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Dunkin' Brands Group (NASDAQ:DNKN)

Q1 2013 Earnings Call

April 25, 2013 8:00 am ET

Executives

Stacey Caravella - Director of Investor Relations

Nigel Travis - Chief Executive Officer and Director

Paul C. Carbone - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

John H. Costello - President of Global Marketing & Innovation

Analysts

David Palmer - UBS Investment Bank, Research Division

John S. Glass - Morgan Stanley, Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Will Slabaugh - Stephens Inc., Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Inc. First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Stacey Caravella, Director of Investor Relations. You may begin.

Stacey Caravella

Thank you, operator, and good morning, everyone. With me today are Dunkin' Brands Chief Executive Officer, Nigel Travis; and Dunkin' Brands' Chief Financial Officer, Paul Carbone. Each of whom will speak on the call. Additionally, Dunkin' Brands President, Global Marketing and Innovation, John Costello is here, and he'll be available for questions during the Q&A session at the end of the call. Today's call is being webcast live and recorded for replay.

Before I turn the call over to Nigel, I'd like to remind everyone that the language on forward-looking statements, including -- included in our earnings release, also applies to our comments made during this call. Our release can be found on our website, investor.dunkinbrands.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Now I'd like to turn the call over to Nigel Travis.

Nigel Travis

Stacey, thank you very much. Good morning, and thanks to everyone for joining today's call to discuss our first quarter 2013 results.

First, we'd like to talk about a very serious subject in relation to last week. The Dunkin' Donuts brand is woven deeply into the fabric of Boston, with the first Dunkin' opening here more than 60 years ago. Our hometown experienced a horrible, senseless tragedy last week, with the Boston Marathon bombings. Frankly, our employees, franchisees and franchisee employees are all safe. We received many kind e-mails from our extended investment community and our QSR peers inquiring about everyone's safety, and we thank you all for your concern.

Dunkin' Brands, along with our franchisees, have pledged our support to help those families most affected by the Marathon bombings. We all breathed a collective sigh of relief when the manhunt ended last Friday night. Our thoughts and prayers go out to all who have been impacted by these tragic events.

Now I'd like to cover our first quarter results. We had another strong quarterly performance, with 6% revenue growth, 12% adjusted operating income growth and 16% adjusted earnings per share growth. This was achieved despite the significant impact weather had on comparable store sales growth for both Dunkin' Donuts and Baskin-Robbins in the U.S.

Our performance in the first quarter was a testament to the strength of our 100% franchise model, combined with our tremendous Dunkin' Donuts U.S. restaurant growth potential. Our franchisees added 78 net new Dunkin' Donuts restaurants in the U.S. during the quarter, the highest number of openings during this period for the past 5 years. This is truly the growth engine for Dunkin' Brands in both the near and the long term.

Now this is high-quality restaurant growth. Franchisee returns remain very attractive, and we look forward to sharing the details on unit economics for the restaurants opened in 2012 at our upcoming Investor and Analyst Day, which is taking place on May 7. That's going to be a very good day and there are some very interesting surprises for you. The event is invitation only, but we will be webcasting it live via our company website. So please tune in, if you're not there in person.

One of the major drivers of the success of Dunkin' Brands over the past couple of years is the significant improvement in restaurant operations for both of our brands. We talk a lot about what we're doing on supply chain, marketing and IT systems and so on to drive franchisee returns. But the operation-focused culture that we've instilled in the business over the last couple of years has enabled Dunkin' Donuts to grow in an intensely competitive U.S. coffee and breakfast marketplace, and it has driven the turnaround of Baskin-Robbins in the U.S.

For Dunkin', this means delivering on the brand promise of America's favorite coffee and differentiated breakfast offerings at a good value with fast and friendly service.

For Baskin-Robbins, this is all about being the place for delicious, innovative frozen treats in your neighborhood, where you're offered the chance to sample flavors with our iconic pink spoon.

And as a franchisor, we do not have direct control over our restaurants. However, our mindset is to act like we do. This has meant significantly growing our operations team, establishing coaching and counseling relationships with franchisees and most importantly, with restaurant managers, and providing our franchisees with tools, systems and trainings around great restaurants.

I guess, that's telling us that this strategy is working. At the end of 2012, Dunkin' Donuts and Baskin-Robbins were outpacing the QSR industry average in guest satisfaction, as measured by a third-party administered guest satisfaction survey. This is especially notable when you consider at the start of our guest satisfaction survey program back in mid-2009, both brands were well under the industry average.

During the first quarter, we announced that Dunkin' Donuts was ranked #1 in customer loyalty in the coffee category by the Brand Keys' Customer Loyalty Engagement Index for the seventh consecutive year. This further underscores the dedication of our franchisees and their hard-working crew members to consistently meet our guests' expectations for taste, quality, service and brand value.

And while we're in the early days of being able to measure operation systematically for our international business, we're implementing many of the same processes, training and systems to drive the same rigor and focus on operations that we had in our 2 U.S. businesses.

Now let me talk about our comp sales performance globally for both brands, and I'll start with the U.S. As I said earlier, weather significantly impacted both Dunkin' Donuts and Baskin-Robbins in the U.S. during the quarter. Dunkin' had 1.7% comp store sales growth during the quarter, driven by increased average ticket, resulting from guests purchasing more units per transaction, including add-on items such as hash browns and turbo shots. For those who don't know what turbo shots is, it's an espresso shot. And positive mix, as guests purchase more premium-priced, limited-time offer breakfast sandwiches and beverages. Overall, transactions ended the quarter nearly flat.

