more than 200 restaurants across all our international markets. So, with that, I will turn it over to Kate to cover our financial results.

Kate Jaspon -- Chief Financial Officer

Thanks, Dave. Q4 revenue increased $4.7 million or 1.5% compared to the prior-year period, due primarily to increased royalty income as well as an increase in advertising fees and related income, offset by decreases in sales of ice cream and other products as well as franchise fees. Q4 GAAP operating income increased $4.4 million or 4.8% from the prior-year period, primarily as a result of increases in royalty income and rental margin. These increases were offset by increased G&A expenses, as we were rolling over a legal reserve reversal last year, as well as the decrease in franchise fees.

Adjusted operating income for the fourth quarter increased $6.6 million or 6.9% from the prior-year period, primarily as a result of increases in royalty income and rental margin as well as a decrease in G&A expenses when excluding the reversal of the legal reserve in the prior year. These increases in adjusted operating income were offset by the decrease in franchise fees.

GAAP net income for the fourth quarter decreased by $81.5 million or 60.5%, driven primarily by income tax expense of $13.3 million in the current period, compared to a net benefit from income taxes of $77.8 million in the prior-year period. The decrease was offset by a $7 million loss on debt extinguishment, recognized in conjunction with the refinancing transactions completed in the fourth quarter of fiscal 2017 and the increase in operating income.

The net benefit from income taxes in the prior-year period included a $96.8 million net tax benefit due to tax reform, consisting primarily of the remeasurement of our deferred tax liabilities using the lower enacted corporate tax rate. In Q4 2018, income tax expense was favorably impacted by the lower corporate tax rate as well as excess tax benefits from share-based compensation of $3.2 million in the current-year period compared to $0.5 million in the prior-year period.

Adjusted net income for the fourth quarter increased $13.2 million, nearly 30% compared to the prior-year period, primarily as a result of the increase in adjusted operating income as well as the decrease in income tax expense that I previously referenced.

GAAP diluted earnings per share decreased by 56.5% to $0.64 compared to the prior-year period as a result of the decrease in net income, offset by a decrease in shares outstanding. Diluted adjusted earnings per share for the fourth quarter increased 41.7% to $0.68 compared to the prior-year period as a result of the increase in adjusted net income as well as the decrease in shares outstanding.

The decrease in shares outstanding was due primarily to the repurchase of shares since the beginning of Q4 2017, 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 $0.04 and $0.01 for the fourth quarter of 2018 and 2017 respectively.

At the end of the fourth quarter, we had a debt to adjusted EBITDA ratio of 5.3 to 1. During the quarter, we generated approximately $57 million in free cash flow. We ended the quarter with $518 million in unrestricted cash on our balance sheet. Of that $518 million, $207 million represents cash associated with our gift card and marketing fund balances. We used $29 million in cash during the quarter to pay our Q4 cash dividend to our shareholders. Additionally, we used $30 million in cash during the quarter to repurchase more than 450,000 shares in the open market. Lastly, we announced this morning that the board of directors increased our quarterly dividend by nearly 8% over the prior quarter.

Now, to our targets that we provided in our press release this morning. First, let me review our 2019 targets. They are low single-digit comparable store sales growth for Dunkin' U.S. and Baskin Robbins U.S. As Dave mentioned earlier, we expect to be at the low end of the range of 200-250 net new Dunkin' U.S. openings. We expect that the new Dunkin' U.S. restaurants opened during 2019 will contribute greater than $130 million to systemwide sales in fiscal 2019.

We expect the Baskin Robbins U.S. franchisees approximately 10 net units. The net decline is driven primarily by continued strategic closures of restaurants as Baskin U.S. works to optimize its store base. We expect low- to mid-single-digit percent revenue growth with low- to mid-single-digit percent other revenue growth, driven by consumer packaged goods.

Internationally, we expect ice cream margin dollars to be flat compared to fiscal 2018 from a profit dollar standpoint, and we expect that JV net income will also be flat to 2018. We expect a mid-single-digit percent reduction to G&A expenses. This is a reduction from our full-year fiscal 2018 G&A expense of $247 million. The 2018 expense includes an approximate $4 million restructuring charge in the fourth quarter, as we continue to meet the changing needs of our business and to increase our operating efficiencies.

We expect mid- to high-single-digit percent operating and adjusted operating income growth. A full-year effective tax rate of approximately 28%, which excludes any potential future impact from material excess tax benefits. We expect net interest expense of approximately $122 million and full-year weighted average shares outstanding of approximately 84 million. We expect GAAP diluted earnings per share of $2.74-2.83 and adjusted earnings per share of $2.94-2.99. Lastly, we expect capital expenditures to be approximately $40 million.

