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DNKN > SEC Filings for DNKN > Form 10-K on 22-Feb-2017All Recent SEC Filings

Show all filings for DUNKIN' BRANDS GROUP, INC.

Form 10-K for DUNKIN' BRANDS GROUP, INC.


22-Feb-2017

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the selected financial data and the audited financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our markets, the demand for our products and services and our future results and involves numerous risks and uncertainties. Generally these statements can be identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "feel," "forecast," "intend," "may," "plan," "potential," "project," "should" or "would" and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See "Risk factors" for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.
Introduction and overview
We are one of the world's leading franchisors of quick service restaurants ("QSRs") serving hot and cold coffee and baked goods, as well as hard serve ice cream. We franchise restaurants under our Dunkin' Donuts and Baskin-Robbins brands. With over 20,000 points of distribution in more than 60 countries worldwide, we believe that our portfolio has strong brand awareness in our key markets. QSR is a restaurant format characterized by counter or drive-thru ordering and limited or no table service. As of December 31, 2016, Dunkin' Donuts had 12,258 global points of distribution with restaurants in 41 U.S. states and the District of Columbia and in 44 foreign countries. Baskin-Robbins had 7,822 global points of distribution as of the same date, with restaurants in 43 U.S. states, the District of Columbia, Puerto Rico, and in 51 foreign countries.
We are organized into four reporting segments: Dunkin' Donuts U.S., Dunkin' Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International. We generate revenue from four primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream and other products to franchisees in certain international markets, and
(iv) other income including fees for the licensing of our brands for products sold in certain retail outlets, the licensing of the right to manufacture Baskin-Robbins ice cream products sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, and online training fees. Prior to completing the sale of all company-operated restaurants in fiscal year 2016, we also generated revenue from retail store sales at our company-operated restaurants. Approximately 66% of our revenue for fiscal year 2016 was derived from royalty income and franchise fees. Rental income from franchisees that lease or sublease their properties from us accounted for 12% of our revenue for fiscal year 2016. An additional 14% of our revenue for fiscal year 2016 was generated from sales of ice cream and other products to franchisees in certain international markets. The balance of our revenue for fiscal year 2016 consisted of revenue from our company-operated restaurants, license fees on products sold in non-franchised outlets, license fees on sales of ice cream and other products to Baskin-Robbins franchisees in the U.S., refranchising gains, transfer fees from franchisees, and online training fees. Franchisees fund the vast majority of the cost of new restaurant development. As a result, we are able to grow our system with lower capital requirements than many of our competitors. With no company-operated points of distribution as of December 31, 2016, we are less affected by store-level costs, profitability, and fluctuations in commodity costs than other QSR operators. Our franchisees fund substantially all of the advertising that supports both brands. Those advertising funds also fund the cost of our marketing, research and development, and innovation personnel. Royalty payments and advertising fund contributions typically are made on a weekly basis for restaurants in the U.S., which limit our working capital needs. For fiscal year 2016, franchisee contributions to the U.S. advertising funds were $430.3 million. We operate and report financial information on a 52- or 53-week year on a 13-week quarter basis with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The data periods contained within fiscal years 2016, 2015, and 2014 reflect the results of operations for the 53-week, 52 week, and 52-week periods ending on December 31, 2016, December 26, 2015, and December 27, 2014, respectively. Certain financial measures and other metrics have been presented with the impact of the additional week on the results for fiscal year 2016. The impact of the additional week in fiscal year 2016 reflects our estimate of the 53rd week on systemwide sales growth, revenues, and expenses.