We estimate the weather negatively impacted comps by approximately 120 basis points versus the prior year. As a reminder, first quarter last year was both unseasonably warm and storm free.

Of course, breakfast is a very ritualistic occasion. It's what makes such an appealing dayparts in the QSR industry. It's also why it is usually the daypart least impacted by the macroeconomic environment. For example, during the 2008 and 2009 years, our comps only dipped slightly negative. And during the first quarter of this year, we don't believe we were significantly impacted by the payroll tax policy ending.

But when our guests' normal morning routine gets disrupted by things such as store closings or delays and office closing caused by snow and bad storms, we lose their visit on that particular day. And that visit in most cases is not recoverable.

Beginning in February, in our core markets, we had significant snow storms nearly weekly, as well as Superstorm Nemo early in the month. These storms affected more than half of our Dunkin' U.S. store base.

All months during the quarter, I'm pleased to say, were positive. But February was the weakest, given that it had the worst weather. Despite this, we were still able to achieve nearly 9% 2-year comps, making the seventh consecutive quarter with 8%-plus 2-year comps.

Driving this growth is continued products and marketing innovation, and we kicked off the year with the launch of the Turkey Sausage Breakfast Sandwich, a DDSMART item with less than 400 calories. We also launched Dark Hot Chocolate nationally in January and bought back Sausage Pancake Bites in selective markets. In February, we celebrated chocolate lover's month with Dark Chocolate Mocha beverages and the Brownie Batter-filled Heart Shaped Donuts.

This doughnut was a phenomenal success and drove the single largest day of doughnut sales per store in company history on February 14. This is especially remarkable when you consider that we've been selling doughnuts for 60-plus years, and it shows the true power of innovation and new news to drive sales.

We also launched Caramel K-Cups, our newest in the lineup of K-Cup limited-time offers along with Hot Cocoa and positive $1 off K-Cup offers helping to drive another quarter of double-digit K-Cup growth.

We finished the quarter strong by bringing back the Angus Steak Breakfast Sandwich in March, featuring our new Pepper Fried Egg. During the month of March, the breakfast sandwich category had its highest average weekly sales and mix percent in recent brand history. We also celebrated Irish Creme beverage flavors and the Irish Creme Donut in March to celebrate St. Patrick's Day.

We had an incredibly strong quarter for our mobile app downloads, driven by the integration of the Dunkin' app into Apple's password -- sorry, Passbook, not password, Passbook. Since January, the Dunkin' app was downloaded more than 1 million times, bringing total downloads to 2.1 million. We continue to look for ways to enhance our mobile app and improve our guests' experience, and we are happy to provide our guests with the added convenience of storing their digital Dunkin' Donuts Cards in Passbook for quick and easy payments. You're going to hear a lot more from us about digital in coming earnings calls.

So while weather certainly dampened our performance during the quarter, we were pleased with the growth we saw across product categories and dayparts. It's important to note that the business was very, very healthy on the days we weren't experiencing bad weather in our core markets. Also our business was strong in the markets outside of the Northeast that were not significantly impacted by weather on a weekly basis. In markets such as Florida and Chicago, we had mid single-digit comp growth for the quarter.

Additionally, we estimated we have increased QSR market share in the first quarter versus a year ago based on independent third-party tracking. These factors, combined with the current trends that we're seeing in the business, gives us confidence that we will achieve 3% to 4% comp store growth target that we set for 2013.

Let me shift to Baskin-Robbins U.S. comps. We knew it was going to be a challenging first quarter for Baskin in the U.S., given that it was rolling over a 9.4% comp store sales growth from last year. As a result of the cold stormy weather and strong rollover, Baskin-Robbins U.S. comp store sales were negative 4.4% during the first quarter, and we estimate that weather negatively impacted comps by 600 basis points versus the prior year.

Baskin-Robbins has nearly 500 restaurants in the West, primarily in California. And in those markets, we had mid single-digit comp store sales growth in the first quarter. That's positive mid single-digit stores growth.

Similar to Dunkin', we feel very good about the growth of the Baskin brand outside of the markets impacted by weather. Growth in these markets was driven by sales of sundaes, take-home quarts, and a Valentine's Day custom Conversation Heart Cake promotion. Dunkin' K-Cups in Baskin-Robbins California restaurants also continued to do very well.

Now we're exploring ways to weather-proof the Baskin U.S. business, particularly in markets such as Chicago and New York, where we have many locations that are combined with Dunkin' Donuts. And our focus on driving cake sales is just one example of this, as cake sales are special occasion-driven and therefore, are impacted far less by the weather.

Despite the challenging first quarter for comp store sales, we're still targeting 1% to 3% full year comp sales growth for Baskin-Robbins U.S.

We are very encouraged by the turnaround of Baskin-Robbins domestically. We had positive net development for the brand in the U.S. during the first quarter, which Paul will address in his comments, and we continue to be excited about the progress the brand is making on its path to growth.

Baskin-Robbins International had a strong first quarter, with 4.2% comp store sales growth. Cake innovation continues to be -- to drive the brand globally, with Korea leading the way, where peace cake sales was strong coming off of fourth quarter holiday momentum. As a reminder, the peace cake is cut into cubes and each cube consists of a different ice cream flavor.