A few notes regarding our 2019 guidance: We are required to adopt new lease accounting guidance this year, which will primarily impact our balance sheet going forward. However, there are also two P&L changes to highlight. First, amortization of certain lease intangible assets previously recorded within the amortization expense line on our P&L will move to occupancy expenses. This will therefore unfavorably impact adjusted operating income and adjusted net income in 2019. We expect the unfavorable impact in 2019 will be approximately $2 million. Prior periods will not be restated.

Second, certain lease-related charges that are passed through to our franchisees will be presented on a gross basis as both revenue and expense going forward, whereas they have been presented net historically. These amounts will be offsetting, and there will be no net P&L impact. We expect the revenue and expense for these items in 2019 to range between $15-20 million. Again, prior period amounts will not be restated.

Finally, a reminder that fiscal 2018 revenue included additional gift card program service fees paid by our franchisees of approximately $12 million, which we began collecting for the first time in the second quarter of 2018. As these fees are collected simply to cover the gift card program costs that are included within advertising expenses, there was no net P&L impact from this additional revenue. We do not expect to collect these additional fees in fiscal 2019. All of these items related to the lease accounting changes in the gift card program service fees are reflected in our 2019 guidance.

Now, let me walk through the long-term targets that we provided in the release as well. We expect Dunkin' U.S. franchisees to open between 200-250 net new units annually, low-single-digit percent DD U.S. comp store sales growth, low- to mid-single-digit percent revenue growth, low-single-digit percent G&A expense growth -- with the exception in fiscal 2019, as we're guiding to a reduction of G&A expense this year -- and we expect long-term mid- to high-single-digit percent operating and adjusted operating income growth. We are no longer providing long-term targets for Baskin Robbins U.S. net unit growth or comp store sales growth.

We feel very good about our accomplishments in 2018 and look forward to continuing to work with our franchisee and licensee partners on our global transformation plans for all of our brands. At the heart of each is our strong partnership with them. Along with their restaurant crew members, they are delivering on our brand promises every day in every restaurant around the globe. And, with that, I will hand it over to the operator to open the line for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press #. And, our first question comes from John Glass of Morgan Stanley. Your line is now open.

John Glass -- Morgan Stanley -- Executive Director

Thanks, good morning. Dave, can you maybe go back and reconcile your thoughts on unit growth today versus where they were a year ago? I think there was an expectation starting in '19 and into the next couple years that there'd be a pickup. What's changed? Is this a conversation you had with franchisees where there's less willingness, or did you determine with them proactively we'd rather have higher volume and fewer units, and how does this stitch together with your view or your conversations with them on the remodel program? Did that play into the conversation if we're going to have to remodel in 2019 and beyond, that's one of the reasons why we choose to go slower?

David Hoffmann -- Chief Executive Officer and President

Yeah, John. Thanks for that question. A couple of things. First, as we started to migrate toward this really diligent focus on quality over quantity, this idea of 90% outside décor was a key element of that, full expressions with drive-through, and really deemphasizing -- as I said earlier -- these self-serve locations, these non-traditional locations that don't offer the full brand expression. So, I think the proof in the pudding on that one was we are at the very top end of our guidance on new first-year sales. So, I think that speaks to this idea of quality over quantity.

I've been at this for a long time, as you know, working shoulder to shoulder with franchisees. This is their balance sheet, they do all of the development, and it's really about collaboration and alignment, which is our No. 1 asset here. We're thrilled about next-gen. I think you see the uptake in terms of our tests, where we targeted 50, and the system pulled 130 new and remodeled in 2018. We like what we're seeing out of that with the customers responding to the front-forward bakery cases, the tap systems, the efficient mobile order pickup. So, all of that has been really tremendous for us.

And, I think the other thing that really plays into this, John, is we're thrilled with next-gen, and everybody's leaning in to the future. Before we scale this, we want to make sure that we have the cost engineering right and it's optimized to its fullest before we roll this out. So, a combination of that as well as making sure that we balance this view that in the core, it's going to be a remodel strategy, and outside the core, it's going to be new store growth. We hit our 90% outside the core, we're excited about that, and I can just tell you the system is solidly behind this, but we don't want to rush anything out and have to do a reset on that. We want to make sure that the cost engineering is correct. And look, I think you'll see here shortly that we're going to release this to the entire system, but that's what plays into that overall factor. And, you know this, but for all of you on the call, where our range is still puts us in the top three developers, I believe, in the QSR space, so we're excited about that.

Operator

Thank you. And, our next question comes from John Ivankoe of J.P. Morgan. Your line is now open.

