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Dunkin' Brands Group, Inc. (DNKN - Snapshot Report) posted third quarter 2012 adjusted earnings of 37 cents per share, beating the Zacks Consensus Estimate by 2 cents and the year-ago quarter earnings by 9 cents. The quarter marked the fifth consecutive double-digit adjusted earnings per share growth.

On a reported basis, the company earned 26 cents per share compared with a loss of $1.01 per share in the prior-year quarter.

Quarter Highlights

Total revenue came in at $171.7 million, up 5.0% year over year, mainly driven by an increase in franchise fees and royalty income. However, the revenue figure missed the Zacks Consensus Estimate of $174.0 million.

Global system-wide sales increased 4.7% in the third quarter, mainly driven by new unit development and hike in comparable sales of Dunkin' Donuts U.S. and Baskin-Robbins International units.

Within the segments, Dunkin’ Donuts comparable sales grew 2.8% and 2.1% in U.S. and the international market, respectively. The U.S. business comps were driven by increased average ticket, innovative menu offerings and higher customer traffic.

On the other hand, comparable sales for Baskin-Robbins increased 1.1% and 3.0% in U.S. and the international market, respectively. The U.S business comps were driven by introduction of new menu items.

In the reported quarter, operating income expanded 30.0% year over year to $16.2 million, driven by an increase in royalty income and one-time expenses related to company's IPO in 2011.

Store Update

In the third quarter, the company’s franchisees and licensees opened 187 new restaurants worldwide, including 36 Dunkin' Donuts in the international market, 78 in U.S. locations and 74 Baskin-Robbins outlets in international locations. This also includes the closure of one Baskin-Robbins unit in U.S. In addition, Dunkin’ Brands’ U.S. franchisees remodeled 144 units during the reported quarter.

As of September 30, 2012, the company owned 10,283 Dunkin' Donuts restaurants and 6,920 Baskin-Robbins restaurants worldwide.

Liquidity

Dunkin’ Brands ended third quarter 2012 with cash and cash equivalents of $165.6 million and shareholders’ equity of $321.5 million. Long-term debt at the end of the quarter was $1,829.6 million.

Share Repurchases & Dividend

In the reported quarter, the company repurchased 15 million shares worth $450 million.

Dunkin’ Brands also announced a dividend of 15 cents per share for the fourth quarter 2012, payable on November 14, 2012 to shareholders of record as of November 5, 2012.

2012 Outlook

The company reaffirmed its comps and operating income guidance for 2012. Dunkin’ Brands continues to project comps increase for Dunkin' Donuts U.S. in the range of 4%-5% and for Baskin-Robbins U.S. in the range of 2%-4%. On the other hand, operating income increase is anticipated to be in the range of 12%-14%.

Dunkin’ reduced its revenue growth guidance for 2012 on account of change in ice cream shipping terms related to the manufacturing shift to Dean Foods, which will result in one-time setback in revenue recognition that will affect sales of ice cream products in the upcoming fourth quarter. Revenue growth is expected to be in the range of 6%- 7%, down from the previous guidance of 7%-8%.

However, Dunkin’ Brands increased its adjusted earnings per share and units growth guidance for 2012. The company now expects adjusted earnings in the range of $1.25 to $1.27 per share, up from the previous guidance of $1.22 to $1.25. The optimism reflects Dunkin’ Brands’ consistent comps growth and strong performance in the reported quarter.

The company expects worldwide unit growth in the range of 620 to 710, up from the previous range of 600-700 units. It upped its guidance to addition of 280-300 Dunkin’ Donuts U.S restaurants, from the previous guidance of 260- 280.

Dunkin’ affirmed its guidance for closure of around 40-60 net Baskin-Robbins U.S. restaurants and opening 400 to 450 new units across the two brands, on the international front.

Our Take

Canton, Massachusetts-based Dunkin’ Brands remains focused on its expansion plan, marketing innovation and menu innovation. Based on this, we expect analysts to revise their estimates upward in the coming days. Currently, the Zacks Consensus Estimate for 2012 and 2013 are pegged at $1.26 and $1.50, respectively.

Dunkin’ Brands competes with the likes of Yum! Brands, Inc. (YUM - Analyst Report), which reported its third quarter 2012 adjusted earnings of 99 cents per share, beating the Zacks Consensus Estimate by 2 cents.

Dunkin’ Brands currently carries a Zacks #3 Rank, implying a short-term Hold rating. We also reiterate our long-term Neutral recommendation on the stock.

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