Dunkin' Brands Group Ramps Up Growth Investments

Dunkin' Brands Group (DNKN) reported second-quarter results on July 26. The doughnuts and ice cream franchiser delivered a solid earnings performance, and management provided investors with more insight into its growth plans.

Dunkin' Brands Group results: The raw numbers

Data source: Dunkin' Brands Group Q2 2018 earnings release. 

What happened with Dunkin' Brands Group this quarter?

Global systemwide sales at franchisee-operated restaurants, from which Dunkin' Brands derives royalty revenue, rose 4.4%. The increase was driven by new store openings and comparable-store sales growth.

Dunkin' Donuts and Baskin-Robbins franchisees opened 96 net new restaurants globally, down from 133 openings in the prior-year quarter. Dunkin' Brands has slowed its rate of expansion in the past year, to focus on simplifying its menu and store operations.

So far, the plan seems to be working. Dunkin' Donuts U.S. comparable-store sales improved 1.4%, compared to a 0.5% decrease in the first quarter. Moreover, customers are enjoying faster and more accurate order processing, while franchisees are seeing reduced labor costs. 

"Q2 was the first full quarter that the simplified menu was in the entire U.S. system, and I am proud to share that the simplification has been a huge success," CEO David Hoffmann said during a conference call with analysts. 

In addition, the company's consumer packaged goods (CPG) business continues to generate solid results, as explained by Hoffmann:

Through mid-June, our total portfolio of CPG products across both brands delivered more than $400 million in retail sales this year, including over $70 million in ready-to-drink bottled iced coffee. Dunkin' Donuts K-Cups continue to outpace the category, growing more than 20%, which is greater than 4x the rate of the category. Our CPG portfolio reinforces that Dunkin' flavor profile to existing loyalists, and we're also reaching out to new customers outside the traditional four walls.

Dunkin' Brands' packaged-goods business is booming. Image source: Dunkin' Brands Group.

For Baskin-Robbins, comparable store sales dipped 0.4% in the U.S. as foot traffic declined amid an increase in average tickets.

All told, operating income -- adjusted to exclude amortization of intangible assets, asset impairments, and certain other items -- increased 6.8% to $119.8 million. Adjusted net income, which benefited from a lower effective tax rate brought about by the Tax Cut and Jobs Act, leaped 19.3% to $64.8 million. And adjusted earnings per share, boosted by stock buybacks, surged 30.5% to $0.77.

Looking forward

Dunkin' Brands reiterated some aspects of its full-year financial forecast, including:

• More than 275 net new Dunkin' Donuts U.S. restaurant openings
• In the U.S., Dunkin' Donuts comps growth of 1% and low-single digit comps growth for Baskin-Robbins
• Total revenue growth in the low to mid single digits

The company did, however, reduce other portions of its guidance due to the anticipated impact of $100 million in growth investments. Management now expects:

• Mid-single-digit operating and adjusted operating income growth, down from a prior estimate of mid to high single digits
• GAAP EPS of $2.48 to $2.56, down from $2.49 to $2.58
• Adjusted EPS of $2.68 to $2.72, down from $2.69 to $2.74

Hoffmann said in a press release: "Our second quarter 2018 Dunkin' Donuts U.S. comparable store sales growth is an early sign of the progress we are making with our Blueprint for Growth. Our highest quarterly beverages sales on record underscored that we're on track toward our goal to be the nation's leading beverage-led, on-the-go brand."