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Selected operating and financial highlights
                                                       Fiscal year
                                              2016          2015         2014
Systemwide sales growth                         6.6  %       4.1  %       5.1  %
Comparable store sales growth (decline):
Dunkin' Donuts U.S.                             1.6  %       1.4  %       1.7  %
Dunkin' Donuts International                   (1.9 )%       0.5  %      (2.0 )%
Baskin-Robbins U.S.                             0.7  %       6.1  %       4.9  %
Baskin-Robbins International                   (4.2 )%      (1.9 )%      (1.2 )%
Total revenues                            $ 828,889      810,933      748,709
Operating income                            414,714      319,567      338,858
Adjusted operating income                   436,578      400,477      365,956
Net income attributable to Dunkin' Brands   195,576      105,227      176,357
Adjusted net income                         208,694      187,893      186,113

Adjusted operating income and adjusted net income are non-GAAP measures reflecting operating income and net income adjusted for amortization of intangible assets, long-lived asset impairments, impairments of investments in joint ventures, and other non-recurring, infrequent, or unusual charges, net of the tax impact of such adjustments in the case of adjusted net income. The Company uses adjusted operating income and adjusted net income as key performance measures for the purpose of evaluating performance internally. We also believe adjusted operating income and adjusted net income provide our investors with useful information regarding our historical operating results. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Use of the terms adjusted operating income and adjusted net income may differ from similar measures reported by other companies. See note 4 to "Selected Financial Data" for reconciliations of operating income and net income determined under GAAP to adjusted operating income and adjusted net income, respectively.
Systemwide sales and points of distribution information related to restaurants located in Puerto Rico were previously included in the Dunkin' Donuts International and Baskin-Robbins International segments, but are now included in the Dunkin' Donuts Donuts U.S. and Baskin-Robbins U.S. segments based on functional responsibility. Prior year amounts below have been revised to reflect these changes for all years presented.
Fiscal year 2016 compared to fiscal year 2015 Overall growth in systemwide sales of 6.6% for fiscal year 2016, or 5.2% on a 52-week basis, resulted from the following:
• Dunkin' Donuts U.S. systemwide sales growth of 7.9%, which was the result of 397 net new restaurants opened in fiscal year 2016 and comparable store sales growth of 1.6%. The increase in comparable store sales was driven by an increase in average ticket, which was favorably impacted by price and unfavorably impacted by units per transaction, offset by a decline in traffic. The growth in sales was driven by beverages, led by iced coffee, including Cold Brew, and hot and iced espresso-based beverages, as well as breakfast sandwiches, led by limited-time-offer products. Approximately 190 basis points of the increase in systemwide sales was attributable to the extra week in fiscal year 2016.

• Dunkin' Donuts International systemwide sales growth of 4.2% as a result of sales increases in Europe, the Middle East, Asia, and South America, offset by a decline in sales in South Korea. Systemwide sales in all of these regions were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for fiscal year 2016 increased by approximately 7%. Dunkin' Donuts International comparable store sales decreased 1.9% due primarily to declines in South Korea and Europe, offset by growth in South America.

• Baskin-Robbins U.S. systemwide sales growth of 1.5% resulting primarily from comparable store sales growth of 0.7%. Comparable store sales growth was driven by an increase in average ticket offset by a decline in traffic. Sales growth was driven primarily by increased sales of cups and cones, which was a result of increased scoop sales and the new Warm Cookie Sandwich platform. Approximately 130 basis points of the increase in systemwide sales was attributable to the extra week in fiscal year 2016.

• Baskin-Robbins International systemwide sales growth of 2.7%, driven by a sales increase in Japan, offset by sales declines in South Korea and the Middle East. Sales in Japan were positively impacted by favorable foreign exchange rates, while sales in all other regions were negatively impacted by unfavorable foreign exchange rates, most notably

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South Korea. On a constant currency basis, systemwide sales for fiscal year 2016 increased by approximately 1%. Baskin-Robbins International comparable store sales declined 4.2% driven primarily by declines in South Korea and the Middle East, offset by growth in Japan.
Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the fiscal years ended December 31, 2016 and December 26, 2015 were as follows:

                                           December 31, 2016    December 26, 2015
Points of distribution, at period end:
Dunkin' Donuts U.S.                                    8,828                8,431
Dunkin' Donuts International                           3,430                3,319
Baskin-Robbins U.S.                                    2,538                2,529
Baskin-Robbins International                           5,284                5,078
Consolidated global points of distribution            20,080               19,357

                                                         Fiscal year
                                                  2016                 2015
Net openings, during the period:
Dunkin' Donuts U.S.(1)                                   397                  349
Dunkin' Donuts International                             111                   91
Baskin-Robbins U.S.                                        9                    -
Baskin-Robbins International                             206                   55
Consolidated global net openings                         723                  495

(1) Net openings for Dunkin' Donuts U.S. for fiscal years 2016 and 2015 reflect the previously-announced closing of 18 and 81 self-serve coffee stations within Speedway locations, respectively.

