Dunkin' Brands Group Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: Dunkin' Brands (DNKN)

Dunkin' Brands Group (NASDAQ:DNKN)

Q3 2013 Earnings Call

October 24, 2013 8:00 am ET

Executives

Stacey Caravella - Director of Investor Relations

Nigel Travis - Chairman and Chief Executive Officer

John H. Costello - President of Global Marketing & Innovation

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

Analysts

John S. Glass - Morgan Stanley, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Gregory R. Badishkanian - Citigroup Inc, Research Division

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Andrew M. Barish - Jefferies LLC, Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Dunkin' Brands Incorporated Third Quarter 2013 Earnings Call. [Operator Instructions] I would now like to introduce your host for today's conference, Ms. Stacey Caravella, Director Investor Relations. Ms. Caravella, please begin.

Stacey Caravella

Thank you, operator, and good morning, everyone. With me today, wearing his Red Sox hat, is Dunkin' Brands' Chief Executive Officer, Nigel Travis; Dunkin' Brands' Chief Financial Officer, Paul Carbone; and Dunkin’ Brands' President of Global Marketing and Innovation, John Costello, each of whom will speak on today's call. The call is being webcast live and recorded for replay.

Before I turn it over to Nigel, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the 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, and thanks to everyone for joining today's call to discuss our third quarter 2013 results. And yes, a good start to the World Series for all of us here at Boston last night, long may it continue.

Back on Dunkin' Brands, we had another strong quarterly performance with nearly 9% revenue growth, nearly 50% adjusted operating income margin and double-digit adjusted earnings per share growth. The strength of our third quarter performance and our underlying business trends is even more impressive when you consider the intense competitive set and macroeconomic choppiness.

I continue to be pleased by our ability to deliver outstanding results in this environment, and I feel really great about our business. Both Dunkin' Donuts and Baskin-Robbins U.S. continue to have excellent momentum and delivered yet another quarter of strong comparable store sales and net new restaurant growth. With 222 net new openings year-to-date, we now have 7,500 Dunkin' Donuts restaurants in the U.S., and the demand by existing and prospective franchisees to grow with us has never been stronger. We continue to believe that we can have 15,000 Dunkin' Donuts U.S. restaurants, including approximately an additional 3,000 east of the Mississippi and 5,000 more in the western parts of the country.

Notably this quarter, we opened our first restaurants in Denver, Colorado and sold additional store development agreements in Southern California, bringing the total to 7 -- 70 restaurants planned for the Southern California region, which, as we explained before, will open in 2015.

And just last week, we announced that we have begun to sell store development agreements for the central part of that state, including Fresno, Bakersfield, Sacramento and Santa Barbara areas. We can really feel the excitement building over California, and later, Paul will tell you about the significant opportunity we've identified in Texas as well.

The healthy store growth rate and the strength of the pipeline for future development is possible because of the highly attractive franchisee returns and strong sales growth that the Dunkin' Donuts brand is experiencing in the U.S. Growth is largely driven by our differentiated products and marketing innovation.

And on that front, we have 2 very exciting updates to share. And to really make sure you get all the detail, I'm going to ask John Costello to take you through the detail of those.

John H. Costello

Thanks, Nigel. Last week, we launched our innovative new #mydunkin advertising campaign that, for the first time, leverages real fans and their social media content to demonstrate their passion for Dunkin' Donuts coffee. Our team literally combed through tens of thousands of posts to our Dunkin' Donuts Facebook and Twitter pages to select the fans to appear in 6 new television commercials that are based on their posting to our pages. The #mydunkin campaign continues the evolution of the very successful America Runs on Dunkin' and celebrates our guests and our coffee leadership in a way that reflects the changing media environment.

Traditional media has always worked very well for our brand, and this campaign enables us to harness the power of traditional TV advertising, but also drives deeper engagement with our guests by featuring their social media content. The first TV spots began airing on Monday, October 1 -- or 14, and feedback so far in the campaign has been very positive.

I'm also very excited to announce that on November 4, we will begin the phased rollout of our new DD Perks loyalty program. The program will go live in Dallas, Texas; Portland, Maine; Orlando, Florida; and Willsboro [ph] and Scranton, Pennsylvania. I've used it many times and love the simplicity for both our guests and our crew. I'm excited about the potential DD Perks has to drive profits using targeted offers, offers specifically designed to drive incremental sales based on guests' individual behavior.

