Key Themes to Track When Dunkin' Brands Reports Earnings

Dunkin' Brands Group (NASDAQ: DNKN) reports its second-quarter 2018 results next week on July 26. The quick-service restaurant chain has chalked up a stock price return of 35% over the last 12 months, due in part to investors' confidence in its strategy of investing in franchisee growth.

Will DNKN shares continue to rise after the company's upcoming earnings release? The following are key themes that investors can use to measure next week's report against current company strategy and goals.

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Comparable-store sales and other vital measures

Dunkin' Brands' comparable-store sales in its largest segment, Dunkin' Donuts U.S., dipped 0.5% in the first quarter of the year, as higher revenue per transaction was offset by lower traffic. Among other segments, Dunkin' Donuts International comps improved by 2.1% and the company's Baskin-Robbins International segment posted attractive comps growth of 10%, offsetting a Baskin-Robbins U.S. comps dip of 1%.

Management typically only provides a comparable-sales growth target for Dunkin' Donuts U.S. as it comprises more than three-quarters of company revenue (excluding advertising revenues). For the full 2018 year, management expects Dunkin' Donuts U.S. to deliver comps growth of 1%, although the second quarter may persist in a flat to negative trend as we'll discuss below.

As for other important measures, Dunkin' Brands has guided investors to expect companywide revenue growth in the low- to mid-single digits and operating income expansion in the mid- to high-single digits in 2018. For comparative purposes, revenue and operating income in the first quarter expanded by 1.7% and 3.5%, respectively.

Finally, the company also is seeking to reduce general and administrative (G&A) expense over the full year by 5%. G&A expense dropped less than 1 percentage point against the prior year in the first quarter of 2018.


New leadership at the helm

As shareholders who closely follow the company already know, last week, CEO Nigel Travis announced his retirement and immediately handed the reins to his chosen successor, Dave Hoffman. Travis has been appointed executive chairman of the company's board of directors and plans to remain active in the business, with a focus on international restaurant expansion.

Hoffman, a veteran of competitor McDonald's Corporation joined Dunkin' Brands in 2016 as head of Dunkin' Donuts U.S. He's led the effort to simplify Dunkin' Donuts' menu and modernize its locations, while increasing brand relevancy in the midst of sharp competition.

Investors should keep an ear open for any initial signs of strategy changes during the company's upcoming earnings conference call. Since Hoffman has already spent the last two years reinvigorating the U.S. franchise, any departures from the current plan are likely to occur in the company's larger global business and/or Baskin-Robbins ice cream revenue stream.

Update on the simplified menu

Last quarter, the company reported that it had completed the rollout of its simplified menu through 100% of the Dunkin' Donuts U.S. system. This initiative included the removal of 10% of items that franchisees were previously required to offer, as well as the elimination of an additional 23 optional products.

Management has projected an initial drag of 1 percentage point on Dunkin' Donuts U.S. comps in the first months following the launch, which investors can take to mean the second quarter. Thus, the full-year comps target of 1% growth in the U.S. Dunkin' business may end up being a task slated for the back half of the year.

Along with a store revamp that will see at least 50 technology-enabled, next-generation locations open this year (between remodels and new units), menu innovation may prove one of Dunkin' Brands' most potent competitive weapons in the coming years. For those interested, I've written a more in-depth analysis on the potential effects of the simplified menu in an article from late spring of this year.

Packaged-foods growth

Consumer-channel sales have become an attractive, emerging revenue source for Dunkin' Brands. Last year, the company derived nearly 5% of total revenue from the licensing fees it earned in the consumer packaged goods (CPG) category. Dunkin' Brands licenses its trademarks and product formulas to the J.M. Smucker Co. for sales of packaged coffee, to Keurig Green Mountain and Smucker for K-cup pod sales, and to the Coca-Cola Corporation for sales of ready-to-drink Dunkin' Donuts iced coffee.

Branded Dunkin' packaged foods are outpacing the rest of the business: During the first quarter, management pointed out that retail sales of these products in grocery and convenience channels expanded at a rate of 10%. The licensing fees from CPG sales get classified in the company's "other revenue" segment, and management expects such sales to expand the other revenue business in the high-single-digits range this year. In the first quarter, other revenue increased just 0.5%; expect to see a much stronger result in the second quarter.

Share repurchases

Following on the heels of a major share-repurchase exercise of $650 million, which was conducted in the first quarter of 2018, Dunkin' Brands announced a new buyback program in May of this year. The organization's board of directors has approved a two-year, $250 million share-repurchase authorization. Shareholders appear to appreciate — and expect — the company's regular share-buying programs. By its own count, Dunkin' Brands has bought back $2.65 billion worth of its stock since becoming a public company in 2011.

For investors, it's important to know how fast the company intends to run through this newest authorization. This is a topic that will likely be addressed by CFO Kate Jaspon during next Thursday's earnings call. My guess is that management will take its time making stock purchases under the new plan.

Dunkin' Brands currently has a debt-to-EBITDA ratio of 6.25 — leverage that's near the upper end of an acceptable limit. Of course, an appreciable amount of the company's debt has arisen from its practice of frequent stock repurchases. From a practical standpoint, the organization will probably keep a minimal pace of repurchasing over the next few quarters as it builds up more cash and borrowing capacity via its strong cash flow.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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