The increase in total revenues of $18.0 million, or 2.2%, for fiscal year 2016 resulted primarily from a $36.3 million increase in franchise fees and royalty income driven by the increase in Dunkin' Donuts U.S. systemwide sales and the extra week in fiscal year 2016. These increases in revenues were offset by a decrease in sales at company-operated restaurants of $16.4 million driven by a net decrease in the number of company-operated restaurants, as well as a decrease in other revenues of $2.2 million, due primarily to revenue recorded in the prior fiscal year in connection with a settlement reached with a master licensee. Approximately $8.8 million of the increase in total revenues was attributable to the extra week in fiscal year 2016, consisting primarily of additional royalty income.
Operating income increased $95.1 million, or 29.8%, for fiscal year 2016 due primarily to an impairment of our investment in the Japan joint venture ("Japan JV") in the prior fiscal year, the increase in franchise fees and royalty income, and gains recognized in connection with the sale of company-operated restaurants. These increases in operating income were offset by an increase in general and administrative expenses. Approximately $6.1 million of the increase in operating income was attributable to the extra week in fiscal year 2016, consisting primarily of additional royalty income, offset by additional personnel costs.
Adjusted operating income increased $36.1 million, or 9.0%, for fiscal year 2016 driven by the increases in franchise fees and royalty income, as well as the gains recognized in connection with the sale of company-operated restaurants. These increases in revenues were offset by an increase in general and administrative expenses. Approximately $6.1 million of the increase in adjusted operating income was attributable to the extra week in fiscal year 2016, consisting primarily of additional royalty income, offset by additional personnel costs.
Net income attributable to Dunkin' Brands increased $90.3 million, or 85.9%, for fiscal year 2016 as a result of the $95.1 million increase in operating income and a $20.6 million loss on debt extinguishment and refinancing transactions recorded in the prior fiscal year, offset by increases in income tax expense of $21.3 million and net interest expense of $3.9 million driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015. Also contributing to the increase in net interest expense was the extra week in fiscal year 2016.
Adjusted net income increased $20.8 million, or 11.1%, for fiscal year 2016 resulting primarily from the $36.1 million increase in adjusted operating income, offset by increases in income tax expense and net interest expense.

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Fiscal year 2015 compared to fiscal year 2014 Overall growth in systemwide sales of 4.1% for fiscal year 2015, resulted from the following:
• Dunkin' Donuts U.S. systemwide sales growth of 6.2%, which was the result of 349 net new restaurants opened in fiscal year 2015 and comparable store sales growth of 1.4%. The increase in comparable store sales was driven by an increase in average ticket, which was favorably impacted by pricing and unfavorably impacted by product mix, offset by a decline in traffic. The growth in average ticket was led by sales of beverages, including iced coffee and espresso, and donuts. In-restaurant K-Cup® sales had a negative impact on comparable store sales.

• Dunkin' Donuts International systemwide sales decline of 2.8% as a result of sales decreases in South Korea and Colombia, offset by sales increases in the Middle East, Asia, and Europe. Sales in South Korea, Europe, South America, and Asia were negatively impacted by unfavorable foreign exchange rates. On a constant currency basis, systemwide sales for fiscal year 2015 increased by approximately 6%. Dunkin' Donuts International comparable store sales increased 0.5% driven primarily by increases in Asia, South America, and the Middle East, offset by declines in Europe and South Korea.

