As chief executive officer Nigel Travis pointed out during Thursday’s (April 26) first-quarter earnings release, Dunkin’ Donuts is one of the fastest growing retail brands in the country. Fueling that expansion long-term, however, are certain initiatives likely to trim short-term sales figures. One of them is Dunkin’s 10-percent cutback of its menu, tested in five markets in 2017 across 5,000 restaurants. When first discussed in January, executives said the change was trimming transactions by about 15 per week, per store. Dunkin’ also warned investors it could result in a 1 percent short-term sales decline.
That reality, along with what Travis called “a tough backdrop of intense competitive activity and adverse weather,” dragged Dunkin’s same-store sales down 0.5 percent in the first quarter.
The simplified menu is in 100 percent of Dunkin’s U.S. restaurants now.
“While we were confident in the 2017 menu simplification test results, and we knew it was the right thing to do if we progressed with the blueprint, we also knew it was an unprecedented effort for the Dunkin' system going from 1,000 to 9,000 restaurants with a new simplified menu,” Travis said in Thursday’s conference call. “We are proud of the team effort that it took to execute this program, despite the other headwinds we were facing in the first quarter.”
Dave Hoffmann, president of Dunkin' Donuts U.S., added that Dunkin’ expects to see an impact to same-store sales of about 100 basis points in the months following this rollout, similar to what Dunkin’ witnessed in test markets.
“We continue to believe that over the long run, the simplified menu is an investment in a better environment for our people by taking complexity out of the restaurants,” Hoffmann said. “This in turn will enable the crew to deliver a better guest experience, improve order accuracy, drive franchisee profitability, and, ultimately, increase restaurant-level margins."
The brand’s oversized offerings led to customer confusion, inconsistency, and unrest with employees, Dunkin’ said. The move cut mostly slow-moving, complex, and off-strategy items, and also eliminated another 23 optional menu items. In test stores the change led to 90 minutes per day of labor savings and created 10 hours per week for employees to improve guest experience.
Despite the kickback, Dunkin’ still beat Wall Street’s marks on earnings by 9 cents at 57 cents per share, and 62 cents on adjusted EPS. Revenues bumped 1.7 percent versus the prior-year period, or $5 million, and the company added 56 net Dunkin’ Donuts in the U.S. It also entered into a $650 million accelerated share repurchase program, and surpassed $220 million in retail sales of CPG products across both brands, including $34 million in ready-to-drink sales.
The menu simplification is just one change unfolding at Dunkin’. Another is the continued introduction of the company’s next-generation store. The first, which debuted in Quincy, Massachusetts, featured a double drive-thru with one lane dedicated to mobile orders. Dunkin’ expects to open about 50 next-generational restaurants, which covers new and remodeled stores, in fiscal 2018.
“The next-generation restaurant is the true embodiment of our blueprint for growth, and is key to transforming Dunkin' into a beverage-led on-the-go brand. The new store designs bring together all of the strategic initiatives we are making and turns them into customer noticeable change which we know is key to driving comp sales growth and profitability for our franchisees,” Hoffmann said.
This model taps into Dunkin’s growing Perks loyalty program. Hoffmann said Dunkin’ added about 500,000 new members to its loyalty program for a total of nearly 8.5 million guests.
“With our Perks program now nearly 4 years old, our strategic focus has shifted from using our loyalty program primarily as a tool to provide value offers to using it as an engagement platform to deepen our relationship with our customers and drive incremental sales and more profitable transactions,” Hoffmann said.
Dunkin’s On-The-Go mobile ordering remains a focus as well. Hoffmann said the Winter Olympics, where Dunkin’ ran dedicated ads in conjunction with its sponsorship of the U.S. women’s hockey team, resulted in On-The-Go transactions as a percentage of overall business hitting record highs. The platform is also experiencing a retrial rate of 80 percent.
Dunkin’ continues to see resounding success with its breakfast sandwich sales as well, appreciating record-breaking numbers yet again in Q1. Earlier in the year, Dunkin’ said its morning business was representing about 60 percent of systemwide sales, and that the segment reported positive for Dunkin year-over-year and increased sequentially each quarter in 2017. The fourth quarter also saw record-breaking sales for breakfast sandwiches, which have gained sales momentum for six straight quarters.
That’s nothing new. Dunkin’ commitment to afternoon business is, though. Hoffmann said the chain “saw an improvement in our afternoon traffic as a result of our PM beverage break offers, conducted successful value menu tests leading to a national launch in April, and drove flavored coffee and espresso sales with our innovative Girl Scout partnership."
Dunkin’ has several plans to boost PM business. Dunkin’ Deals—a series of value offers expected to go live at participating restaurants throughout the yea—is one. The first deal, for example, offered two Egg and Cheese Wake-up Wrap Sandwiches for $2, and, to drive afternoon traffic specifically, a medium hot or iced latte for $2 from 2 to 6 p.m. Dunkin’ is working to extend its premium tea and frozen beverage lines, as well as introducing more espresso products.
The Girl Scout promotion Hoffmann referenced arrived in February. Dunkin’ Donuts, under a licensing agreement with Girl Scouts of the USA, introduced a trio of new coffee flavors inspired by iconic Girl Scout Cookie varieties: Thin Mints, Coconut Caramel, and Peanut Butter Cookie. The deal ran from February 26 through May.
Dunkin’ said it had the highest daily donut sales on record this past Valentine’s Day, up 10 percent over last year’s results with more than 70 percent of donut transactions coming with an attached product.
Diving deeper into the comps drop, Dunkin’ said the 0.5 percent decline could be credited to an increase in average ticket offset by a decline in traffic.
In the 1Q, Dunkin’ franchisees and licensees opened 71 net new restaurants globally, including 56 in the U.S., six Baskin-Robbins U.S. stores, five international Baskin-Robbins, and four Dunkin’ international units. Additionally, Dunkin’ U.S. franchisees remodeled 55 restaurants and Baskin-Robbins U.S. franchisees remodeled 26.
Dunkin’ wants to add about 1,000 new stores in the next two years—more than 90 percent of which will be built outside of its Northeast base.
Baskin-Robbins U.S. comparable store sales declined 1 percent during the first quarter as an increase in average ticket was offset by a decline in traffic. Beverage sales were up during the quarter driven by shakes, smoothies, and Cappuccino Blast.
Dunkin’s international first quarter systemwide sales increased 8.8 percent from the prior-year period driven primarily by sales growth in Europe, the Middle East, South Korea, and Latin America.
For fiscal 2018, Dunkin’ said it expects about 1 percent same-store sales growth in the U.S. and for franchisees to add more than 275 net new restaurants. Additionally, for 50 next-generation units, and low-to-mid single-digit revenue growth.
The company also raised its forecast for GAAP diluted earnings per share from $2.20–$2.29 to $2.49–$2.58.