I'm also particularly happy that this program is largely paperless. You've heard us say this before, and I'll reiterate it today. We're committed to being a leader in digital mobile and loyalty in the QSR industry. To achieve this, we've been, and we'll continue to be, highly methodical, deliberate and strategic in designing and rolling out a fully integrated mobile technology program from our franchisees' unified POS to the mobile app and now with our DD Perks rewards program.

To that end, we are taking a very methodical and phased rollout approach to the launch of DD Perks. We're going to use our experience and learning in these first 4 markets, as well as others to come to enable us to deliver the best possible franchisee, crew member and, most important, guest experience when we eventually expand nationally, which we plan to do in the first quarter of 2014.

We have 3 goals for the enhanced DD Perks program: first, reward our best guests for their loyal business; second, increase guests' spend through both increased ticket and driving visits; and third, have the most robust loyalty program in the QSR industry.

Once registered in DD Perks, guests earn 5 points for every dollar they spend and -- when they spend with an enrolled DD card, either plastic or on the DD mobile app. Once they accrue 200 DD Perks points, they receive a free medium beverage. Guests will also receive personalized offers based on their spend history in Dunkin' restaurants. This is a very exciting milestone on our long-term digital mobile and loyalty journey. And in fact, during the third quarter, we surpassed 4 million downloads of the DD mobile app, another great milestone. But we're just at the beginning of this journey. We look forward to bringing the DD Perks to more and more guests in time and to having an even deeper engagement with them in the future.

I'll now turn it back over to Nigel.

Nigel Travis

John, thank you, and I'm personally very excited about both of those 2 developments. So let's now talk about the comp sales performance globally for both brands. I'll start with the U.S. Dunkin' Donuts U.S. had yet another strong quarter, delivering a 4.2% comp store sales increase in Q3. It marked the 14th consecutive quarter of same-store sales growth and was well above the QSR average. For the quarter, we saw healthy gains in both traffic and ticket and increases in both the number of units per transaction and the price per unit. Ticket and traffic growth were fairly balanced for the quarter. Our franchisees, again, took very little pricing in the quarter, we guess about 100 basis points.

Let me talk about our performance across the product categories. We had another quarter of very strong beverage sales growth. These gains were driven by the outstanding performance of Iced Coffee and hot and iced espresso. The continuation of Baskin-Robbins inspired iced coffee flavors through the summer, the introduction of Caramel across all beverages in August and the return of Pumpkin in September brought news and incremental sales to both coffee and espresso products.

The breakfast sandwich platform continues to be one of our shining stars. In addition to growth in core breakfast sandwiches, the limited time offer, the Hot & Spicy Breakfast Sandwich, and it really was spicy, and incremental gains from the Turkey Sausage Breakfast Sandwich drove outstanding results for the category.

Donuts continued to deliver the same strong results we've seen throughout the year. Highlights for the quarter include the Lemonade, Key Lime and Pumpkin Pie donuts, as well as successful bulk offers. And the category is stronger than it has been in years. It's a great example of how product innovation can drive a category, even one that's been part of the business for 60-plus years.

Afternoon food, again, played a significant role in our quarterly growth as we continue to expand our offerings. We saw all-time highs in terms of average weekly sales and product mix for the p.m. food driven by wraps, the new Chicken Sandwiches and my personal favorite, which was the Pretzel Roll Roast Beef Bakery Sandwich.

Dunkin' K-Cups experienced a comp sales decline in the third quarter, which, similar to the second quarter, did not have a significant impact to overall rooftop sales. We continue to see increased competition in the category, with major brands offering products at a significant discount in the grocery channel. We're addressing this with some attractive K-Cup value offers in our restaurants. On the last weekend of September, in celebration of National Coffee Day, guests could purchase Dunkin' K-Cups for $7.99. And in October, guests have been able to purchase 2 boxes of K-Cups for $19.99. That's a great deal, and both programs drove strong results.

