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Dunkin' Brands Beat Earnings Thanks to Ice Cream, Not Doughnuts

By Jamal Carnette, CFA - Feb 14, 2018 at 11:11AM

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The company can credit Baskin-Robbins, its lesser-known division, for strong same-store sales.

Dunkin' Brands (DNKN) had a mixed earnings announcement. As for financial figures, the company outperformed expectations on both the top and bottom lines with revenue at $227.1 million versus $220.6 million, and adjusted EPS at $0.64 versus $0.63, according to Thomson Reuters. Additionally, the company announced a dividend increase of 8% this year.

Despite the apparent solid quarter, shares of the company sold off as much as 3%. Investors were particularly concerned by weakness in the company's Dunkin' Donuts brand, as fourth-quarter same-store sales came in below expectations. For Dunkin' U.S., same-store sales narrowly beat expectations, rising 0.9% versus 0.8% consensus; Dunkin' International significantly underperformed by posting 0.3% same-store sales growth versus expectations of 1.6% growth.

While growth at Dunkin' Donuts was hard to come by, it was the company's lesser-known brand that outperformed in the quarter.

Ice cream, waffle cones, and sprinkles.

Image Source: Getty Images.

Baskin-Robbins, the little engine that could

Baskin-Robbins significantly outperformed analyst expectations during Q4. Its U.S. division reported a same-store sales increase of 5.1%, a figure significantly higher than the 0.2% growth expected. Baskin-Robbins U.S. was able to parlay same-store sales increases into 12% revenue growth attributable to the segment.

Baskin-Robbins International followed suit by growing same-store sales 3% over the prior year versus an expected decrease of 0.9%. Management said Dunkin' Brands (the corporate parent) growth was driven by beverages, or shakes, smoothies, and cappuccinos. Although it should be noted that revenue attributable to Baskin-Robbins International declined during the quarter, this was mostly due to timing issues from sales of ice cream and other products, related to shipment lag times.

Even with Baskin-Robbins punching well above its weight on comparable sales, it still affects Dunkin' Brand's top and bottom lines to a lesser extent than Dunkin' Donuts does. In Q4, revenue attributable to Baskin-Robbins U.S. and Baskin-Robbins International came in at $36.4 million, approximately 16% of Dunkin' Brands total revenue during the period.

Should Dunkin' Brands consider a POD shift mix?

The next question investors should ask is if it's time for the company to consider a shift in the points of distribution (POD) mix. Management is aggressively rolling out new locations for its Dunkin' Donuts brand in the United States; currently, there are approximately 9,150 U.S. PODs, with guidance for this to double to 18,000 in the long term. Worldwide, the current POD mix is roughly 60% Dunkin' Donuts locations and 40% Baskin-Robbins locations.

In the short run, look for this disparity to continue. During Q4, Dunkin' Brands opened a total of 126 net new PODs globally with Dunkin' Donuts providing approximately 75% of net POD additions. However, if Baskin-Robbins continues to post strong growth for same-store sales, a possible shift in the POD mix may help offset possible weakness in Dunkin' Donuts same-store sales.

While Dunkin' Donuts will (and rightfully should) continue to be the focal point for Dunkin' Brands, investors should pay more attention to its Baskin-Robbins business in future quarters.

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