The latest ice cream innovation is a singing birthday cake. Yes, you did hear that right. A singing birthday cake. It has a QR code on it that when it is scanned with a smartphone, links to a website that will play Happy Birthday. The cake innovation coming out of Korea is tremendous, and we're actively pursuing ways to leverage it globally for Baskin-Robbins.

For example, Japan will roll out the peace cake in the second quarter. Signature product brands, such as flavor of the month, winter warmers and the Lucky Eight waffle cone differentiate the Baskin-Robbins brand and are driving growth in Australia, the Middle East, the U.K. and China.

After a tough fourth quarter last year, Japan is showing signs of improvement and our JV business there had flat comps in the first quarter. I was really pleased with that. The industry as a whole seems to be challenged in Japan, so we feel relatively encouraged by our results. Our JV partners just kicked off the start of their fourth year anniversary celebration with an online contest, which has generated a tremendous amount of entries in the first days of its launch. They're also rolling out new marketing creative aimed at building traffic. Overall, it was a strong performance of Baskin-Robbins International in the first quarter.

Dunkin' Donuts International had 1.3% comp store sales growth in the first quarter. We're focused on driving consistency across the brand globally, using new product innovation to grow the core business and working with our licensee partners on more robust advertising plans.

An example of driving consistently for the brand globally is breakfast sandwiches and non-doughnut bakery. We do not sell breakfast sandwiches in many markets outside the U.S. today. We believe that adding breakfast sandwiches and broadening bakery beyond doughnut to the Dunkin' menu globally can be a powerful growth driver in the future.

Another big opportunity outside the U.S. is mobile. As I travel the globe, it is clear that many countries are well ahead of the U.S. when it comes to using mobile and technology in retail. And some of our international licensee partners are very innovative in this area, like Korea and their singing cake that I discussed earlier. It's another area we can leverage global earnings to drive growth across the businesses.

So I feel very good about the health of the business despite the weather challenges we faced during the quarter, noise around the payroll tax holiday and overall consumer sentiment and the impending health care legislation, the mood of our franchisees is very positive, indeed.

And franchisee profitability remains high for both brands domestically. Our Baskin franchisees in the West had a great Q1 and are encouraged by the returns they're seeing. They are more excited about the business than we have ever seen over the past few years. Dunkin' franchisees continue to be more profitable than ever.

And our development results during the quarter underscore that our franchisees have committed to grow with the brand.

So with that, I will turn over to Paul Carbone, who will discuss our restaurants both globally and also our financials. Paul?

Paul C. Carbone

Thanks, Nigel, and good morning, everyone. Let me start with Dunkin' U.S. net development. During the quarter, our franchisees added 78 net new Dunkin' Donuts restaurants in the U.S. during the quarter versus 45 during the same period last year. This was the highest number of openings during Q1 for the past 5 years, demonstrating that our efforts to bring more openings into the first half of the year is working.

We put a lot of strain on the system when we have a significant number of openings late in the year, like we did in 2012, when more than half of our total gross openings were in the fourth quarter. By bringing forward openings, we can even better support our franchisees as they continue to grow with us.

Of the 78 net openings this quarter, 27% were in the core, 41% in the established markets, 23% in emerging and 9% in the West. Again, more than 90% of the growth this quarter was with existing franchisees showing their belief in the brand.

During the same time period this quarter, our franchisees completed 113 remodels this quarter. Since January, we have sold multiunit store development agreements in markets such as West Virginia; West Texas; Salt Lake City; New Orleans; Washington, D.C.; Dayton and Cleveland, Ohio.

We continue to be very excited about the quantity and the quality of demand for the brand from both new and existing franchisees. We continue to target openings between 330 and 360 net new Dunkin' Donuts restaurants in the U.S. this year.

Baskin-Robbins U.S. franchisees added 2 net new units during the first quarter versus 5 net closures last year. We continue to target negative 30 to flat net development on a full year basis for 2013, which would be flat to slightly up from last year, as we continue to be encouraged by the signs of growth in this brand. We look forward to sharing more information on the unit economics of the new Baskin-Robbins restaurants at our upcoming Investor and Analyst Day.

Turning to international. Baskin-Robbins International added 34 net new restaurants versus 49 last year. Development was down slightly year-over-year, mostly driven by Japan, as they closed some underperforming locations, but still strong growth for the segment during the quarter.

In March, we announced plans to enter into a massive franchise joint venture with the Galadari Brothers to open approximately 200 additional Baskin-Robbins restaurants in Australia over the next 10 years, more than tripling the brand's presence in that country.

The Galadari Brothers are a long time Baskin-Robbins licensee for the Middle East and have done an outstanding job of making Baskin-Robbins one of the preeminent ice cream brands in that region. With a well-developed and growing economy, Australia has tremendous growth potential for Baskin-Robbins.

Dunkin' Donuts International had a declining store base during the first quarter, with 6 net closures, driven by closing of the Taiwan market. As you remember, we discussed this on our fourth quarter earnings call and we made a mutual decision with our Dunkin' Donuts partner in Taiwan to end our franchise agreement and close the 19 locations in that market, which we did during the first quarter. We believe that we will return to that market in the future.

From a growth perspective, our franchisee partners in Frankfurt opened their first Dunkin' Donuts in that market in March, bringing the total number of Dunkin' Donuts locations in Germany to 36. This is an example of focusing our development on countries such as Germany that we believe offer the greatest potential. Consumers in Germany continue to embrace the Dunkin' Donuts brand, and we are excited about the performance of our restaurants in that country.