John Ivankoe -- J.P. Morgan Chase -- Managing Director

Hi, great. Two questions, if I may. First, with fiscal '19 being at the lower end of 200-250, which is obviously a significant throttle back from what you guys achieved in '18, what gives you confidence that 200-250 is the right range, considering the change between the two years versus bottoming in '19 and having an increase in '20? And then, I have a follow-up.

David Hoffmann -- Chief Executive Officer and President

Okay. John, thanks for that. The biggest piece is -- like I've always said, we do have visibility into the pipeline, but the gestation period from opening to ground-break is -- we understand how long that time is. So, we have an understanding of the pipeline that gives us confidence in the range, and really, it's a matter of just releasing this to the system and getting that going. So, we're slightly behind what I've said in the past in terms of we thought we would have had this released. It was on us with the franchisees to take a step back here and say, "Hey, let's get this cost engineering right," but the system is thrilled and soundly behind where we're going with next-gen. Nobody wants to go backwards with this. They're excited. But, we want to make sure for all of the franchisees that we've got this cost engineering right. So, it's really our confidence in the pipeline and how we see that, and it's also the pent-up demand that we see from the franchisees, and we have clear visibility into that. What's your next question, John?

John Ivankoe -- J.P. Morgan Chase -- Managing Director

It's in terms of drive-through times. We could talk about that maybe in the context of espresso, or we could talk about it in the context of tight labor markets, which I would assume has some stores having sub-optimal staffing. So, could you make a comment on what speed of service is for Dunkin', if in hindsight, maybe that was the reason that you didn't do better than you thought, or example, in the fourth quarter, and what that outlook is in terms of improving speed of service, or at least not allowing any worse speed of service as we go into '19?

David Hoffmann -- Chief Executive Officer and President

Yeah. John, on that one, as I've continued to say, the blueprint is the five-year plan, and we're going to be very deliberate and intentional on sequencing. We feel really good about the seeds that we planted for transformation, and we know that's going to produce results going forward, so we're confident in how we accelerated out of the quarter in the month of December. Look, a couple of thoughts here: When you line up behind a marketing campaign or a consumer proposition, "sipping is believing," you've got one shot to get that right. So, making sure we had the installs, the quality, all of that detail behind that -- that was critical because we wanted to make sure that was No. 1.

The second thing was what you called out around speed. That is a key asset for us, and we intentionally went marketing-light leading up to the launch. We trained over 100,000 crew people, which was significant for us, and we installed over 9,000 restaurants. So, we made the decision to go marketing-light, we pulled back on some of our media spend all leading up to this because we felt like our killer app on espresso was that great quality that we've achieved at a better value that you're going to find in the marketplace, and then that all-important "at the speed of Dunkin'."

Look, what I would say, John, on this is we have seen no impact on speed since we've launched, and that's not just six weeks closing the quarter, that's the 10 weeks that we're in today. I could be more optimistic on that, but I won't. I'm just going to say 10 weeks in, no material impact on speed, but focus has done wonders on that. So, we've been really pleased with how we've landed, and how we've accelerated out of the quarter, and how espresso has -- like I said -- skewed younger is one headline, it plays well in the afternoon for us, and I think the other thing that we're seeing is the new guests that are coming in and the all-important switchers between brands -- we like how that's operating across all three of those aspects. So, 10 weeks into this, we're very happy with the espresso launch.

John Ivankoe -- J.P. Morgan Chase -- Managing Director

Thank you.

Operator

Thank you. And, our next question comes from Jeffrey Bernstein of Barclays. Your line is now open.

Jeffrey Bernstein -- Barclays Capital -- Director

Great, thank you very much. Two questions as well. The first one on the Dunkin' U.S. comps -- Dave, I know you mentioned they were disappointing despite a lot of initiatives that you seemed happy with. So, I'm just wondering, first, just to clarify, did you say that overall sales accelerated through the quarter? I didn't know if you meant that you were pleased to see comp trend accelerated through the quarter. And, just wondering how you think about 2019 with your presumed expectation for an acceleration -- how would you prioritize the drivers of hopefully what's more consistent traffic? And then, I had one follow-up.

David Hoffmann -- Chief Executive Officer and President

Yeah. Jeff, to that, we accelerated since Thanksgiving the launch of espresso, and we accelerated out of the quarter from that launch. Again, as I mentioned to John earlier, we intentionally went marketing-light, we pulled back on some of the media because the implementation of this was so massive for us as an organization and for our franchisees, so we're thrilled with how that played out. What we're really pleased with is 2018 was a real foundational year for us as we planted these seeds for transformation, and it started in Q1 with simplification.

