Dunkin' Brands (DNKN), the parent company of Dunkin' Donuts and Baskin-Robbins, is trading modestly higher today (+1.3%) after reporting Q1 results last night. This was a solid quarter and it's good to see the espresso roll-out going well.
The stock has been on a bit of a roller coaster ride. It sold off aggressively in December with a dip into the low $60's,but has now recovered to around $74. DNKN has been making a lot of changes, so these next few quarters should be indicative of whether DNKN's new strategy was the right thing to do. Over the past year or so, DNKN has simplified its menu to make room for more impactful product innovation. For example, its Dunkin' Run snacking platform has been quite popular with consumers.
DNKN also has been modernizing the guest experience with new restaurant designs and menu innovation on both premium products and value offerings. In 2018, DNKN announced an investment of $100 mln into Dunkin' US. Much of this was for new equipment so that DNKN could expand its beverage portfolio beyond traditional drip coffee, including new espresso equipment.
Turning to the Q1 results, non-GAAP EPS rose 8% yr/yr to $0.67, which was quite a bit better than market expectations. DNKN reported larger EPS upside in Q4, but this was still a solid upside result. Revenue rose 5.9% yr/yr to $319.1 mln, which also was better than expected. Full year guidance was reaffirmed, with EPS expected at $2.94-2.99.
You may think that is a low revenue figure for a company with 12,900+ Dunkin' restaurants and 8,000+ Baskin-Robbins restaurants. In fact, this number makes sense because DNKN is a 100% franchise operation, with no company-operated locations. So DNKN's revenue is primarily from royalties/fees and rental income and not from the actual food sales. This model frees DNKN to focus on menu innovation, marketing, franchisee support etc. It also reduces cap-ex spending and results in very high margin sales.
Investors have been particularly interested in how successful DNKN's relaunch of its handcrafted espresso platform is going. On the call this morning, CEO David Hoffman said its espresso relaunch has been an "incredible success." Hoffman further said that "Q1 was led by the strongest sales increase in beverages in nearly three years." DNKN has grown the category by 30% and it has brought new guests into its restaurants.
Overall, this was a good start to 2019. It was particularly good to hear that the espresso relaunch has gotten off to a good start. This folds nicely into DNKN's desire to focus more on beverages.