We continue to target openings between 400 and 500 net new restaurants outside the U.S. for both brands combined.

So now let's turn to Dunkin' Brands' results. Revenues for the first quarter increased 6.2% to $161.9 million compared to the prior year, primarily from increased royalty income, as a result of increases in system-wide sales, as well as increased franchise fees, driven by additional gross development and franchise renewals.

Operating income for the first quarter of $63.5 million represented an increase of $8.3 million or 15% from the prior year, primarily as a result of the increase in total revenues, continued general and administrative expense leverage, as well as cost incurred in the prior year related to a secondary offering.

Adjusted operating income was $70.7 million, which represented an increase of $7.7 million or 12.2% from the first quarter of 2012, also as a result of the increase in total revenues and continued G&A leverage.

Adjusted operating income margin for the quarter was 43.7%, which represents a 230 basis point expansion from the first quarter of 2012. Net income for the first quarter of $23.8 million was a decrease of $2.2 million or 8.3% compared to the prior year, as a result of $5 million in charges incurred in connection with the February 2013 debt refinancing, where we were able to lower our interest rate and extend our debt maturity, a $4.1 million increase in interest expense, due to $400 million increase in our term loan executed last August and $0.9 million increase in income tax expense. All of this was offset by $8.3 million increase in operating income. As a reminder, we increased our term loan last year to do the $450 million share repurchase.

Adjusted net income was $31.1 million during the quarter, which represented an increase of $0.5 million or 1.7% compared to the first quarter of 2012, as a result of the increase in adjusted operating income offset by increases in both interest expense and income tax expense.

Diluted adjusted earnings per share were $0.29 compared to $0.25 for the same quarter last year. This 16% increase in EPS year-over-year was driven by both the decline in shares outstanding, as well as the increase in adjusted net income. Our diluted weighted average shares for the quarter were 108 million.

At the end of the first quarter, we had debt-to-adjusted-EBITDA ratio of 5.0:1. Our effective tax rate for the quarter was 37%.

During the quarter, free cash flow was a use of cash of $6.4 million, which was in line with our expectations, mainly as a result of the timing of planned interest payments during the quarter. We ended the quarter with $179 million in cash on the balance sheet. Of that $179 million, $97 million represents cash associated with our gift card programs and our marketing fund balances. We used $20 million in cash during the quarter to pay our Q1 cash dividend to our shareholders.

For the full year, we continue to expect revenue growth of between 6% and 8%, adjusted operating income growth between 10% and 12% and we continue to target 150 to 200 basis points of adjusted operating income margin expansion. Lastly, we continue to target 2013 adjusted earnings per share of between $1.50 and $1.53.

In conclusion, as Nigel mentioned and I'd like to reiterate, our business is strong. Our U.S. restaurant operations have never been better and our guest satisfaction survey results are the highest in recent brand history. We continue our track record of outstanding product and marketing innovation. And Dunkin' U.S. net development got off to a great start for the year. We're encouraged by our momentum as we enter the second quarter, and look forward to the start of key warmer weather selling seasons for both our brands.

Now I'd like to open the call and turn it back over to the operator for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from David Palmer of UBS.

David Palmer - UBS Investment Bank, Research Division

I got to ask a question on the digital payment and loyalty. It looks like when we visit the Dunkin's around here that you simply have that in-store signage saying that the mobile app is available. Is there going to be a time similar to what we see Starbucks doing where you're going to push really hard to gain users to a rewards program really making -- giving them an upfront reason to get into the system?

Nigel Travis

Okay, that is a good question. Something that again, we'll discuss in more detail at the Investor Day. And so I'm going to pass it over to John to give you the answer.

John H. Costello

Sure, David. Beyond the in-store signage that you saw, we also have extensive digital marketing targeted against growing mobile downloads, which we have found to be very effective. Just to put it in perspective, it took us 4.5 months to reach the first 1 million downloads and 3 months to hit the second 1.1 million downloads. And that accelerating trend has continued into the second quarter. So what we're seeing is mobile downloads increasing and the rate of expansion not flattening. We've also begun to launch geo-targeted offers on a DMA basis in addition to national offers as well. So we're not kind of spamming the world, but what we're doing is very strategically targeted offers on a DMA and national basis, as well as looking at enhancements. So for example, Nigel touched briefly on adding the Passbook feature. We saw a clear step-up in downloads per week post the Passbook inclusion, and that step-up has continued. So just to kind of summarize it, it took us over 4.5 months to reach the first 1 million and less than 3 months to hit the second 1 million, and those trends are continuing. And you'll see more marketing and mobile enhancements unfold as 2013 unfolds, including a launch of a mobile loyalty program later this year.

Operator

Our next question is from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Just a couple of questions. On the comp goal for the year, 3% to 4%, are you -- even with the first quarter results, are you talking about maybe if you adjust those for the weather, so if you can adjust that, if you think this has changed the outlook and if you look at the actual reported? And then can you just talk about what you think the role of traffic is in that 3% to 4%? I understand this quarter had some impact. But are you seeing traffic normalize in the second quarter? And what do you think a normalize traffic level is for the Dunkin' Brand?

