Earnings call overview: DBI delivered positive but modest same store sales, beat consensus earnings by $.01 but missed the revenue consensus forecast. Problems in DD international, DD withdrawal from Taiwan and continued US Baskin net store contraction didn’t seem to worry Wall Street, with the stock up $.83 or 2.2% at 200P EST. The sell side analysts were concerned that US DD comps would continue to fall, but actually wiggled up a bit, as seen below. DNKN’s earnings numbers continue to be affected by a lot of special one time adjustments, which makes the number hard to read. The adjustments make the sky high DNKN PE ratios look lower and more reasonable. Most of this memo will relate to US DD matters. The non-US DD discussion tone was guarded and “improvement will happen in the future”, with the market closure, and additional international DD supply chain investments required (always scary to Wall Street). There was even a Baskin ice cream revenue problem associated with the changeover to Dean Foods. There is no doubt that DD US is the total key to this company right now.
The DD comp was described as 2.4% higher average check, .8% higher traffic. Of the higher average check, Paul noted the components were about 1% price and 1.4% favorable product mix. This is the first time DNKN has talked to these components in such detail, and is about what I thought it would be.
Nigel noted that traditional DD US store AUVs were now $1M for the first time ever. Nigel mentioned DD US shops in the west had already received a 300 basis points (3% of revenue) store EBITDA favorable impact due to the NDCP level pricing, and another 300 basis points in store expected later. 1 John Costello mentioned the rate of sales comp growth was better in the new markets. This seems to be confused by Nigel sometimes who says West AUVs are higher than in the core markets. Note that Starbucks US reported much higher traffic (+4%) versus DD US, and another smaller chain, Coffee Bean and Tea Leaf, reported this week same store sales gains in excess of 5% for 4 years straight.
The brand continues to use the 2011 DD Store data, as AUV of $858K (all store types), buildout cost of $464K, and a 25-30% EBITDA payback. Working backwards, this indicates the US store EBITDA is approximately 13.5% or $116K per store. As I’ve discussed, that is a misleading metric because debt service and capital expense (CAPEX) isn’t included.
- Nigel noted the NDCP was doing well and they had worked some issues with them earlier in the year—a POS system technology issue.
- DD US K Cups comps were said to be strong (+30%) with one new flavor and 2 KCup LTOs. This is good product lifecycle extension in my opinion.
- DBI announced the hope to refinance and has a private lenders call today. They hope to score interest rate savings, not run up the debt. Corporate debt currently is cheap and this is a good thing overall. Their debt to EBITDA ratio is now 5.2X 2and they hope to get to 4.5X range before more dividends or stock buybacks are done. My note: over 5X is a bit high and the debt markets see franchisors ideal at about 4X.
- John Costello noted franchisees serve on a new products screening team—hope DDIFO has watchers there.
- The chart below outlines planned US DD development my geography—only 2% in core markets. Hopefully that means less cannibalization threats, but must watch this.