Dunkin' Donuts Fixes Its Eye on Europe

NEW YORK (AP) - Dunkin' Brands Group Inc., which reported flat earnings on Wednesday after becoming a public company a week earlier, said it plans to rejuvenate the struggling Baskin-Robbins brand in the U.S. and expand its Dunkin' Donuts chain in Europe.

Dunkin' Donuts' U.S. revenue grew 6.3 percent over the year, helped by the success of new stores. But the U.S. division of Baskin-Robbins, hurt by rising dairy costs, was the only unit to lose revenue over the year, with a decrease of nearly 6 percent.

Nigel Travis, who's been CEO since early 2009, told analysts on Wednesday that he largely had been focusing on the Dunkin' Donuts U.S. brand, which makes up about 70 percent of the company's revenue. The brand, which has been in a fight with Starbucks and McDonald's Corp. for the loyalty of coffee drinkers in an increasingly competitive market, opened more new U.S. locations last year than any restaurant except Subway.

"That tends to happen in companies where you have a big opportunity like Dunkin' Donuts," said Travis about his focus on the brand. "It is easy to forget some of the other bits."

Travis said he's now turning some of his attention to Baskin-Robbins. He said he's reaching out to Baskin-Robbins franchisees, introducing new technology to their operations, and cutting the fields of operations managers to allow them to focus on 50 stores each instead of 120.

Travis also said he plans to expand the Dunkin' Donuts brand beyond the company's current focus in Asia, where stores may enjoy low costs but also relatively low sales, into Europe, beyond the company's base of Germany, Russia and Spain.

Both brands have done well internationally. Revenue grew the most - by 17.3 percent - in the international unit of Dunkin' Donuts, driven by sales in South Korea, Southeast Asia, Russia, Colombia and the Middle East. But it made up just a tiny sliver of the company's overall revenue, about 2.4 percent.

Baskin-Robbins' international arm was much stronger than that of its U.S cousin. Revenue there grew 8 percent, helped by sales in South Korea, Saudi Arabia and Australia.

Dunkin' Brands said its net income fell 1 percent in the quarter ended June 25, to $17.2 million, weighed down by the higher costs for ingredients. Earnings excluding one-time items fell about 3 percent, to $24.7 million, which the company said was because it paid higher interest costs before retiring some of its debt.

Revenue climbed about 4 percent to $157 million, helped by new store openings and by customers buying more on each visit.

Company executives noted that the money Dunkin' Brands raised last week by going public had allowed it to slash its debt load to $1.5 billion from $1.88 billion, which also cut its annual interest expenses in half. They also noted that the banks that underwrote the public offering had decided to purchase extra shares, an indication that the banks believe the shares will continue to rise.

Investors have been attracted to Dunkin' Brands for the strong name recognition of its two chains, Dunkin' Donuts and Baskin-Robbins. They also believe that the Massachusetts-based company has room to expand outside its stronghold in the Northeast U.S., both internationally and in the U.S.

Neal Yanofsky, hired in May for the newly created position of president of international, said the company has increased its national advertising budget for Dunkin' Donuts by tenfold over the past five years, which will help "soften the beaches" as the company expands southward and westward in the U.S.

Like many restaurant companies, Dunkin' Brands acknowledged that it raised prices on customers as it paid more for raw materials like dairy products and coffee. Travis estimated that Dunkin' Donuts' U.S. franchisees - who make their own pricing decisions - had raised prices an average of 2 percent in the quarter. But, he added, they were trying to avoid the price increases by negotiating with suppliers and offering fewer discounts.

Executives said that more price increases at Dunkin' Donuts were unlikely as long as there isn't another spike in the cost of coffee. Coffee is currently trading around $2.43 per pound, down from a spike of about $3 in the spring but still up significantly from a year ago, when it was at about $1.70.

But they said they expect to take another price increase at Baskin-Robbins by the end of September. Ice cream revenue rose about 5.5 percent over the year, but the cost of making the ice cream rose more than 17 percent.

Dunkin Brands' shares fell about 2 percent Wednesday morning to $27.25.

____