Nigel Travis

Yes, we feel good about the 3% to 4%. We feel good about it, taking into account the first quarter, which we always believe that the last quarter of last year and the first quarter of this year because of the weather from the prior year is going to be tough. We feel that we have a good cadence. And we're very impressed, as I said, in my remarks on the days where we didn't have any weather impacts or let's say the weather was normalized. In terms of moving forward, we think traffic is going to continue to grow. We feel good about the start to the second quarter, but I want to remind everyone, it's still early days. And we've got another 2 and a bit months to go yet, but we feel we've got a good cadence. I feel great about innovation. I feel good about the digital things that John just touched on. I feel outstandingly good about our operations, which continue to improve. And that's all backed up by franchise enthusiasm. I mean, I met with 250 franchisees earlier this year -- earlier this week down in Orlando, and I was impressed they were bring their restaurant managers with them. And I have to say, the morale in the system is just incredible. So we feel we are hammering our way on all cylinders. And probably just to sum it all up, the new news and as far as the innovation that goes with it is what will drive the traffic and we feel very good about that.

Paul C. Carbone

And, John, just let me just add one thing. So for the quarter, we said we were nearly flat in transactions. So the 120 basis points of weather impact, you can think of that as coming through transactions, as you would expect. And then as we've talked about our long-term earnings algorithm and comp algorithm, we've said that we believe that traffic will continue to grow. And of that long-term 3% to 4%, there's probably about 100 bps of traffic in that model. So we expect to continue to drive traffic into the store.

John S. Glass - Morgan Stanley, Research Division

And then just one other question on development, I appreciate the comments that you had a great uptake or development rate in the first quarter but you're maintaining the year. What drove -- was there a desire from the franchisees to front-load their own development? Or do you just think that maybe you are early on and you're likely to end up exceeding the goal? What drove, I guess, that spurt of development year-over-year this quarter? And why isn't that sustainable at that rate?

Nigel Travis

Yes. Go ahead, just go on through that.

Paul C. Carbone

Yes. So this is something we've been working on. So just so -- this is something we've been working on since the middle of last year of trying to better balance growth throughout the year. And when you start focusing on this in the second quarter of 2012, you don't see the results in 2013 just because of the time it takes. So I would say that it is a focus of ours to better balance the year, and we'll continue to look at that going forward. We are not taking up our guidance today of the 330 to 360. The 78 represent less than 25% of the full year, but we feel very comfortable as we look forward into the visibility of not only '13 but also 2014.

Nigel Travis

Yes, I think what I'd add is and we've said this before -- and again, I'm going to give so many commercials today for the Investor Day that we'll have everyone turn up, which is what we want. But I think we've got a great set of disciplines on real estate. The franchisees really understand unit economics better than they've ever done it before. I think we understand unit economics. As I've said, we look at, senior levels, the pro forma of every stall before it's built. We look at its performance afterwards. And when you get into that discipline, with such high results of hitting those numbers, I think there's a natural momentum that goes with it. And I've been recently doing these big franchise meetings that I touched on. And just to give you a few examples, I was in Charlotte last week and the gaps that we have available to fill are enormous. I was in Orlando this week. We've got gaps there. And Baltimore, we've got gaps there. Washington, I've even have senators complaining about the lack of Dunkin' Donuts. You go on and on and on. And people are sometimes skeptical about the lack -- about how we're going to actually build 3,000 east of the Mississippi, the answer is yes. And then you add the West on top, so there's a natural momentum that goes behind all this, so we feel really good about development.

Operator

Our next question is from David Tarantino of Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Just a follow-up on the development question. I think you mentioned that 9% of the openings in Q1 came from the West, and I think you're planning on more than that for this year, at least a higher percentage for this year. So I was just wondering if there's anything that's slowing down the West Coast development. And maybe just if you could give us some perspective on the enthusiasm of the newer franchisees for getting ramped up?

Paul C. Carbone

Yes. So on -- so you're right on that the full year in the West will be higher than 9%. A big piece of that is we're opening the Denver market, which is a, obviously, a Western market. And that is scheduled to open near the end of the year, so in the back half of the year is the way we've -- we have this planned for the last 18 months. So that will take up our Western development to get to the overall number that we talked about for the full year. From a franchisee demand, it continues to be very strong, both the quantity and importantly, the quality. We started selling -- Southern California demand has been very high, people with deep operations backgrounds. And as all of you know following the QSR industry, great comps and great new unit returns will drive demand for the brand. So we are very cognizant of that. It's why we talk every day about comps. Even though, as we've talked many times, it doesn't impact our EPS as much. But every day, we talk about what yesterday's comps were and why we are fanatical about tracking these cash-on-cash returns, which again we'll share the 2012 cohort in about a month or about 3 weeks when we get together, which are also very positive. So demand is very high, the quantity and the quality of that demand. And yes, you will see more Western development, which is in our plans. So there are no market issues or fundamental roadblocks we're seeing to get that Western development.

Operator

Our next question is from Andy Barish of Jefferies.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Just a couple of questions, if you're willing to share the data. On food attachment, I know this might be not something you have kind of specifics on. But if you can give us a sense of sort of where you are and maybe where you've come from and any goals on that. And then a bigger picture sort of marketing budget, advertising budget question, just how your -- how you would characterize your spend increase this year, whether it's TRPs or impressions or what have you?

Nigel Travis

Okay. I'm going to let John answer both those, Andy.

