Dunkin' Brands Group Battles Lower Traffic as the "Amazon Effect" Takes Hold

By Joe Tenebruso Markets Fool.com

Dunkin' Brands Group (NASDAQ: DNKN) reported first-quarter results on May 4. The owner of the Dunkin' Donuts and Baskin-Robbins chains was able to deliver higher profits despite tepid sales growth, yet the relentless onslaught of e-commerce -- and its far-ranging impact on the broader retail industry -- remains a challenge.

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Dunkin' Brands Group results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$190.7 million

$189.8 million

0.5%

Operating income

$91.3 million

$85.3 million

7%

Earnings per share

$0.51

$0.40

27.5%

Data source: Dunkin' Brands Group Q1 2017 earnings release.

Image source: Dunkin' Brands Group.

What happened with Dunkin' Brands Group this quarter?

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Franchisees and licensees opened 29 net new restaurants, including 56Dunkin' DonutsU.S.stores, which were offset by the closure of 27internationallocations. That helped bring Dunkin' Donuts' total store count to 12,287 at the end of the first quarter, signifying year-over-year unit growth of 3.8%.

Dunkin' Donuts comparable-store sales, however, were flat, as a decline in store traffic negated the positive impact of price increases. Lower traffic levels also dented comps at U.S. Baskin-Robbins locations, which fell 2.4%.

During a conference call with analysts, Dunkin' Brands Chairman and CEO Nigel Travis said that sales are being affected by Amazon.com's (NASDAQ: AMZN) impact on the overall retail industry:"The consumer is demanding higher-quality products more quickly and at lower prices, a phenomenon known as the Amazon effect. It's pushing grocery stores to lower food prices to compete and is resulting in a greater than 3-point gap between food-at-home and food-away-from-home indices."

Cheaper grocery prices make restaurants a relatively less compelling option for consumers, which is serving as a headwind for Dunkin' Brands' business.

In all, companywide revenue rose less than 1%, to $190.7 million, as increased royalty and rental income was largely offset by Dunkin' Brands' decision to sell its remaining company-owned restaurants in the fourth quarter.

Yet those store closures did have a beneficial impact on adjusted operating income, which rose 5.9% to $96.7 million, as adjusted operating margin improved to 50.7% from 48.1% in the year-ago period.

All told, adjusted net income -- aided by tax benefits -- jumped 24.6% to $50.7 million, and adjusted EPS increased 22.7% to $0.54.

"In the first quarter of 2017, we achieved mid-single digit operating income growth and double-digit earnings-per-share growth," Travis said in a press release. "While ourDunkin' DonutsU.S.comparable stores sales were flat in the quarter, these results, delivered against an increasingly challenging environment for retail and restaurants, demonstrate thebenefitsof our asset-light, 100-percent franchised business model."

Looking forward

As for its full-year guidance, Dunkin' Brands remains confident that it can deliver "low single digit" comp growth and "low-to-mid single digit" revenue growth.

In total, the company expects to add 385 Dunkin' Donuts and 10 Baskin-Robbins net new restaurants in the U.S., as well as 200 net new international stores across the two brands.

Dunkin' Brands also raised its full-year adjusted EPS forecast to $2.40-$2.43 -- up from prior estimates of $2.34-$2.37 -- mainly due to a lower expected tax rate.

"Going forward, we will ... drive growth and long-term competitive differentiation bypositioning Dunkin' as a beverage-led, to-go brand," added Travis."Our goal is to ensure that Dunkin' is a place of positive transition in our guests' lives, the place thatenergizes them andsendsthem on their way to make the most of their day."

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.