Dunkin' Brands Group, Inc. (DNKN) announced its second quarter earnings last month, which, unfortunately, could not live up to the analysts’ expectations. Revenue went up 4.6% to $191 million, mainly on account of improved royalty income brought about by a rise in sales. U.S. sales grew a mere 1.8%, way below the Street’s expectation of 3% to 4%. Let’s delve deeper to find out what drew attention this earnings.
Growing raw material cost a cause for worry
Profit margins were hurt badly by skyrocketing commodity prices. As Baskin Robbins, one of Dunkin’s sub-brands, relies majorly on dairy products, rise in their prices has a direct effect on Dunkin’s business. Cost of dairy products showed no signs of going down for the last three months, thereby enhancing input cost of ice cream. Sugar prices also rose along with this to pull the margins down to 49.3% from 50% in the prior-year period.
Floods preceded by extended droughts in Brazil resulted in tense availability and escalating price of Arabica coffee beans, which almost doubled to 220 cents in April. And like many other fast food joints, Dunkin too felt its profitability pressured and increased the rates of its items. The change helped sustain operating margins of the company.
Breakfast category sees swelling contenders
Dunkin’, with a 9% market share in the breakfast division, has carved a niche for itself based on honest efforts and superior quality. However, it’s still way behind its competitors like Starbucks Corp. (SBUX) and McDonald’s Corporation (MCD) that have major shares in the segment, which is presently the most popular category.
The restaurant giant’s also facing a tough challenge from the industry as more and more brands are entering the segment, with innovative marketing strategies, leading to Dunkin’s diminishing power as far as pricing management is concerned. Though in the first quarter, footfall suffered on the back of inclement weather, the company offered exclusive items in the second quarter in order to lure customers. The select breakfast menu at reasonable rates triumphed to attract them, while the afternoon service proved to be the major draw. But despite increased traffic, sales growth was sluggish in the face of heightened competition in the industry.
What would the outlook be?
Dunkin’s taking no chances in its full-year estimates after the discouraging performance this quarter and has consequently brought the guidance down by a generous measure. Overall sales growth that was previously predicted to range between 6% and 8% is now being seen from 5% to 7%. Earnings, too, are expected to linger around $1.73 a share to $1.77 a share from the earlier guidance of $1.79 per share to $1.83 a share. Operating income could rise in the range of 7% to 9%, as opposed to the former outlook of 10% to 12%.
Shabby second quarter performance from the house of food chain bigwig is raising eyebrows. Disheartening show in two consecutive quarters should prod Dunkin’s to come up with strategies to solve the problem. Let’s keep a close watch to find out where the company’s headed.