John H. Costello

I think in answer to your question, what we find, Andy, is that beverage drives food attachment and food drives beverage attachment. So part of our strategy is to continue to provide both morning and afternoon product innovation across both food and beverage. So for example, as we continue to roll out our Bakery Sandwiches, they draw -- they drive attachment. And the incremental sales for products like iced coffee, as we roll out and emphasize products like iced tea, those are also providing a complement. So what we're finding is that there's a real synergy between providing a combination of old favorites and product news on both beverages and food. So an example, Nigel talked about the Brownie Batter Heart Shaped Donut in Valentine's Day, that drove a record doughnut sales. Those doughnuts tend to be highly attached to hot coffee. So what we're finding is there is real synergy between food and beverage innovation, with each driving the others. In terms of the marketing budget, we collect 5% of revenue for the DD U.S. ad fund. So our marketing goes up in direct proportion to the revenue increases that Paul has talked about. And what's happened is because we also run a very efficient ROI-driven marketing plan, we are able to generate increases in GRPs, along with those spending increases. Another thing which we implemented 2 [ph] years ago was using a blend of national and local media. What that -- in general, national media is more efficient than local. What that's done is it's provided 2 benefits. First in established markets, they get the efficiency impact of national media, so it benefits established markets. And then in new markets, they're getting TV where they never had TV before. Paul talked about us opening stores in Denver later this year. Traditionally, before we implemented national media, it might be 3 or 4 years before we had enough stores in a market to really afford television. Now virtually all of our markets have a layer of TV support in there against both coffee behind What Are You Drinkin', as well as behind our LTOs. So kind of an answer to your question, marketing spending is growing with revenue. As that number grows, efficiency grows and that is benefiting both established markets, as well as new markets.

Operator

Our next question is from Michael Kelter of Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Yes. I just wanted to follow-up on, I guess, John's question earlier. So if Dunkin' U.S. same store sales were 1.7% in the quarter and you said 120 basis points is weather. If we add that back, it suggests the underlying run rate is around 3%. So I guess, I'm curious how you square that with the guidance that's a little bit higher than that for the year. Have you accelerated post quarter close? Or do you have some major new product news that you're counting on for the year? Or is there some other way to look at this?

Paul C. Carbone

Yes. Thanks, Michael, great question. So as we came into the year and on our fourth quarter call, I think you remember us saying that just based on the way 2012 laid out, right, on the 3% to 4% guidance that the first half of the year would be below the average and the second half of the year will be above the average. Because in the fourth quarter last year, we're rolling over 7.2%. And we were rolling over in the third -- in the second quarter of 2012, we're going to roll over a 2.8% for instance. So as we go to the back half of the year, compares get easier. So we always knew the back half of the year, from a comp perspective, the numbers would be higher. Now as you know because you've done this so long, in 2012, we had the opposite, right? So the first half of the year was very strong from a comp basis and the back half was lower because of the rollovers. So we always knew the first half would be below the average, call it, 3.5% if you're saying the 3% to 4% range. And it has played out that way. Now certainly the weather being 120 basis points, would have got us close to 3% for the quarter had we not had that weather.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then on a separate topic, there's obviously quite a bit of growth, unit growth overseas, but the actual pace of International unit growth for both Dunkin' and Baskin has been decelerating. And I'm talking about gross not net. So nothing to do with closures, really just the openings. Are you deemphasizing international unit growth right now to focus on the U.S. opportunity? Or are franchisees just not opening as many on their own accord?

Nigel Travis

Okay. So several things there. I could actually say no, we're not deemphasizing international growth to focus on the U.S. because it's managed by separate management teams. Like you, we want growth everywhere. But we want -- we're applying the same playbook internationally as we applied it in the U.S. We're very focused on unit economics. We're not going to open stores that don't make any sense. So I think that your interpretation should we -- be that we're more disciplined and more process is in place than we've ever had before for international development, and we feel good about those disciplines getting instilled. And in fact, in the quarter, we had an outstanding international convention in Las Vegas. The franchisees were very enthusiastic. I think they were impressed with the new focus on unit economics, bigger focus than we've ever had before. And as a result of that, we rolled out more, let's say, processes, disciplines, even forms that they have to fill in when they open stores and when they close stores. So we're now getting to a stage where we're going to have a much more disciplined international business. And I think the short-term impact is going to be that some stores that would have opened in the past won't open in the future.

Operator

Our next question is from Jeff Farmer of Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just couple of quick questions. Can you discuss your speed of service opportunities in some of your higher volume markets? Just what have you been doing as of late? What are some of the near-term opportunities there?

Nigel Travis

Okay. Great question, Jeff. We're going to talk about that, again, at the Investor Day. Actually, I think Stacey has changed her mind. They have to now pay to come to it. So speed of service, we're going to talk about. It's something that we feel is critical. It's something that we're famous for. I also think it's something, going back to Michael's question, we've got to really push very hard in international for Dunkin' as well. Basically, we're very focused on, I think, speed of service in 3 areas. One is, as I've said on previous earnings calls, John's caused the problem for us with his great innovation on breakfast sandwiches. And we have to find a way of speeding up the sandwich station, and we are. We have to find a way to keep the dry food moving at the very fast pace that it operates already and to try and make it faster, and we've got some ideas on that. The mobile app is also partly intended to do that. And we've got some other things that we're working on that we don't want to reveal, but speed is something we talk about every day. It's something that we measure externally every day. And it's a major reason why people come to Dunkin' against the competition.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just one more follow-up. I think it was Dave Palmer that asked this and this might be in the same boat where you're probably going to give us more detail at the Analyst Day. But just again, can you help us understand what's going on behind the scenes as you prepare to roll out the loyalty part of this program? I guess, some of the big decisions that still need to be made in terms of functionality of the product design and the like. Anything you can share preliminarily would be helpful.