Look, we knew it was the right thing to do. I knew it as 25 years as an operator. It was short-term pain for long-term gain. We went into Q2 with our first-ever national value program, called Go2s, which was really about our customers' favorite sandwiches. We did exceedingly well on sales and traffic. We intentionally went off of that in Q3 because, like I said, our No. 1 asset is collaboration and alignment with the franchisees, so we do this hand in glove with them, and that's really part of our huge success on where we're going. We worked with them, we said, "Let's make sure we get this right," we did a number of iterations on this in Q3, and where we landed is what you're seeing in the marketplace today. It's not everything, but we like the cornerstones of Go2s now and the happy hour p.m. break that we're seeing as well.

So, all of this has been a journey -- that, to going after the afternoon business, what we did with the card-free acquisition in terms of securing our digital future and bringing that in-house, and you're going to see our new head of digital, Stephanie, really ramp that up in 2019. Espresso -- we've grown that category for us around 35%, so we really like what that's doing for us as well. So, we think all of this wrapped into the next-gen restaurant, the new branding, and how that comes to life -- we're excited about what we laid in 2018. I don't think there's many brands that could have done all of these things that set us up for the future, but this is a journey with our franchisees, and this is a five-year plan to transform a 70-year-old brand into a beverage-led, on-the-go brand. So, this isn't going to happen overnight, we like what we've planted in 2018, and we're excited about what that's going to produce in 2019 and beyond.

Jeffrey Bernstein -- Barclays Capital -- Director

Got it. And, my follow-up was for Kate. You mentioned the G&A saves. It looks like another year of mid-single-digit reduction. I know 2018 was a year of reduction, so I'm just wondering if you could maybe provide some color on the primary buckets, and how do you really get comfortable and make certain that you're not cutting too significantly where it may negatively impact the health of the system and the fundamentals to help in the short term at the expense of maybe risking the long term?

Kate Jaspon -- Chief Financial Officer

Great, thanks for the question. Just to remind everybody, last year, in 2017, most of our restructuring had come around our international markets and what we were doing to stabilize and optimize internationally. This year, what we actually did -- it was probably a "net restructuring," we would call it -- we actually shuffled resources to focus on the key components of the blueprint and the other strategies of the other segments. So, while we have cut back on G&A, we've also invested in different areas, and I'd also like to remind everyone on the call that we continue to invest in things like mobile and innovation, which are covered through our advertising fund, which is separate from the G&A expense. So, we did a long process where we went through projects that we would remove from the company and feel that we've sufficiently got the resources to support the blueprint as we move forward.

Operator

Thank you. And, our next question comes from Matthew DiFrisco of Guggenheim Securities. Your line is now open.

Matthew DiFrisco -- Guggenheim Partners -- Managing Director

Thank you. I just wanted to get a couple of numbers on some figures on the digital side with respect to percent of sales and mobile order and pay, and then I just had a question with respect to -- a follow-up on a same-store sales question.

Tony Weisman -- Chief Marketing Officer

Good morning, it's Tony. As we've said, Perks members continue to represent 12% of our visits with 3% on-the-go mobile. We just celebrated last weekend our 10 millionth member in the Perks program on our fifth anniversary. That 3%, as I've said before, can be misleading because it can be as high as a third of the business in some heavily trafficked, non-drive-through, in-line stores, where we see a tremendous amount of consumer positivity and stickiness. More than 80% of those who use on-the-go mobile come back as a retrial. It has very high customer satisfaction. As Dave mentioned, we continue to iterate on the app to make it even faster. In fact, last week was our most recent app refresh, making it even simpler and faster to go from opening the app to completing the transaction. And, as we've also seen in the 130 next-gen new and remodels that have opened with a more prominent mobile order pickup station, we've had a higher take rate where more and more consumers are aware of the benefit of it.

Matthew DiFrisco -- Guggenheim Partners -- Managing Director

Okay. And then, just with respect to the Dunkin' Donuts U.S. slowdown in the comp, a follow-up to Jeff's question -- with all of the new initiatives, has there been a change in the competitive environment? Was there a -- are there some regional competitors that might have stuck out a little bit more or accelerated their level of discounting in the fourth quarter, and how does that carry into '19 as far as what you're seeing from your Northeast direct competitors, which have been the Cumberland Farms of the world, et cetera?

Tony Weisman -- Chief Marketing Officer

Yeah, I think you would characterize all of 2018 as a pretty aggressive, value-driven, competitive landscape. We didn't see anything in Q4 that was particularly different than what we'd seen earlier in the year, whether it was Cumby in the Northeast or others. They remained very aggressive, and as a result, that's what got us to our value platform in Q2 -- which, as Dave said, was very successful -- iterations of it that we tested in Q3, and have come back with it here in Q1.

