Weaker Dunkin’ U.S. Comps and International Profits Prompt Downward Revision to Guidance

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Dunkin’s second-quarter adjusted EPS rose 15%, to $0.47, above our estimate of $0.46 and in line with consensus. EPS included an approximate $0.02 benefit from a lower-than-expected tax rate along with a $0.01 gain on a sale of all of Dunkin’s company-owned locations in Atlanta. Dunkin’ U.S. sales trends were softer than consensus expectations of 3.5% as well as our 2.5% to 3.0% comp estimate, as comps rose 1.8% against a 4.0% comparison. Traffic remained positive, accounting for more than half of the comp gain, while average ticket growth appeared to decelerate from recent quarters on fewer add-on items (food flat to slightly positive) and more strategic discounting in the midst of a more promotional competitive environment.

Rainy, cold weather at the start of the quarter also dampened trends (less than 100 basis points), although sales improved as the quarter progressed, hitting all-time-high average weekly sales in June. As a result of a 1.5% comp gain through the first half of the year, management lowered full-year comp guidance to 2% to 3% from prior expectations of 3% to 4%. Encouragingly, management indicated that recent sales trends provided it with confidence in its ability to meet the 2.5% comp gain needed in the second half of the year to meet the low end of guidance.

Comps at Dunkin’ International declined 3.1% against a -1.7% comparison, marking the fifth-straight quarter of negative trends, while Baskin International comps decreased 1.6% against a 2.6% comparison, marking the segment’s first negative comp in at least two years, with the weakness at both segments driven by soft results in two of the company’s largest international joint venture markets (comps were positive at both international segments after excluding results at Dunkin’ South Korea and Baskin Japan).

At Baskin-Robbins U.S., comps rose 4.2% against a 1.6% comparison, yielding the fifth-straight quarter of positive same-store sales growth and representing the segment’s best comp performance in two years. For the full year, management reiterated guidance for Baskin-Robbins U.S comps in the 1% to 3% range. All told, systemwide sales rose 6%, to $2.5 billion, in line with our estimate and accelerating from a 4.3% increase in the first quarter, yielding revenue of $191 million, up 5% but below consensus of $198 million and our estimate of $199 million. Margins at Dunkin’ Donuts U.S., Baskin-Robbins U.S., and Dunkin’ International rose versus last year while Baskin International declined, yielding 70 basis points of adjusted operating margin contraction, to 49.3% (lapping a $7 million gain on the sale of an 80% stake in Baskin-Robbins Australia last year, partly offset by a $2 million gain on the sale of company-owned Dunkin’ Donuts locations in Atlanta this year).

Jarrod Wesson covers media, telecom and momentum stocks for StreetWise. Prior to joining the company, Jarrod was a financial analyst for Pacific Crest.