I'm pleased to say that Baskin U.S. had a very strong third quarter, finishing with 3.2% comp store sales growth. I'm also pleased with the development trend we're seeing in Baskin as the brand moves from store count declines as it had for many years to slow growth in the U.S. Encouragingly, the initial signs of new store economics are terrific, and we look forward to discussing in more detail when we have more store performance history and more new stores in the data set.

Back now to comps. During July and August, Baskin featured 2 new OREO flavors that drove growth across product categories as guests enjoy the flavors in cups and cones, beverages and sundaes. OREO flavors are always a hit at Baskin, and this year's OREO n' Chocolate and OREO Nutty Salted Caramel didn't disappoint. We supported the OREO flavors of the month with TV advertising, and the national print drop [ph] to help ensure we capitalized on the key summer months.

Cakes and take-home items also did well in the quarter, with our continued efforts to get behind both categories driving incremental sales.

Let me now switch to international. Baskin-Robbins International had a 0.7% store sales growth in the third quarter, largely the result of challenging weather in Japan, with monsoons hitting the country on several weekends during the quarter. And just to remind you, Japan represents approximately 40% of the segment's sales. And I have to tell you the weather in Japan has been very weird. I'm looking at a chart for the last week that shows that last weekend, Typhoon Wipha impacted Tuesday and Wednesday. And then coming up this weekend, they're forecast to have Typhoon Francisco. The weather has been extremely strange.

Cake innovation continues to be a major focus for Baskin globally. We did a royal baby cake in the U.K., with a sale price equal to the birth weight of Prince George, and we had great PR buzz from this unique item.

Cake innovation also continues to drive sales in Korea, which is now in the third generation of the highly successful Piece Cake. Various iterations of the Piece Cake now represent more than half the total Baskin International cake sales. And it is interesting, just to remind you, the Piece Cake is basically a cake that's cut up by different flavors. And Rich Emmett, our General Counsel, who returned from Korea yesterday, said you have to actually see the cake live to really understand how good this thing looks. So we're very excited about that, and we will continue to move this around the world when we have the opportunity.

Turning now to Dunkin' Donuts International business. They had a negative 1.4% comp store sales decline in the third quarter as we continue to reposition that business. The negative results were driven by our Korean operations, which represents 45% of the segment's sales.

Besides Korea, there were some individual country weaknesses, but we feel that overall franchisees are now learning about the benefits of differentiated product marketing, such as frozen and iced products, supported by broadcast media. We're focusing on a strategy that enhances our coffee credentials and product innovation to continue to build guest ritual.

Despite some hurdles, we continue to be excited about the long-term growth potential of our brands outside the U.S. We continue to retool International and in the past several months, I visited 13 international markets. And my conclusions are, and you may want to follow up in Q&A because these are top line conclusions, our high average weekly sales markets are primarily in Europe, and as such, we continue to be excited by the performance of new stores in Germany in particular.

Secondly, sandwiches are a big opportunity in many Dunkin' Donuts markets. Just to remind you, many markets started with donuts and then added beverages later.

Thirdly, in certain markets, such as Southeast Asia, we have franchisees who've been in the system for a long time and are very profitable on low average weekly sales. Our goal, therefore, is to get those sales even higher. The Middle East, especially Saudi Arabia, is a base that does well with both brands, and we can grow very quickly. We are excited about that region.

The next point is, adding Soft Serve to our existing hard scoop offerings in Baskin-Robbins is critical to fighting the competition, and we're adding Soft Serve in many countries right now. The next point is, and this is very important for all those who've listened to our story over the last few years in that we are making real progress in updating our international supply chain for both brands.

And I think the last point is we have to be better at migrating positive lessons from our U.S. business to international. And going forward, you will see us putting more of our U.S. processes and disciplines in place internationally.

We're also leveraging our U.S. resources to support international. For example, we recently changed our U.S. operation and services team, which support Dunkin' and Baskin domestically into supporting international as well. You'll see us do more of this in the future.

Lastly on International. Let me address at a high level the write-down that we took related to our joint venture for Dunkin' Coffee Spain. And by the way, just to remind you, it's called Dunkin' Coffee in Spain, not Dunkin' Donuts.