• Baskin-Robbins U.S. systemwide sales growth of 6.1% resulting primarily from comparable store sales growth of 6.1%. Baskin-Robbins U.S. comparable store sales growth was driven by increased sales of cups and cones, beverages, desserts, and sundaes, as well as increased sales of cakes stimulated by strong year-over-year growth of online cake ordering. Comparable store sales growth was driven by increases in both traffic and ticket.

• Baskin-Robbins International systemwide sales decline of 4.6%, driven by sales declines in Japan, South Korea, and Europe, offset by sales growth in the Middle East and Asia. Sales in all regions were negatively impacted by unfavorable foreign exchange rates, most notably Japan and South Korea. On a constant currency basis, systemwide sales for fiscal year 2015 increased by approximately 5%. Baskin-Robbins International comparable store sales declined 1.9% driven primarily by declines in Japan and South Korea, offset by growth in the Middle East.

Changes in systemwide sales are impacted, in part, by changes in the number of points of distribution. Points of distribution and net openings as of and for the fiscal years ended December 26, 2015 and December 27, 2014 were as follows:

                                           December 26, 2015    December 27, 2014
Points of distribution, at period end:
Dunkin' Donuts U.S.                                    8,431                8,082
Dunkin' Donuts International                           3,319                3,228
Baskin-Robbins U.S.                                    2,529                2,529
Baskin-Robbins International                           5,078                5,023
Consolidated global points of distribution            19,357               18,862

                                                      Fiscal year ended
                                           December 26, 2015    December 27, 2014
Net openings, during the period:
Dunkin' Donuts U.S.                                      349                  387
Dunkin' Donuts International                              91                   65
Baskin-Robbins U.S.                                        -                   17
Baskin-Robbins International                              55                  235
Consolidated global net openings                         495                  704

The increase in total revenues of $62.2 million, or 8.3%, for fiscal year 2015 resulted primarily from a $30.9 million increase in franchise fees and royalty income driven by the increase in Dunkin' Donuts U.S. systemwide sales and additional franchise fees due to favorable development mix and additional gross development, and an increase in other revenues of $24.7 million, due primarily to licensing fees earned from the Dunkin' K-Cup® pod licensing agreement. Also contributing to the increase in revenues for fiscal year 2015 was an increase in sales at company-operated restaurants of $6.1 million, driven by a net increase in the number of company-operated restaurants.
Operating income decreased $19.3 million, or 5.7%, for fiscal year 2015 driven by a $54.3 million impairment of our investment in the Japan JV, an increase in general and administrative expenses driven primarily by incremental incentive compensation accruals, an increase in share-based compensation, and costs incurred related to the final settlement of our

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Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012. Also contributing to the decrease in operating income was a decrease in other operating income due to the timing of the sale of real estate and a gain recognized in the prior year in connection with the sale of company-operated restaurants in the Atlanta market. These items were offset by the increase in franchise fees and royalty income, licensing fees earned from the sale of Dunkin' K-Cup® pods, and an increase in ice cream margin.
Adjusted operating income increased $34.5 million, or 9.4%, for fiscal year 2015 driven by the increases in franchise fees and royalty income, licensing fees earned from the Dunkin' K-Cup® pod licensing agreement, and ice cream margin. The increases in revenues and ice cream margin were offset by an increase in general and administrative expenses, net, driven primarily by incremental incentive compensation accruals and share-based compensation, and a decrease in other operating income due to the timing of the sale of real estate and a gain recognized in the prior year in connection with the sale of company-operated restaurants in the Atlanta market.
Net income attributable to Dunkin' Brands decreased $71.1 million, or 40.3%, for fiscal year 2015 as a result of the $19.3 million decrease in operating income, a $28.5 million increase in net interest expense driven by additional borrowings incurred in conjunction with the securitization refinancing transaction completed during January 2015, a $16.2 million increase in income tax expense as the prior year was favorably impacted by tax benefits resulting from a restructuring of our Canadian subsidiaries, and a $6.8 million increase in loss on debt extinguishment and refinancing transactions.