I really -- as we said, it was a deliberate effort on our part to clear the deck so that we could deliver when we started on November 18th and told the world that sipping is believing, from new equipment, new recipes, new packaging, new marketing -- we really wanted to deliver that superb experience for those who were espresso lovers who may have been skeptical about us, and from day one, our metrics showed that more than 70% of those folks who tried an espresso from us for the first time said that it meet or beat their expectations. The awareness levels were where they were, the take rates were where they wanted them to be, and so, it was really our decision to make sure that when we launched it, we did it well.

Matthew DiFrisco -- Guggenheim Partners -- Managing Director

Thank you. Last question, on development: What gives you confidence beyond 2019 that you'll get to that 200-250 range rather than the low end? What has to happen in '19 -- if anything -- to get to either the midpoint or the upper end of that?

David Hoffmann -- Chief Executive Officer and President

It's as simple as releasing the next-gen designs and making sure that's out there as soon as possible. Like I said, Matthew, we're very close. That's going to be released here shortly, so we feel really good about that, so we're not concerned, but like I said, this is a collaboration alignment with our franchisees, and we want to make sure that we get this right, and so, they're solidly behind us.

Matthew DiFrisco -- Guggenheim Partners -- Managing Director

Excellent. Thank you.

Operator

Thank you. And, our next question comes from David Tarantino of Baird. Your line is now open.

David Tarantino -- Robert W. Baird -- Associate Director

Hi, good morning. First question is on the long-term targets. Kate, the unit growth percentage came down by maybe more than a percentage point versus your prior three-year targets, but you didn't change the revenue or the operating profit growth, so can you just reconcile that? Is it because you don't expect the sales contribution from the units to be materially different than what you had before? How should we think about that difference?

Kate Jaspon -- Chief Financial Officer

There's a couple of different things. The opening revenue is less impactful in-year given revenue recognition last year, so, with the unit count coming down, that initial franchise fee gets amortized into the P&L over the life of the franchise agreement. And then, to Dave's point, the quality over quantity -- so, while we have taken new first-year sales contributions down slightly, it still remains relatively high with stronger-performing stores opening. And then, also, a lot of what opens at the end of the year is not included in that number, so some of the later openings would be out of that. And then, additionally, there's just some other things going on in revenue, so you continue to grow other revenue through CPG, and then, some of the changes we discussed on the accounting changes -- so, the rent will mark revenue up between $15-20 million, and then, the removal of the stored value card collections is about $12 million, so you have a net pick-up as well.

David Tarantino -- Robert W. Baird -- Associate Director

Great. And then, a question again on this next-generation prototype as a follow-up. Dave, you mentioned the need to cost-engineer it the right way before you release it. So, is the goal that this would be the same or higher ROIC for franchisees? Maybe directionally speak to what you've seen on the ROICs of what you have already.

Scott Murphy -- Chief Operating Officer

Yes, this is Scott Murphy. I would say absolutely, our goal is to have a consistent or higher return on capital with this investment. We're getting very close. The value-engineering piece is obviously critical to that calculation, and with the number of stores we have now on next-gen, we're really finally locking in the pieces of equipment and the components, and now we're using our partners at our supply chain group to go contract out for those components, get the lowest cost we can so that we can release it.

David Hoffmann -- Chief Executive Officer and President

David, this is just a restatement on that equation -- we're thrilled with the numerator in there. We're just making sure the denominator is right before we release that to the full system. But, look, the leadership franchisees who are some of our biggest developers -- they've lined up behind this, and they're very excited about this, and again, before we release it to the full system and the masses, this is all part of our process that we do with our franchisees.

David Tarantino -- Robert W. Baird -- Associate Director

Great. So, is the idea that these will be higher volume and higher cost and net to a similar return equation? Is that the way to think about it?

David Hoffmann -- Chief Executive Officer and President

Higher volume and as close to similar cost as we can get it.

David Tarantino -- Robert W. Baird -- Associate Director

Great, thank you.

David Hoffmann -- Chief Executive Officer and President

Thanks.

Operator

Thank you. And, our next question comes from Will Slabaugh of Stephens. Your line is now open.

Will Slabaugh -- Stephens, Inc. -- Managing Director

Yeah, thank you. I had a follow-up on the espresso launch and your initial takeaways. How would you characterize the customer response as the past few months have progressed, and does this tell you that maybe your core customer either is or isn't adventurous in espresso, as you had hoped, or is it too early to say that, and maybe we simply have an awareness curve to go along the next few quarters?

Tony Weisman -- Chief Marketing Officer

Yeah, thanks for the question. I would say that we would characterize the espresso launch as, so far, beating or exceeding all of our expectations, and it's a really interesting question about our customers. We've seen the espresso customer really come from three sources. 1). From the leading espresso players in the business who introduced espresso to America, 2). From our C-store and other competitors like that, where customers -- the indications we have how they've settled for decent espresso because the place happened to convenient and discovered that, in fact, our espresso meets or exceeds their expectations, and then, 3). Quite a number of our customers.