Nigel Travis

Okay. So I'll kick off. You're absolutely right. We believe that loyalty is a major part of what we're going to get right. And I think the most important thing I'd say is we need to get it right. And as I've said previously, we're not going to rush it because we want to get the loyalty program designed highly appropriately. I've been very involved in it recently. But to give you more details, and he's not going to give you too much, is John.

John H. Costello

Yes. The -- we have a cross-functional task force driving loyalty, being led by marketing and IT with very, very close involvement of our finance team and our operations team. The #1 goal is to drive franchisee profitability by encouraging even more loyalty from our customer base. So what we have is we're doing a lot of work benchmarking what we know develops, drives the business for Dunkin', but we're also benchmarking best-of-breed loyalty, not only in the food space but outside of this food space. And we're looking at things, like I said, that aren't just spamming discounts out there. We also will be targeting the loyalty, recognizing different development of Dunkin' in different parts of the U.S. In New England, where we have strong ritual, we'll obviously be encouraging additional purchases and additional visits. In the contrast, when we open a brand-new market, the focus will be on introducing Dunkin' and our great coffee and food to those players. The important part of this is the operational training part of that. And hopefully what you saw when we rolled out the original mobile app in mid-August of last year, there was an important operations aspect to that as well. So kind of in summary, it's a cross-functional effort. We're benchmarking the best of food and nonfood. And the real goal is to build customer loyalty in a way that drives franchisee profitability. As Nigel touched on, the more we can help increase our franchisees' profitability, the healthier the business is.

Operator

Our next question is from John Ivankoe of JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Two quick questions, if I may. First on unit development, revisiting that theme. Are you -- in 2013, I mean, are you setting the governor to your own growth? It only feels like, I mean, you do want to have growth more even throughout 2013, but it's very, very unusual that a franchise community would go from opening so many units in the fourth quarter, and one year are not opening so many units in the fourth quarter as the previous year. So the question is are you -- is the governor of growth from this point of you taking up unit development today, for example, or at the Analyst Meeting in a month, I mean, are you that governor? Or is there some other constraint to growth that we should be aware of?

Nigel Travis

Okay. So 2 ways to answer that, John. One is I've always said that we don't want to go too far too quickly when we talked about annual guidance, and that we wanted to open stores consistent with franchise profitability and all the disciplines that I spelled out earlier. But I could absolutely go directly and say we're not acting as the governor this year. I mean, we're very focused on that guidance. If we end up above guidance, that is great because that makes life easier for next year. But we're not deliberately holding back this year quarter-by-quarter. And I'd love to believe that we could, as with most things, speak to our guidance, but we're not in a position where we could say that. And if ever we get in that position, we would change guidance at the time. But we -- but also is we feel really, really good about development. And I think it's a testament to the franchise economics and the franchise relationships that we touched on earlier.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Of course. And secondly, if I may follow up on, maybe it's a question for Paul. That franchise fee per gross unit opening of Dunkin' in the U.S. was again high. I mean, I think relative to kind of an average of around $60,000 is what we've discussed longer term. So I do understand that there are renewals in the quarter as there are in many quarters. But how many more renewals are there to go? And what really is -- what is that rate going forward of franchisee per gross opening that we should think about going forward because obviously there's a lot of leverage on that line?

Paul C. Carbone

Yes. So on a full year basis, we're in that $60,000 range. Q1 traditionally has been higher and it's traditionally been higher because we have lower gross openings against an even flow of renewals, right? So you get a higher number. Last Q4, where we did a lot of gross openings, we had a lower number per gross opening because there's a lot of gross openings in that normal flow of renewals. Renewals are a normal part of our business. So when you open up a restaurant, we sell you 20 years of what we call term, right, that gives you the right to pay us royalties for 20 years. And then at 10 years, when you remodel, we give you the option to buy another 10 years or you don't have to and you can run it down. And then when you get to 20 years of your original and you do a second remodel, you can buy an additional 20 years of term. So this is an ongoing piece of the business, and it always has been. So renewals always have been, we continue to collect them. Back in 2009, we changed it a little bit. So after 10 years, you could go back to 20, which it wasn't that case prior to that, but we've now anniversary-ed that and rolled over that. So this is steady -- renewals would relatively be steady going forward. So it's part of the business.

Nigel Travis

And I'd add that we also increased our fees in certain areas.

Paul C. Carbone

We did.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay. And then -- so I'll ask the question directly then. So when we look at 2013 for example, where do you think the average fee per gross openings settles out, just from a modeling prospective?

Paul C. Carbone

So I think it averages out at that $60,000 range, where we talked about.

Nigel Travis

Yes, John. Just one more thing on that. I think one of the things that we're seeing is we've got huge demand for the same territories. So there's certain supply and demand factor that we take into account. So I think that's because the economics is so good [ph].

Operator

Our next question is from Will Slabaugh of Stephens.

Will Slabaugh - Stephens Inc., Research Division

Just had a quick question on costs and on G&A, in particular. That was down significantly year-over-year, and I know there are some one-timers in there. But wondered if you could talk about what you may have pulled out there year-over-year. And then where you're scrutinizing cost the most? And then if I could, just what G&A may look like on a more normalized year-over-year growth basis going forward?

