Dunkin' Brands Group, Inc., the parent company of Dunkin' Donuts and Baskin-Robbins, reported results for the third quarter ended September 24.
"Our Dunkin' Donuts U.S. business delivered solid comps for the quarter, fueled by record-breaking beverage sales, with double-digit growth in the espresso and iced coffee categories. Other noteworthy achievements in the quarter included: surpassing five million members in our DD Perks rewards program, which remains one of the fastest growing loyalty programs in the quick-service-restaurant industry; the opening of our 12,000th Dunkin' Donuts restaurant worldwide; the hiring of Dave Hoffmann, a leading restaurant executive, as our new Dunkin' Donuts U.S. and Canada president; and the announcement that we will be launching a line of Dunkin' Donuts ready-to-drink iced coffee beverages nationwide in 2017," says Nigel Travis, Dunkin' Brands chairman and CEO. "We are very pleased with the direction of the Company, and while we have much work to do, we are cautiously optimistic that our new five-part strategy for Dunkin' Donuts U.S., which focuses on coffee leadership, faster innovation, targeted value offers, digital leadership and an improved restaurant experience, will position the Company to see healthy growth in the months and years ahead."
"While the sale of our remaining company-operated restaurants drove a decline in revenues in the quarter, we are pleased to announce that we are now 100 percent franchised," adds Paul Carbone, Dunkin' Brands chief financial officer. "In regards to restaurant-level economics, we are particularly encouraged by first-year cash-on-cash returns that franchisees are experiencing in our high-opportunity West and Emerging markets. We will continue to focus on driving franchisee profitability by better serving the customer, building high-margin beverage sales, lowering store construction costs and simplifying store operations. Additionally, sales of Dunkin' Donuts- branded consumer goods through locations outside our restaurants, including our recently announced ready-to-drink iced coffee line, should drive Brand awareness, provide more opportunities for consumers to drink our coffee every day, and deliver profit-sharing income for our franchisees, including in our newest markets."
Global systemwide sales growth in the third quarter was primarily attributable to global store development and Dunkin' Donuts U.S. comparable store sales growth (which includes stores open 78 weeks or more).
Dunkin' Donuts U.S. comparable store sales growth in the third quarter was driven by increased average ticket offset by a decline in traffic. Growth was driven by strong beverage sales, led by iced coffee, including Cold Brew, and hot and iced espresso-based beverages, as well as breakfast sandwiches, led by the Maple Sausage and the Belgian Waffle breakfast sandwiches.
Baskin-Robbins U.S. comparable store sales were negative during the third quarter driven by a decline in traffic offset by increased average ticket. Growth in sales of cups and cones led by Warm Cookie and Donut Ice Cream Sandwiches was more than offset by declines in beverages and sundaes.
In the third quarter, Dunkin' Brands franchisees and licensees opened 115 net new restaurants around the globe. This included 56 net new Dunkin' Donuts U.S. locations (including the closing of five Speedway self-serve coffee stations), 45 net new Baskin-Robbins International locations, 11 net new Dunkin' Donuts International locations, and three net new Baskin-Robbins U.S. locations. Additionally, Dunkin' Donuts U.S. franchisees remodeled 127 restaurants and Baskin-Robbins U.S. franchisees remodeled 18 restaurants during the quarter.
Revenues for the third quarter decreased $2.7 million, or 1.3 percent, compared to the prior year period due primarily to a decrease in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants, a decrease in franchise fees driven by declines in gross openings and renewal income, as well as a decrease in sales of ice cream and other products primarily to the Middle East. As of September 24, there were six points of distribution that were company-operated, all of which were sold subsequent to quarter end. These decreases in revenues were offset by increased royalty income as a result of systemwide sales growth. Also offsetting the decrease in total revenues were increased license fees related to the Dunkin' K-Cup pod licensing agreement.
Operating income and adjusted operating income for the third quarter increased $9.6 million, or 9.6 percent, and $8.8 million, or 8.3 percent, respectively, from the prior year period primarily as a result of the increase in royalty income, as well as gains recognized in connection with the sale of company-operated restaurants and a reduction in general and administrative expenses driven primarily by a decrease in bad debt expense, offset by the decrease in franchise fees.
Net income and adjusted net income for the third quarter increased by $6.5 million, or 14.1 percent, and $5.8 million, or 11.5 percent, respectively, compared to the prior year period primarily as a result of the increases in operating income and adjusted operating income of $9.6 million and $8.8 million, respectively, offset by an increase in income tax expense.