As you know, we have a predominantly hot and iced drip coffee business. Based on the presence that we created in and around the store with the orange-themed packaging and the $2.00 afternoon latte and cappuccino offer, we saw a significant number of our customers try it, principally because they just weren't even aware that we were offering it. And, across all three of those, we saw consistently very high metrics on quality perception. Not just the product itself, but the way it was crafted met or exceeded their expectation. So, all their new equipment installs, the crew training, the way the recipes were built all met or exceeded their expectations of what espresso drinks should be like.

So, I think we're going to continue to see sources of volume from all three of those, and we're going to continue to iterate on the platform, putting news into these beverages that the customers will be surprised and delighted, and I think -- to the last part of your question -- I'm quite confident over time that as more and more of our current customers who haven't necessarily been espresso drinkers take advantage, for example, of our $2.00 happy road offer, they're going to convert into espresso lovers, and it might be the second trip of the day for an afternoon indulgent espresso beverage, which, as Dave said, has the advantage for us of higher ticket and great attachment.

David Hoffmann -- Chief Executive Officer and President

And, Will, if I could just hook on to that, we're thrilled with espresso 10 weeks into this. We're very excited with how this launched; the franchisees are extremely excited with how this launched. I want to make sure that we separate this -- look, it was a tough decision for us when we said we're going to double down on espresso and put this in before the holiday season. We thought about the training that was going to be involved with 100,000 crew people, the over 9,000 installs that were needed, and that type of monumental effort by the franchisees and the brand. So, we made that call.

I think what I'd like to bifurcate here is that decision on our part to go light on marketing to relieve some of that pressure on the restaurants, light on media, light on some of our offerings. So, that was a big part of October and November. The other thing you haven't heard from us -- and, look, I don't want to bring it up too much because we hate that the weather reports always -- I know you guys don't like it. We don't like it either, but the reality is for the quarter, we had about 50 basis points of weather impact going against us, largely in October and November as well. So, there's a lot going on in there, but I would separate that from the distinction that espresso has been very successful for us -- again, 10 weeks into it.

Will Slabaugh -- Stephens, Inc. -- Managing Director

Thanks for that. That's helpful. And, just a quick follow-up there. It sounds like you've been pretty positive on the afternoon. Maybe that momentum has continued, as you've mentioned, in the past quarter or so. Can you talk about the day part performance of the breakfast day part versus afternoon?

David Hoffmann -- Chief Executive Officer and President

Yeah, and again, this is one that we started to get into, we know we needed to attack it, we've been so strong in the morning, and this was a big opportunity. We're three quarters -- this is the third quarter of positive comps in the afternoon, and we think our winning formula has been when we can bring some really good offerings with that compelling happy hour or p.m. break, and that's what you're seeing right now in the restaurants today in January, and that's going to be a cornerstone of our value strategy with the Go2s. We think that's a lot of white space for us, and again, early days, but we like the improvement that we've made in the p.m. business, but it's the combination of great products at a compelling price. That one-two punch is what's driving that success.

Will Slabaugh -- Stephens, Inc. -- Managing Director

Great, thank you.

Operator

Thank you. And, our next question comes from Sharon Zackfia with William Blair. Your line is now open.

Sharon Zackfia -- William Blair -- Partner

Hi, good morning. I was curious about the decision to use Grub for Dunkin', but I think you use Door Dash for Baskin. I would have thought there might be some synergies to working with one partner, so if you could talk through how you think about those third-party delivery options.

Tony Weisman -- Chief Marketing Officer

Yes. We do Door Dash across both brands, and have had success with both, but it was our exploration of all the players out there that we thought Grubhub brought a really sophisticated technology platform, which, as Dave says, allows us for the POS integration, which allows for the easiest and most frictionless experience to the consumer. Secondly, we were really impressed with the rigor that they brought to understanding the customer experience and helping us really optimize so that the customer experience is flawless.

And, the sense of partnership that they've brought to this -- I think that they're very committed to this, they're very committed to working with us to market it aggressively, and so, we're very excited about this announcement today. It does not mean that we're not going to continue to work with others, and in some cases, we have some very successful Door Dash partnerships with some of our franchisees, but we are very excited that it feels like there's real synergy here between us and Grubhub, a real similar view of how to optimize the customer experience and make it not just really easy, intuitive, and frictionless to the consumer, but very easy on our store operation so that there's no impact on customers who happen to be coming in or driving through the store.

Operator

Thank you. And, our next question comes from Jon Tower of Wells Fargo. Your line is now open.

