Dunkin' charts course in C.P.G.

by Monica Watrous
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First-quarter revenue benefited from agreement to expand K-Cup distribution to retail outlets.

CANTON, MASS. — Dunkin’ Brands Group, Inc. is forging a greater presence in retail following the February agreement with the J.M. Smucker Co. and Keurig Green Mountain to expand distribution of Dunkin’ K-Cup packs to additional retail outlets. Beginning this year, Smucker will distribute and market Dunkin’ K-Cup packs exclusively to grocery chains, mass merchandisers, club stores, drug stores, dollar stores and home improvement stores. Keurig, which will remain the exclusive producer of Dunkin’ K-Cups, will distribute and market Dunkin’ K-Cup packs to specialty stores and office superstores. Dunkin’ K-Cup packs will continue to be available in Dunkin’ Donuts restaurants in the United States.

“With the K-Cup announcement, it is fair to say that we are now firmly in the consumer packaged goods business,” said Nigel Travis, chairman and chief executive officer of Dunkin’ Brands, during an April 23 earnings call with financial analysts. “In addition to Dunkin’ K-cups, we now sell packaged coffee, creamers and also Baskin-Robbins products, where I have to say we’re making really great inroads into supermarkets.”

Two years ago, Dunkin’ brought its Baskin-Robbins brand into the retail channel with the introduction of licensed sherbet flavored tubes and ice cream pints and novelty bars in grocery stores. The packages contain coupons that customers may use in the Baskin-Robbins stores. The company said it plans to expand distribution of the products and introduce new varieties.

“And we are also continuing to grow our presence in BR products in grocery stores across the Middle East and Asia,” Mr. Travis said. “Although early, our international C.P.G. efforts are being well received.”

With the K-Cup agreement, Dunkin’ Brands received upfront revenue that contributed to a strong first quarter. For the three months ended March 28, Dunkin’ Brands had net income of $25,631,000, or 26c per share on the common stock, up 12% from $22,956,000, or 22c per share, in the year-ago quarter, reflecting an increase in operating income that was offset by a loss on debt extinguishment, refinancing transactions and an increase in interest expense.

Revenues totaled $185,905,000, up 8% from $171,948,000 in the prior-year period, driven by increased royalty income as well as revenue recognized in connection with the Dunkin’ K-Cup agreement.

“We think there are some cross-marketing opportunities recognizing that being in the retail channels has the ability to make Dunkin’ K-cups available in a number of other outlets, and we think the cross-marketing opportunities there will have a stabilizing and perhaps even a positive impact on our K-cups in-store,” said John Costello, president of global marketing and innovation.

Added Mr. Travis: “I think it is fair to say taking K-Cups into retail and on-line across the country will help us as we go into some of these Western markets where we are not highly penetrated today. We have seen that with packaged coffee and I think you will see more of it in K-Cups.”

Concurrent with its expanded partnership with Smucker and Keurig, Dunkin’ Brands also announced details of a new franchisee profit-sharing program as part of a long-term deal under which Dunkin’ Brands will equally share with qualified U.S. Dunkin’ Donuts franchisees its net profits from the sale of its K-Cup packs and packaged coffee from outlets outside of its restaurants.

Segment performance

Dunkin’ Donuts U.S. first-quarter revenues rose 7% to $133,867,000 as a result of an increase in system-wide sales, franchise fees and rental income. Segment profit increased 4% to $93,406,000, driven by revenue growth. Comparable store sales rose 2.7% as a result of increased average ticket and higher traffic driven by strong beverage sales growth and continued breakfast sandwich momentum. The company opened 78 units in the quarter.

“We faced both record-breaking snowfall and prolonged periods of remarkably cold weather across many of the markets where the majority of our Dunkin’ Donuts restaurants are located in the U.S., such as in New England and New York,” Mr. Travis said. “Despite this, we had positive traffic growth and a stronger overall comp growth performance than people may have been expecting.”

Baskin-Robbins U.S. revenue increased more than 8% to $9,872,000 as a result of increased royalty income and revenues driven by an increase in licensing income from the sale of ice cream. Segment profit rose 23% to $5,969,000 in the quarter as a result of an increase in revenues and a decrease in general and administrative expenses. Comparable store sales grew 8%, driven by increased sales of cups and cones, desserts, beverages and sundaes, as well as increased sales of cakes boosted by on-line cake ordering.

Dunkin’ Donuts International revenues rose 54% to $6,578,000, due to the recovery of prior-year royalty income and franchisee fees as a result of a settlement reached with a master licensee. Segment profit increased 51% to $4,300,000, driven by revenue growth offset by increases in general and administrative expenses. Comparable store sales grew 1.7% for the quarter. System-wide sales declined 0.3% from the prior-year period, reflecting weakness in South Korea offset by growth in Asian and the Middles East. Sales in Europe, South America and South Korea were affected by unfavorable currency translation. On a constant currency basis, system-wide sales grew approximately 5%.

Baskin-Robbins International revenues fell 22% to $23,568,000, reflecting decreases in ice cream sales in the Middle East and Australia and decreases in royalty income and franchise fees. Segment profit dropped 16% to $7,971,000, due to a decrease in net margin on ice cream as a result of sales declines. Comparable store sales grew 0.3%.

“As for our international businesses, I feel we are making real progress with these segments but make no mistake, it is tough,” Mr. Travis said. “In my experience, this is typical in an international turnaround. We’re going to have hits and misses along the way, and the world economies are highly fluid, and at any given time you can have regions where macro factors are significantly challenging the business despite your plans for the market.”

Management has raised its targets for revenue growth to 6% to 8%, up from 5% to 7%, and adjusted earnings per share to $1.87 to $1.91, up from $1.83 to $1.87. The company has updated the targets to reflect the financial impact of the Dunkin’ K-Cup agreement net of the financial impact of the profit-sharing agreement with Dunkin’ Donuts U.S. franchisees.

The company continues to expect comparable store sales growth of 1% to 3% at Dunkin’ Donuts U.S. and 1% to 3% at Baskin-Robbins U.S. in 2015. Globally, the company expects to open between 615 and 750 net new restaurants.

The company also announced some changes on the executive team. Mr. Costello plans to retire in 2016. Chris Fuqua, who has been named vice-president of Dunkin’ Donuts brand marketing and global consumer insights and product innovation, and Scott Hudler, vice-president of global consumer engagement, will assume Mr. Costello’s responsibilities. Mr. Fuqua previously was vice-president of Dunkin’ Donuts brand marketing.

Additionally, Scott Murphy, chief supply officer and senior-vice president of international, will expand his responsibilities to oversee operations of Dunkin’ Donuts and Baskin-Robbins Europe, and Paul Carbone, senior vice-president and chief financial officer, will lead the company’s growing C.P.G. business, in addition to his current responsibilities.
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