Dunkin': Menu, Marketing Drive 3Q Sales Growth

Dunkin' Brands Group Inc., parent company of Dunkin' Donuts and Baskin-Robbins, reported Tuesday a decline in third-quarter income, driven by expenses surrounding its initial public offering in July, but discussed positive sales trends and aggressive expansion plans.

The Canton, Mass.-based company also said Tuesday that certain shareholders would hold a secondary offering of stock, looking to sell 22 million shares in the fourth quarter. Dunkin' Brands is not selling stock and will not receive proceeds from the pending sale.

Looking at third-quarter results, Dunkin' officials said new menu items, consumer engagement and operational improvements helped performance during the company's first full quarter as a public company, which ended September 24. The company held its initial public offering at the end of July.

In a conference call to discuss the quarterly results, chief executive Nigel Travis and chief financial officer Neil Moses said same-store sales at both Dunkin' Donuts and Baskin-Robbins increased on the strength of new menu items, improved and targeted marketing programs and greater efficiencies resulting from new technologies, like point of sale systems.

Domestic same-store store sales for Dunkin' Donuts rose 6 percent in the quarter, up from a 2.7 percent increase in the third quarter of 2010. Domestic same-store sales at Baskin-Robbins rose 1.7 percent, turning around a 5.8 percent decline a year earlier.

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Third-quarter net income totaled $7.4 million, a decrease of 60.7 percent from $18.8 million in the year-ago quarter. Adjusting for one-time items like IPO expenses and debt reductions, Dunkin' Brands' adjusted net income for the quarter rose to $31.3 million, a 32.5 percent increase from the same quarter a year ago. The company cited increased adjusted operating income and lower interest expense.

Corporate revenue rose 9.3 percent to $163.5 million.

Menu and marketing driving results

Travis said both the number of transactions and the average price of each transaction rose at Dunkin' Donuts, in part due to premium items such as the Big 'N Toasty breakfast sandwich, and the 9,900-unit chains' chicken sandwich, which helped drive lunch traffic. New frozen iced tea and frozen lemonade and additions to the chain's Coolatta slush beverage line helped to drive consumer interest, he said.

So did Dunkin' Brands' first-ever movie promotion. Travis said he believed this summer's promotion of Captain America: The First Avenger, with limited time offerings at both Dunkin' Donuts and Baskin-Robbins, helped drive traffic. He added that Dunkin' Donuts promotional presence on the Sims Social Facebook game, in which players can give each other Dunkin' products within the game, and the first national check-in promotion with Foursquare and Facebook, engaged customers and helped generate more than a million new Facebook fans.

He added that those fans tend to spend more money per visit than non-fans.

Travis added that Dunkin' Donuts advertising on ESPN's Monday Night Countdown also helped to drive sales.

Also during the quarter, Dunkin' introduced single-serving Keurig cups, or K-Cups in 14-count boxes for a suggested $11.99. The cups were introduced in August, one month into the quarter, and advertising for them began in September.

Travis said consumer response to the cups had been "very positive," and had increased average tickets without cannibalizing other sales. In response to questions from analysts, executives said K-Cups accounted for slightly less than 20 percent of total same-store sales, in line with expectations, and that brewers would start going into restaurants this week for sale to consumers.

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Expected expansion

Pointing out that Dunkin' Donuts does not have a strong presence across the United States, Travis said the opportunity to expand separates it from competitors and that it plans to expand to contiguous territories, radiating from "hub cities to spoke markets." The franchisor has been actively recruiting in Texas, Oklahoma, Colorado, Nevada and Nebraska, he said, although units in those states would likely not open until early 2013.

The chain added 57 new franchised locations in the United States during the third quarter, and more than 70 percent of those were outside the chain's core markets, Travis said. He narrowed its projection of new openings for the year to between 220 and 240. Previously the target had been between 200 and 250, he said.

Additionally, 135 units had been remodeled with an updated image, and Travis said they were on track to remodel more than 500 stores this year.

Travis said he expected international growth to exceed domestic growth. He said he saw particular potential for growth in Spain, Germany, India and Latin America. He said Chinese and Taiwanese franchisees were currently repositioning themselves and localizing their offerings more. He said the company's partners in South Korea had already done "a very good job in this repositioning," and was focusing more on beverages.

Baskin-Robbins closed a total of 18 units in the United States, but sees growth possibilities overseas. Travis called Baskin-Robbins' international division, which accounts for about 15 percent of total revenues, a "real jewel in the crown," with potential for "significant growth both in the near and longer term."

New products were being introduced in those markets, including snowman cakes and scoops in the Middle East and South Korea. Moon cakes had been introduced to China with the first-ever television campaign in that country. Moon cakes are a stuffed Chinese pastry traditionally eaten during a mid-Autumn festival.

Revenue from Baskin-Robbins International totaled $28.1 million, compared with $25.3 million in the year-ago quarter. A net 83 units opened in the quarter.

Contact Bret Thorn at bret.thorn@penton.com.
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