Paul C. Carbone

Yes. So a good question, Will. So on the face of the P&L, our G&A was $53 million last year, $54.4 million this year. When you take a couple of adjustments, last year, we had about $900,000 of secondary costs, this year about $300,000 of some Peterborough costs, as we continue to wind it down up there. So on an adjusted basis, G&A last year was $52.1 million this year $54.1 million. So on an adjusted basis, we leverage G&A about 80 basis points, which is exactly what we talked about as what this business should be. We continue to look at G&A growing 3% to 4%. Or another way of saying that is growing half the rate of revenue. Revenue, we've talked about 6% to 8%. On an adjusted basis for 2012, we were at $209.1 million, right? And we expect to grow that in the 3% to 4% range this year, is what we talked about as our guidance. And we continue on that. Where have we -- like all companies, we scrutinize -- the biggest piece of our G&A is payroll, and really where we scrutinize is when do we bring new people on. So how do we grow headcount and when do they start? We haven't done anything to unnaturally depress Q1 G&A spend. So this is just kind of how we run the business. But it's something that we talk about. And as a leadership team, probably not every week but I'd say every 2 weeks, we talk about expenses and the G&A spend.

Nigel Travis

Yes, this is a simple business. You have to keep driving the top line. And if you can control and leverage the G&A, you get a beautiful result. And I think we're on track for seeing that continue to improve.

Operator

Our next question is from Joe Buckley of Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Two questions. As you think about mobile going forward, was any tied to your prior loyalty program? Or is this just sort of start from scratch?

John H. Costello

It's John. It will be tied to our current loyalty program. So we have members in our current loyalty program. We also have people who have opted in to e-mails from Dunkin'. And our loyalty program will leverage the current members of those programs and others, as well as our mobile downloads. We also have a nicely growing number of both Facebook fans and Twitter followers, both who will be invited into our mobile programs. So it will really leverage all of our current databases. It will also leverage our very strong U.S. store footprint.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then I just wanted to follow up on John's question on the franchise fees. So is there anything lumpy about that first quarter? Yes, I think the second quarter in a row, you were at $9 million in franchise fees for U.S. Dunkin'. And the $60,000 per gross opening, Paul, is that like a real number? Or does that include the renewals and that's kind of what it works out to be for modeling purposes?

Paul C. Carbone

It's the latter, Joe. It's what it works out to be for modeling purposes, right? So our franchise fees range from $40,000 to $80,000 per restaurant. From a modeling perspective, it comes out to about $60,000 because it has renewals in there.

Operator

Our last question is from Jeffrey Bernstein of Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

I had one question with 14 parts. Just 2 things actually. First on the U.S. comp and you mentioned on a couple of occasions very, very, healthy x the weather. I'm wondering if you do strip out the weather, did you see any improving trend in terms of cadence through the quarter as it kind of rolls into -- especially kind of leading into -- as it rolls into April, where I don't know if it's reasonable to assume, acceleration. But if you're running roughly at 1-ish in the first quarter, now the compares becomes 300-plus basis points easier. Is that not a simplified way to look at it? And then I have a follow-up.

Nigel Travis

So Jeff, I should really apply our new disciplines in international. So limits you to just one question but I'll be nice if you said nice things about our comps. I think just look at the numbers there, Paul, what's your conclusion on this question?

Paul C. Carbone

Yes. So I would say that the year started out very strong. February was the weakest of the months, although just to be clear not negative, but was the weakest of the month based on the weather. And then we came back and had a very strong March. And we're happy with the business as we have begun April.

John H. Costello

I think the other part is if you look at parts of the U.S. that had -- that were not affected by storms, they had solid, consistent -- very solid comp trends.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then just simply on the cost side. Obviously, the coffee cost favorability continues. And I'm wondering if that has any impact at all on how you suggest your franchisees operate, whether it be more promotions or discounting. I know you were careful not to raise prices when commodities were on the rise. But perhaps there is a traffic-driving opportunity as coffee eases to maybe reinvest the portion of the savings one way or another.

Nigel Travis

Yes. So we talked about that a lot and I talked about it with our franchisees this week. Our franchisees have been very disciplined. Effectively, there was no price increase in the quarter. They understand that we're in a competitive mind -- we're in a very competitive area. Because if you look at QSR numbers, I would imagine many people had negative numbers in the quarter. We've already seen that from some people that had reported, so that increases the competitive pressure. I think our franchisees have got a more aggressive mindset than they had. It doesn't mean that we're moving away from our strategy of being highly differentiated, which we think is the true way of driving our business, and our franchisees understand that. We're constantly on their backs about improving their operations at the same time, and that's kind of the messages we keep sending them and it keeps working. But you're right, we're in a very benign commodity environment, which is great. Franchisee profitability in the quarter, I think was up about 11% over the previous first quarter. So that's great, and that's one of the reasons they feel so good. And by the way, just to throw in Baskin was also up significantly. So both groups feel good about that. So the whole focus is on franchise profitability. But we're not going to become a chain that has one set of coupons after another. We're going to use them on a very measured basis. We think the long-term answer to that, as John mentioned, is loyalty. So I think that's the answer to your question, Jeff.

Okay. So thank you, everyone. We feel this is a good quarter if you strip out the weather. We remain very excited about the business. We feel that we're putting pressures on some regional competitors around the country, and I think some recent actions have demonstrated the results of that. So we will continue to pound on. We continue to work for the benefit of our shareholders and our franchisees. And with that, we thank you for your interest, and I hope to see many of you at the Investor Day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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