Dunkin' Brands (DNKN) Beats Q3 Earnings, Revenues Miss

Dunkin' Brands Group, Inc. (NASDAQ:DNKN) reported mixed third-quarter 2016 results, wherein the bottom line outpaced the Zacks Consensus Estimate while the top line lagged the same.

Earnings and Revenue Discussion

Adjusted earnings of 60 cents per share beat the Zacks Consensus Estimate of 58 cents by 3.4% and increased 15.4% year over year mainly due to decrease in shares outstanding and an increase in adjusted net income.

The quick service restaurant operator’s revenues in the quarter decreased 1.3% year over year to $207.1 million. Primary causes for the fall were a decline in sales at company-operated restaurants, a decrease in franchise fees as well as a drop in sales of ice cream and other products primarily to the Middle East. Revenues, thus, missed the Zacks Consensus Estimate of $213 million by 2.8%.

These declines were however somewhat offset by higher royalty income and increased license fees related to the Dunkin' K-Cup pod licensing agreement.

Inside the Headline Numbers

Dunkin' Brands operates through its Dunkin’ Donuts and Baskin-Robbins brands.

System-wide sales increased 6.3%, comparing favorably with 3.8% growth in the prior quarter.

Dunkin’ Donuts

Dunkin' Donuts U.S. reported revenues of $152.4 million, reflecting a decline of 1.3% over the prior-year quarter. The decrease was mainly attributable to decline in sales at the company-operated restaurants, a decrease in franchise fees and other revenue, partially offset by increased royalty income.

Comps increased 2% in the Dunkin Donuts U.S. division, comparing favorably with 1.1% growth in the prior-year quarter and 0.5% growth in the preceding quarter.

Comps at Dunkin’ Donuts International division declined 1.4%, as against 0.8% growth in the prior-year quarter. The figure compared favorably with a decline of 3.1% in the preceding quarter.

Baskin Robbins

Baskin-Robbins revenues were up 1.5% from the prior-year quarter to $13.8 million mainly due to rise in rental income, sales of ice cream and other products, and franchise fees, offset by a decrease in royalty income.

Comps decreased 0.9% in the Baskin Robbins U.S. division, weaker than 7.5% growth in the year-ago quarter and 0.6% growth in the prior quarter.

However, at Baskin Robbins International division, comps declined 2.9%, wider than the 2.4% slump in the prior-year quarter but better than the 6.6% fall in the prior quarter.

DUNKIN BRANDS Price, Consensus and EPS Surprise

Operating Margin

Adjusted operating income rose 8.3% from the prior-year quarter to $114.8 million mainly due to the increase in royalty income, as well as gains from company-operated restaurants and a reduction in general and administrative expenses. Meanwhile, adjusted operating income margin rose 490 basis points to 55.4%.

Store Update

In the third quarter, Dunkin' Brands opened 115 new restaurants worldwide. These include 56 Dunkin' Donuts U.S. locations and 11 Dunkin' Donuts international outlets. There were 45 new openings under Baskin-Robbins International and 3 under Baskin-Robbins U.S. division.

Additionally, Dunkin' Donuts U.S. franchisees remodeled 127 restaurants while Baskin-Robbins U.S. franchisees renovated 18 outlets during the quarter.

Guidance for 2016

For full-year 2016, Dunkin’ Brands maintains adjusted earnings per share projections in the range of $2.20–$2.22 and adjusted operating income growth in the band of 8–10%. Notably, the adjusted earnings per share guidance is based on a period of 53 weeks. The 53rd week is expected to add approximately 3 cents to 2016 earnings.

However, Dunkin’ Brands lowered its expectation of revenue growth to approximately 2% (earlier 3–5%) taking into account weaker-than-expected sales of ice cream products related to its Baskin-Robbins International segment.

Dunkin' Donuts U.S. comps are maintained in the range of flat to up 2%. However, Baskin-Robbins U.S. comps growth is now expected to be slightly positive as compared with the previous guidance of 1–3%.

Zacks Rank and Stocks to Consider

Currently, Dunkin’ carries a Zacks Rank #3 (Hold).

Better-ranked restaurant stocks include Potbelly Corporation (NASDAQ:PBPB) , Wingstop, Inc. (NASDAQ:WING) and Darden Restaurants, Inc. (NYSE:DRI) .

Potbelly currently sports a Zacks Rank #1 (Strong Buy). Its current year growth estimate is pegged at 25.9% compared with the industry average of 8.7%.

Wingstop current year growth estimate is pegged at 18.1% compared with the industry average of 8.7%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Darden holds a Zacks Rank #2 (Buy). It recorded positive earnings surprises in all of the four trailing quarters, with an average beat of 9.32%.

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