Dunkin' reflects on bittersweet year

by Monica Watrous
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Growth in beverages helped drive sales at Dunkin' Donuts during the year.

CANTON, MASS. — As the chairman and chief executive officer of Dunkin’ Brands Group describes it, “2014 was a mix of disappointments and significant achievements.” The company reported below-expectations growth in profit and revenue for the fiscal year and has lowered its outlook for 2015.

“We learned a lot and made some changes to our plans,” said Nigel Travis, the company’s top executive, during a Feb. 5 conference call with analysts. “As indicated with our 2015 guidance, we expect that we will be slightly behind some of our long-term growth targets this year as well.”

For the year ended Dec. 27, 2014, Dunkin’ Brands had net income of $176.4 million, equal to $1.67 per share on the common stock, up 20% from $146.9 million, or $1.38 per share, for the prior fiscal year. Revenues totaled $748.7 million, up 4.9% from $713.8 million the year before.

Fourth-quarter net income advanced 25% to $52.5 million, which compared with $42.1 million for the same quarter of the previous year as a result of a $7.5 million increase in operating income and a $3.1 million decrease in interest expense. Revenues rose 5.5% to $193.2 million from $183.2 million for the comparable quarter.

Executives reported continued momentum for the chain's breakfast sandwich platform.

 

The good news

Highlights of the year included robust restaurant development, transaction growth at Dunkin’ Donuts amidst competitive headwinds, the launch of a loyalty program at the donut chain that now has more than 2.5 million members, and progress in improving the company’s international business with development agreements in Sweden, Austria and China.

“Additionally, we completed a highly successful refinancing last week that provides us with a great combination of additional financial flexibility, stability of fixed-rate interest and the ability to return value to shareholders by repurchasing shares with the net proceeds,” Mr. Travis said. “Our nearly 100% franchise business model lends itself quite well to a securitized debt structure due to our stable and strong cash flows and the strength of our cash flow stream was evident in our 2014 performance as we delivered more than 50% free cash flow growth over 2013.”

Slower sales of packaged coffee and K-Cups in Dunkin' Donuts stores weighed on results.

 

The bad news

But slower sales of packaged coffee in restaurants and pressure on joint ventures in Korea and Japan weighed on 2014 results and continue to challenge the company. For 2015, the company now projects comparable sales growth of 1% to 3% for Dunkin’ Donuts U.S. and 1% to 3% for Baskin-Robbins U.S. Executives expect revenue growth of 5% to 7% and adjusted operating income to grow 6% to 8%.

“Despite some of the struggles in 2014, I remain really excited about the future of Dunkin’ Brands,” Mr. Travis said. “When you go back to when we went public in July of 2011 and look at the number of stores we have opened, we have opened 2,500 and I think we can add another 3,000 by the end of 2018.”

Segment performance

Increased average ticket and higher traffic drove Dunkin’ Donuts U.S. comparable store sales up 1.4% for the fourth quarter and 1.6% for the year. Executives previously projected 3% to 4% growth for the year.

Strong growth in beverages, led by iced coffee and new dark roast coffee, record seasonal results from frozen beverages and iced tea, continued breakfast sandwich momentum, and the launch of the Croissant Donut contributed to higher sales during the quarter. Dunkin’ Donuts U.S. segment quarterly profit increased 4% over the prior year, driven by revenue growth.

“The Q.S.R. breakfast and coffee segments were very challenging in the quarter as they had been all year,” Mr. Travis said. “Additionally the K-Cup and packaged coffee categories, where this business has primarily moved to the highly competitive grocery channel, negatively impacted comps in the quarter.”

The company added 260 net new Dunkin’ Donuts units worldwide, including 141 units in the United States, during the quarter, and 704 net new units worldwide, including 405 net new units in the United States, for the year.

Contributing to increased transactions at Dunkin’ Donuts U.S. during the year was the new DD Perks loyalty program, which has enabled the company to track purchasing patterns and engage with customers on an individualized basis.

“For example, if you purchase an iced coffee and muffin two times a week, we can now target you with an offer when we have a new muffin L.T.O. as well as offers to drive increased visitation during the week,” said Scott Hudler, vice-president of global consumer engagement, during the call. “Or if we see that you only visit us in the mornings when we have new product news for the afternoon, we can target you with an aggressive trial offer to return in the afternoon day part.”

Perks members are visiting Dunkin’ Donuts restaurants more often and spending more money per visit than before joining the program, according to company data.

“So what has this meant for comp store sales growth?” Mr. Hudler said. “We estimate that Perks contributed about 50 basis points to comps in 2014, which was in line with our expectations. For the full year, Perks made up about 3% of transactions. The program grew through the year and was about 4% of transactions in the fourth quarter.

“Looking ahead, we plan to continue to grow the number of Perks members, grow Perks as a per cent of transactions and increase the comp contribution from our loyalty program.”

The launch of on-line cake ordering led to higher revenue for Baskin-Robbins U.S. Comparable store sales grew 9.3% for the fourth quarter, but segment profit fell 9.3% as a result of increased expenses and investments in brand-building and advertising.

“Fourth-quarter growth was driven by a very strong performance in four core categories, cups and cones, desserts, beverages and take home,” Mr. Travis said. “Additionally, on-line cake ordering continues to fuel the cake category growth. We ended the year with the strongest cake comps on record, and part of the reason for this success is the result of on-line cake ordering, which contributed nearly 5% of all cake sales.”

Optimistic for the future

Though pressures persist within the business, executives are counting on several priorities to achieve long-term growth. A key strategy at Dunkin’ Donuts is driving beverage growth, in part with a new platform of blended frozen beverages. Mobile, loyalty and social media efforts are expected to improve global consumer engagement.

Sustainability also remains a focus, with progress under way in replacing foam cups with greener alternatives.

Finally, the company is targeting development in markets with high potential, including California, Europe, the Middle East and China.

“Dunkin’ Brands is unique and, I think, totally unique in having tremendous global growth opportunities,” Mr. Travis said. “We are now at only approximately 19,000 restaurants and we are well on our way to more than 30,000. There are not many concepts out there that have the brand awareness and history of our two brands and such a long runway for expansion.”
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