Jon Tower -- Wells Fargo -- Analyst

Great, thanks. I was just going to ask a little bit on the loyalty program. I think you mentioned earlier you're up to 10 million members, it's about five years old, and looking back, you've got roughly three years now of negative traffic growth for Dunkin' in the U.S. I'm just curious to get your assessment on how the loyalty programs work, if it's hit the metrics that you were hoping it would when it was initially launched, where it's worked, and then, what might need to be improved or addressed going forward to drive better traffic in the future.

Tony Weisman -- Chief Marketing Officer

I think we're very happy. In fact, in the last weekend of January, we celebrated the fifth year, and in the same weekend, we celebrated our 10 millionth member and had a special 5x points offer, which had great traction. I think we feel that having been first in the industry, both with mobile ordering and with the loyalty program, we feel really good about the consistent growth quarter to quarter. We've added about half a million members per quarter with a very high customer satisfaction rate with on-the-go mobile ordering. But, what we are now doing is focusing the program more on personalization and customization. To date, the program was a single set of goals, X amount of purchases equals Y level of redemption regardless of your individual behavior. What we're evolving to is a far more typical loyalty-type program where the incentives will be personalized and customized based on driving more incremental traffic.

I'll give you an example. During the espresso launch, we did programs that offered three different tiers of points to our Perks members based on their current and potential usage of our espresso beverages, and we saw terrific results there, pretty much on line with what we expected, with the higher level of points being to those who we thought needed the greater incentive to try the espresso beverage, and our follow-up showed that they had a retrial rate greater than the average customer. Look for more of that. Look for more day part customization, personal customization, and more offers that are built around driving your personal incremental business. I think that will be the core to the next level of growth.

The next part of that will be the multi-tender offer that we are about to test. We have found that the single greatest barrier to greater participation in the program has been a construct that requires pre-loading a credit card in order to participate in the program and use on-the-go mobile. That is a significant barrier, not just to people in general, but in an era of high levels of concern about data security. The multi-tender test that we are about to roll out we are very optimistic will allow customers to participate and benefit from the Perks program and pay as they choose, and we're just about to start that test. The next time we get together, we'll be able to update you on that. We're very optimistic. All of our research indicates that it will be a huge unlock for those who have wanted to participate in the program, but have felt that that barrier was just something they weren't willing to overcome.

David Hoffmann -- Chief Executive Officer and President

And, John, from where I sit, you can tell, listening to Tony, this is his sweet spot, among a number of other things. Look, this is a constant theme on 2018, 2018 being a transformational year. When we rolled out the app, we essentially rented the app. As you recall, in 2018, we acquired that IP and brought it in-house. Everything Tony's talking about -- it gives us more flexibility, more options, move at a faster speed -- if you talk to any CIO, that lift and shift is not as significant, and it's a lot of work behind the scenes. So, that's also a big piece of what went on when we talk about the seeds that were planted in 2018 and why we think that's going to produce so much fruit for us going forward.

Jon Tower -- Wells Fargo -- Analyst

Thank you.

David Hoffmann -- Chief Executive Officer and President

Yup.

Operator

Thank you. And, our next question comes from Eric Gonzalez of KeyBanc Capital Markets. Your line is now open.

Eric Gonzalez -- KeyBanc Capital Markets -- Vice President

Hey, thanks. Maybe if you could just clarify your response to some earlier questions. Slowdown in development -- was that a corporate decision to prioritize quality over quantity, or was it being driven by a lower rate of franchisee demand, or is it simply next-gen? And then, regarding the pullback in value this quarter, was that just about capacity as you train new employees on the espresso platform? You said there's no impact to speed of service, but as you look ahead, are the employees now in a place where they can successfully execute handcrafted beverages at scale while balancing some of the traffic-driving value initiatives?

David Hoffmann -- Chief Executive Officer and President

Eric, the decision on development was really a brand-driving decision, is the way I would say that. We wanted to make sure that we were focused on full expressions with drive-throughs where we could, in as many places as we could. Ninety percent of that outside the core -- that was really a brand decision, and we felt -- and, we still do -- we feel very confident in that direction based on how the new first-year sales are performing in terms of the top end of that range that we gave you for guidance last year. So, that was really what was behind that piece.

I think the thoughtfulness that we're doing around next-gen and making sure we get that denominator right and that all-important return number is really the collaboration -- when I talk about the spirit of collaboration and alignment with the franchisees, that's that cost engineering work. And so, there's probably a couple of factors at play there on why we ended up with our development, but again, the system is full speed ahead on next-gen because we know what it's doing for us on sales and traffic as well, so, excited about that.

