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Dunkin' Brands Group, Inc.’s (DNKN - Snapshot Report) second-quarter 2013 adjusted earnings of 41 cents per share beat the Zacks Consensus Estimate by a penny and the year-ago quarter’s earnings of 33 cents by 24.2%. The company’s higher top line and margin expansion boosted the earnings during the quarter. 

Quarterly total revenue came in at $182.5 million, up 5.9% year over year, driven by the increase in the company’s ice cream products sale and higher royalty income. However, revenues missed the Zacks Consensus Estimate of $184.0 million by 0.8%

Behind the Headline Numbers

During the second quarter, Dunkin' Donuts U.S. revenues increased 4.9% annually to $128.7 million on the back of higher royalty income and an 8.2% rise in systemwide sales growth. The segment’s comparable store sales grew 4% during the quarter with the rise in the average ticket as well as traffic. An increased business in beverage line up also facilitated the growth. Although comps remained flat year over year, it increased 230 basis points (bps) sequentially.

Revenues from the Dunkin' Donuts International nudged up 1.6% year over year to $3.9 million led by a 3.5% rise in systemwide sales and improved business in Germany and Southeast Asia. Comparable store sales at the segment were down 1.7% owing to bad weather especially in Korea (accounts for 45% of the company’s international business). However, comps were up 3.5% in the comparable year-ago quarter.

Baskin-Robbins U.S. segment’s revenues were $12.5 million, down 2% year over year owing to a 19.9% fall in rental income due to a decrease in the company’s refranchising activity. Comps were up 1.6%, led by higher sales of Baskin-Robbins’ Flavors of the Month in the country. However, comps were down 300 bps from the year-ago quarter.

Baskin-Robbins International’s sales increased 16.0% to nearly $34.9 million, driven by higher sales of the ice cream products in Middle East. The segment has also gained from the divestment of Baskin-Robbins Australia. Comps were up 2.6% versus 1.5% in the prior-year quarter. Introduction of new items in the cake category helped augment the segment’s comps offsetting the adverse impact of the cold weather.

Margin

Adjusted operating margin increased 420 bps to 50%, gaining from the sale of Baskin-Robbins Australia and lower operating costs. 

Store Update

The company’s franchisees and licensees have unveiled 151 restaurants worldwide during the second quarter. While the company has opened 63 and 33 Dunkin' Donuts in the domestic market and international market, respectively, it has launched five Baskin-Robbins outlets in the U.S. and 50 at international locations. In addition, Dunkin’ Brands has renewed 141 franchised units in the U.S. As of Jun 29, 2013, the company owned 10,600 Dunkin' Donuts restaurants and 7,000 Baskin-Robbins restaurants worldwide.

Liquidity

Dunkin’ Brands ended second-quarter 2013 with cash and cash equivalents of $177 million versus $179.2 million at the end of previous quarter. Long-term debt at the end of the quarter was $1.82 billion versus $1.83 billion in the first quarter.

Share Repurchase

Dunkin’ Brands bought back 0.4 million shares in the quarter. At the end of the quarter, shares worth nearly $33 million were left under the company’s existing share repurchase program. 

Outlook

The company increased its earnings guidance for 2013. Dunkin’ Brands projected adjusted earnings in the range of $1.50 to $1.53 per share, up from the previous $1.48 to $1.51 per share for 2013.

However, the company has maintained its revenue and comps guidance for 2013. Revenue growth is projected to be 6%-8% and adjusted operating income is likely to grow by 10%-12% in 2013. The company anticipates that comps at Dunkin' Donuts and Baskin-Robbins in the U.S. will grow 3%-4% and 1%-3%, respectively.

Our Take

We are encouraged by Dunkin’ Brands’ double-digit earnings growth and higher top line. The company’s increasing focus on expansion efforts, advertising and promotion strategies and menu innovation is augmenting its business. 

With its 100% franchise-based model, this Zacks Rank #2 (Buy) company will be able to reduce its capital requirements and facilitate earnings per share growth and return on equity expansion. Additionally, we remain optimistic about Dunkin’ Brands’ breakfast sandwich and beverage business which is expected to boost its sales, going ahead.

Some other players in the restaurant industry which look attractive at the current level include Yum! Brands Inc. (YUM - Analyst Report), Bravo Brio Restaurant Group, Inc. (BBRG - Snapshot Report) and Burger King Worldwide, Inc. (BKW - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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