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DNKN reported a strong 4Q13 yesterday in which revenues ($183.177m) and EPS ($0.43) beat by 274 and 824 bps, respectively.  The Dunkin’ Donuts U.S. business posted 3.5% comp growth despite an underwhelming sales environment.  For the year, the company grew revenues, operating income and EPS by 8%, 11%, and 20%, respectively, and managed net new unit development greater than 5%. 

Comp growth in the U.S. business was driven by both traffic and ticket across multiple dayparts, as the number of units sold per transaction and the price per unit sold increased.  Beverages, breakfast sandwiches and bakery sandwiches provided the majority of growth in the quarter, while card sales (activations, reloads, redemptions) were all up significantly over the prior year.  Management acknowledged the 4Q online shopping trend, but noted they weren’t negatively affected by this.  Loyalty continues to be a primary catalyst for growth in the U.S. and, ultimately, abroad.  For the full year, 43% of domestic net development was in emerging and Western markets as the brand continues its expansion outside of the Northeast.  The West continues to have very strong cash-on-cash returns north of 25%.  The potential for domestic expansion is still broad, as management believes they still have a 3,000 store opportunity east of the Mississippi River. 

The Dunkin’ Donuts international business was slightly underwhelming (-0.3% comp), primarily due to poor Korean operations which make up 45% of international sales.  The company also expects to close about 100 small kiosk locations in the Philippines in 2014.  New openings in Germany and the U.K. were encouraging, reporting similar AWS as new openings in the U.S.  2014 will mark a slowdown in development (targeting 300-400 net new units across both brands) as management becomes more selective over the quality of openings and the aforementioned closures impact the net number.  Management spoke briefly about their recently announced partnership with Liverpool.  They believe the partnership will be beneficial in the U.S., particularly among Millennials and Hispanics, and internationally, where soccer is the number one sport.  This is a tremendous opportunity for the brand to gain widespread international exposure (both on TV and on the pitch) that we view favorably.

Overall, it was another solid quarter from DNKN as it continues to build sales momentum through global expansion, an all-encompassing menu, and loyalty.  This name strikes us as one of the better growth opportunities in the restaurant space. 




Howard Penney

Managing Director