As it relates to espresso and the training -- look, a huge undertaking on the 100,000 crew, and our folks have delivered everything we've asked of them -- the franchisees -- in terms of a great-quality espresso, and like I said, we think the killer proposition or winning formula is Dunkin' is always No. 1 in quality. We don't have to be the best price in the marketplace, but we are a damn good, compelling price point in the marketplace. And, the other one is "at the speed of Dunkin'." As you heard Tony say before, no one is waking up wondering where they can get a latte, but where can they get a fast latte at the speed of Dunkin'? That's really what we think is our point of differentiation. So, that's what the monumental undertaking was.

And, going forward -- look, you know our turnover rate for our industry, so that's something we're staying very focused on. This isn't a one-and-done, not only on training with the crew people and the franchisees, but also, this isn't a launch-and-leave. You're going to see Tony and his culinary team continue to iterate on espresso lineup going forward, and this is a comprehensive, double-down campaign. But also, we know how important speed is to us as our differentiator in the marketplace, so, like I said, this is going to be an ongoing training effort with the franchisees and their crews.

Operator

Thank you. Our next question comes from Andrew Strelzik of BMO. Your line is now open.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hey, good morning. Thanks for taking the questions. Two from me. The first one -- as you've become more rigorous around the real estate strategy, outside of trade areas, I'm wondering about some of the differences you're seeing in those units kind of underpinning the stronger sales, maybe differences in sales mix, or mobile mix, or more drive-throughs -- those types of things. Any color on that would be helpful. And also, my second question -- the next-gens have been trending higher than you expected, new units are going to be trending lower going forward. Prior communication was that -- I think it was 2x the next-gen remodels relative to the development pace. Does that change at all, or is the next-gen pace more fixed?

David Hoffmann -- Chief Executive Officer and President

Let me start with the next-gen one, Andrew. We're still on track for that. It'll be about a 2x rate between remodels and new stores when we ultimately release that, which, like I said, will be shortly. In terms of when you go out west or in other parts of the area -- these emerging markets, top 10 developing markets -- and what you're seeing in terms of our cash-on-cash returns being on the higher end of that 20-25% range, and we feel really good about that -- you're seeing the shift we're making with the blueprint because the all-important number is to drive beverage incidents, and that was a big part of this transformation that needed to take place.

So, the rebranding work, everything that we did around that, the next-gen, and bringing all the blueprint to life underneath that -- it's about driving that beverage incident out there. And, look, in these markets like Denver, Phoenix, and some of these other places, we really like -- and, the franchisees that we're talking to -- the blueprint is working exceedingly well for them out there. It's that in combination with -- when we do things like national value and we're so disparate in terms of our share of voice from coast to coast, that's when you get a bigger uptick as well. So, there's a lot of pieces working for us out west, but again, it starts with a real focus on quality over quantity and making sure that we get that equation right. But, we feel great about our development strategy going forward. We feel great about where the franchisees are. It's competitive, as Tony said, but we're excited about where we are.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Great, thank you.

David Hoffmann -- Chief Executive Officer and President

Thanks, Andrew.

Operator

Thank you. And, that concludes our question and answer session for today. I'd like to turn the conference back over to Dave Hoffmann for closing remarks.

David Hoffmann -- Chief Executive Officer and President

Okay. Thanks, everyone, and thanks for hanging on with us as we cycle through all those calls today. I really appreciate you being here. As we said -- and, you've heard me say this numerous times -- 2018 was a foundational year for Dunkin', a year of progress across both of our brands, and -- but now, it's 2019, and we're working in collaboration with our franchisees to transform these great brands together to produce customer-noticeable change in the marketplace. This is our No. 1 asset. Franchisee alignment and collaboration is a hallmark of who we are as a brand. But, with this team -- our grant franchisees -- we believe we have what it takes to succeed, and we're excited about the future. So, thanks, everyone. I look forward to talking with you again soon. Take care. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

Duration: 69 minutes

Call participants:

Stacey Caravella -- Senior Director, Investor Relations

David Hoffmann -- Chief Executive Officer and President

Kate Jaspon -- Chief Financial Officer

Tony Weisman -- Chief Marketing Officer

Scott Murphy -- Chief Operating Officer

John Glass -- Morgan Stanley -- Executive Director

John Ivankoe -- J.P. Morgan Chase -- Managing Director

Jeffrey Bernstein -- Barclays Capital -- Director

Matthew DiFrisco -- Guggenheim Partners -- Managing Director

David Tarantino -- Robert W. Baird -- Associate Director

Will Slabaugh -- Stephens, Inc. -- Managing Director

Sharon Zackfia -- William Blair -- Partner

Jon Tower -- Wells Fargo -- Analyst

Eric Gonzalez -- KeyBanc Capital Markets -- Vice President

Andrew Strelzik -- BMO Capital Markets -- Analyst

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