Adjusted net income increased $1.8 million, or 1.0%, for fiscal year 2015 resulting primarily from a $34.5 million increase in adjusted operating income, offset by increases in net interest expense and income tax expense.
Earnings per share
Earnings per common share and diluted adjusted earnings per common share were as follows:

                                          Fiscal year
                                     2016     2015    2014
Earnings per share:
Common - basic                      $ 2.14    1.10    1.67
Common - diluted                      2.11    1.08    1.65
Diluted adjusted earnings per share   2.26    1.93    1.74

Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. Diluted adjusted earnings per share is not a presentation made in accordance with GAAP, and our use of the term diluted adjusted earnings per share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted adjusted earnings per share should not be considered as an alternative to earnings per share derived in accordance with GAAP. Diluted adjusted earnings per share has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted adjusted earnings per share is appropriate to provide investors with useful information regarding our historical operating results.
The following table sets forth the computation of diluted adjusted earnings per share:

                                                                  Fiscal year
                                                      2016            2015           2014
Adjusted net income                              $    208,694        187,893         186,113
Weighted average number of common shares-diluted   92,538,282     97,131,674     106,705,778
Diluted adjusted earnings per share              $       2.26           1.93            1.74

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Results of operations
Fiscal year 2016 compared to fiscal year 2015 Consolidated results of operations

                                          Fiscal  year          Increase (Decrease)
                                         2016        2015          $            %
                                            (In thousands, except percentages)
Franchise fees and royalty income     $ 549,571    513,222       36,349        7.1  %
Rental income                           101,020    100,422          598        0.6  %
Sales of ice cream and other products   114,857    115,252         (395 )     (0.3 )%
Sales at company-operated restaurants    11,975     28,340      (16,365 )    (57.7 )%
Other revenues                           51,466     53,697       (2,231 )     (4.2 )%
Total revenues                        $ 828,889    810,933       17,956        2.2  %

Total revenues increased $18.0 million, or 2.2%, in fiscal year 2016, driven by an increase in franchise fees and royalty income of $36.3 million, or 7.1%, primarily as a result of Dunkin' Donuts U.S. systemwide sales growth and the extra week in fiscal year 2016, as well as an increase in rental income of $0.6 million driven primarily by an increase in the number of leases. These increases in revenues were offset by a decrease in sales at company-operated restaurants of $16.4 million driven by a net decrease in the number of company-operated restaurants. All remaining company-operated points of distribution were sold during fiscal year 2016. Also offsetting the increase in revenues was a decrease in other revenues of $2.2 million due primarily to revenue recorded in the prior fiscal year in connection with a settlement reached with a master licensee, a decrease in refranchising gains, and a one-time upfront license fee recognized in connection with the Dunkin' K-Cup® pod licensing agreement in the prior fiscal year, offset by increases in transfer fees and licensing income. Sales of ice cream and other products decreased by $0.4 million. Approximately $8.8 million of the increase in total revenues was attributable to the extra week in fiscal year 2016, consisting primarily of additional royalty income.

                                            Fiscal  year              Increase (Decrease)
                                         2016          2015            $              %
                                                (In thousands, except percentages)
Occupancy expenses - franchised
restaurants                          $   57,409        54,611         2,798            5.1  %
Cost of ice cream and other products     77,608        76,877           731            1.0  %
Company-operated restaurant expenses     13,591        29,900       (16,309 )        (54.5 )%
General and administrative expenses,
net                                     246,814       243,796         3,018            1.2  %
Depreciation and amortization            42,537        45,244        (2,707 )         (6.0 )%
Long-lived asset impairment charges         149           623          (474 )        (76.1 )%
Total operating costs and expenses   $  438,108       451,051       (12,943 )         (2.9 )%
Net income (loss) of equity method
investments                              14,552       (41,745 )      56,297            n/m
Other operating income, net               9,381         1,430         7,951          556.0  %
Operating income                     $  414,714       319,567        95,147           29.8  %

Occupancy expenses for franchised restaurants for fiscal year 2016 increased $2.8 million, or 5.1%, from the prior fiscal year due primarily to expenses . . .

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