Dunkin' Donuts U.S. third quarter revenues of $152.4 million represented a decrease of 1.3 percent compared to the prior year period. The decrease was primarily a result of a decline in sales at company-operated restaurants driven by a net decrease in the number of company-operated restaurants, as well as a decrease in franchise fees due to declines in renewal income and gross openings, and a decrease in other revenues driven primarily by a decline in refranchising gains. These decreases in revenues were offset by increased royalty income due to an increase in systemwide sales.
Dunkin' Donuts U.S. segment profit in the third quarter increased $6.2 million over the prior year period to $119.4 million, which was driven primarily by the increase in royalty income and an increase in other operating income due primarily to gains recognized in connection with the sale of company-operated restaurants, as well as a reduction in general and administrative expenses. These increases in segment profit were offset by the decreases in franchise fees and other revenues, as well as expenses incurred to record lease-related liabilities as a result of lease terminations.
Dunkin' Donuts International third quarter systemwide sales increased 8.1 percent from the prior year period driven primarily by sales growth in the Middle East, Europe, South America, Asia, and South Korea. Sales in South Korea were positively impacted by favorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 7 percent.
Dunkin' Donuts International third quarter revenues of $4.4 million represented a decrease of 3.8 percent from the prior year period. The decrease in revenues was primarily a result of a decline in franchise fees, offset by an increase in royalty income.
Segment profit for Dunkin' Donuts International decreased $0.3 million to $0.7 million in the third quarter primarily as a result of the decrease in revenues and an increase in general and administrative expenses driven primarily by an increase in bad debt expense, offset by an increase in net income from our South Korea joint venture.
Baskin-Robbins U.S. third quarter revenue increased 1.5 percent from the prior year period to $13.8 million due primarily to increases in rental income, sales of ice cream and other products, and franchise fees, offset by a decrease in other revenues driven by a decrease in licensing income.
Segment profit for Baskin-Robbins U.S. increased $1.3 million in the third quarter, or 13.4 percent, over the prior year period primarily as a result of a reduction in general and administrative expenses, due primarily to expenses incurred in the prior year period related to brand-building activities, as well as reductions in bad debt expense and incentive compensation.
Baskin-Robbins International systemwide sales increased 8.8 percent in the third quarter compared to the prior year period driven by sales growth in Japan and South Korea. Sales in both Japan and South Korea were positively impacted by favorable foreign exchange rates. On a constant currency basis, systemwide sales increased by approximately 2 percent.
Baskin-Robbins International third quarter revenues decreased 8.8 percent from the prior year period to $27.9 million due primarily to a decrease in sales of ice cream products to the Middle East, partially offset by an increase in royalty income. Systemwide sales and sales of ice cream products are not directly correlated within a given period due to the lag between shipment of products to licensees and retail sales at franchised restaurants, as well as the overall timing of deliveries between fiscal quarters.
Third quarter segment profit increased 18.5 percent from the prior year period to $11.2 million as a result of a decrease in general and administrative expenses driven by a reduction in bad debt expense, an increase in net income from our Japan joint venture, and an increase in royalty income. These increases in segment profit were offset by a decrease in net margin on ice cream driven primarily by a decline in sales volume.
The company announced that the board of directors declared a fourth quarter cash dividend of $0.30 per share, payable on November 30 to shareholders of record as of the close of business on November 21.
The company announced on September 22 that David Hoffmann was named president of Dunkin' Donuts U.S. and Canada, effective October 3. Hoffmann joins Dunkin' Brands after 22 years with McDonald's Corporation, where he most recently served as president, High Growth Markets, which included China, South Korea, Russia, and several additional European markets.
Hoffmann replaces Paul Twohig who, as previously announced, is retiring and will stay with the company through the end of the first quarter 2017 to ensure a smooth transition. In his new position, Hoffmann is responsible for Dunkin' Donuts operations and marketing in the U.S. and Canada, as well as global franchising and store development for both Dunkin' Donuts and Baskin-Robbins.
The company announced on September 29 that it will launch a line of Dunkin' Donuts branded ready-to-drink (RTD) coffee beverages in the United States in early 2017. The Coca-Cola Company will manufacture, distribute and sell the product. This marks Dunkin' Donuts' first entry into the RTD coffee category, which has enjoyed very strong growth over the past five years and represents $2.3 billion dollars in annual sales according to Nielsen.
The company now expects Dunkin' Donuts U.S. net development to be at the low end of the previously-provided range of 430 to 460 net new restaurants, excluding Speedway self-serve coffee station closures.
The company continues to expect Baskin-Robbins U.S. will add between five and 10 net new restaurants.
Internationally, the company continues to target opening around 200 net new restaurants across the two brands.