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Dunkin' Donuts Comps Fall Amid "Intense" Competition

Joe Tenebruso, The Motley Fool

Dunkin' Brands Group (NASDAQ: DNKN) saw its profits boosted by tax reform in the first quarter, but lower comparable-store sales at its most important restaurant chain are giving investors cause for concern.

Dunkin' Brands Group results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$301.3 million

$296.4 million

1.7%

Operating income

$89.8 million

$86.8 million

3.5%

Earnings per share

$0.57

$0.48

18.8%

Data source: Dunkin' Brands Group Q1 2018 earnings release.

What happened with Dunkin' Brands Group this quarter?

Franchisees opened 71 net new restaurants, including 56 net new Dunkin' Donuts U.S. stores. That brought the company's total store count to 20,591 -- including 12,598 Dunkin' Donuts locations and 7,993 Baskin Robbins stores -- at the end of the first quarter, representing year-over-year growth of 2.4%.

However, Dunkin' Donuts U.S. comparable-store sales declined 0.5%, while Baskin-Robbins U.S. comps fell 1%. During a conference call with analysts, CEO Nigel Travis said that sales were negatively impacted by Dunkin' Donuts' move to simplify its menu, as well as unfavorable weather and "intense competitive activity":

As I have said on prior calls -- in fact, many prior calls -- we're not immune to the current macro environment. It is an increasingly challenging environment for retail and restaurants. Value wars among [quick-service restaurants] fighting for market share, minimum wage increases, and low unemployment: These are all realities our franchisees are seeing and feeling in the business.

To adapt to these challenges, Dunkin' Donuts is attempting to transform into a "beverage-led on-the-go brand." Seventy-five percent of its new restaurants will feature drive-thru lanes, which tend to increase sales by 40% on average compared to non-drive-thru locations.

"Going forward we believe we have the right plans in place, as well as the full alignment of our franchisees, to position ourselves for growth both now and for the long-term," Travis said in a press release.

A Dunkin' Donuts store with a drive-thru lane

Dunkin' Donuts is increasing drive-thru locations to boost sales. Image source: Dunkin' Brands Group.

All told, adjusted operating income rose 3.9% to $95.7 million. Adjusted net income, which benefited from a lower effective tax rate brought about by tax reform, jumped 14.4% to $54.4 million. And adjusted earnings per share -- boosted by a $650 million accelerated share repurchase program the company entered into during the first quarter -- leapt 21.6% to $0.62.

Looking forward

Dunkin' Brands issued an updated financial outlook for 2018, which includes:

  • 275 net new Dunkin' Donuts U.S. restaurants
  • Dunkin' Donuts U.S. comparable-store sales growth of 1%
  • "Low-to-mid single digit" companywide revenue growth
  • "Mid-to-high single digit" operating and adjusted operating income growth
  • GAAP EPS of $2.49 to $2.58, up from a prior forecast of $2.20 to $2.29
  • Adjusted EPS of $2.69 to $2.74, up from $2.40 to $2.45

"The Dunkin' U.S. blueprint for growth is all about deliberate, strategic sequencing," said David Hoffmann, president of Dunkin' Donuts U.S. and Canada. "And we are solidly on track to transform this iconic brand with our great franchisees and ensure long-term success for years to come."

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.