Paul will detail the financial impact, but I'd like to discuss the strategic rationale of the investment. As you know, we're very committed to an asset-light model. And on a limited basis, we have invested in markets to either stimulate growth or resolve individual franchise issues. Great example of this are markets like Atlanta and Dallas in the U.S.

In fact, I've been in Dallas twice recently, and both Jerry Jones and Troy Aikman, our joint venture partners in Dallas, are delighted with the progress that we made together in that market. We did something similar with Dunkin' in Spain in the fourth quarter of 2012. We had a very strong licensee partner for the country facing significant macroeconomic and supply chain challenges. Because we believe in the long-term opportunity for Dunkin' in Europe, we decided to step in and help our licensee partner with a combination of equity and debt investments, with the goal of helping them navigate through the near-term financial challenges in the region, where we believe there is significant long-term opportunity.

Turning around our Dunkin' Coffee business in Spain is going to take some time. This business continues to be significantly challenged, which is why we took the write-down in the third quarter. We have, however, made good progress on supply chain in the country and now have a third party producing the donuts for the market, relieving our joint venture of having to be in the donut manufacturing business, which simultaneously works to turn around the restaurants.

However, the macroeconomic environment in the country remains a significant headwind, not to us but to many global brands in Spain. However, I was very encouraged by the fact that the GDP in Spain actually cracked up to a mammoth 0.1% yesterday, but at least it was positive.

So in conclusion, we really do believe that investing in the Spanish business was the right move for the brand's long-term opportunity in Europe. Before I turn it over to Paul to discuss our restaurant growth globally and also our financials, I want to close by saying that I feel extremely good about the overall strength of the business. Innovative marketing and new product innovations, as well as a focus on delivering a great customer experience continue to deliver attractive franchisee returns and exceptional results. We remain steadfastly focused on delivering profitable growth to both our franchisees and our shareholders.

And over to Paul.

Paul C. Carbone

Thanks, Nigel, and good morning, everyone. Let me apologize for my voice. While I'm not wearing a Red Sox hat like Nigel, I was at the game last night, and may have shouted a little bit too much on our great results by the Red Sox.

So let me start overall with our development results. We continued to execute successfully on our contiguous expansion strategy for Dunkin' Donuts U.S. Recently, we achieved some important milestones in our expansion. As Nigel mentioned, our first 2 stores opened in Denver at the end of September. Consumers are very excited that we're finally there. In fact, when the first stores opened, it was a line of cars 8 blocks long at the drive-thru. We're also seeing continued strong results from our 3 new stores in Salt Lake City as well.

Our California plans are on track. We recently sold 2 additional store development agreements and announced that we're beginning to sell the next round of store development agreements. We look forward to opening a nontraditional location at Barstow Station by the end of this year, as well as in a location at the Embassy Suites in San Diego that will open next year. As we've said in the past, traditional stores will begin to open in 2015.

Texas is another area with tremendous long-term opportunity. We currently believe the brand could potentially have 1,000 restaurants there some day. Just in the first 3 quarters of this year, we've sold store development agreements in Corpus Christi, Houston, Lubbock and San Antonio for nearly 50 restaurants. And our recent openings in El Paso, Houston and San Antonio are achieving some rather impressive new store opening numbers.

With stores out west seeing record opening sales and double-digit EBITDA margins, it's not surprising that we have new franchisees who are already looking to grow in other areas. For example, one of our Denver franchisees is also developing stores in Salt Lake and El Paso.

With 222 net new units open year-to-date, we still have a significant number of net openings to achieve in the fourth quarter to reach the top end of our guidance range of 330 to 360 net openings. But we are confident that we will achieve this target.

In the third quarter, our franchisees opened 81 net new units versus 78 last year. Nearly 90% of that development in the quarter was full-expression restaurants and, of that, 70% of them had a drive-thru. By region, 28% of net development was in the core, 26% in established markets, 21% in emerging markets and 25% in the West.

I'd like to update you, all, where we believe restaurant development will be by region for the full year. As we guided earlier this year, the majority of our net development will be in established and emerging markets. We expect those markets to represent approximately 30% -- 35% and 30%, respectively, for the full year net development. Core will represent approximately 20%, and West will represent approximately 15%.

The percent coming out of the core market has ticked up slightly. But to provide some additional insight, this is development in New York State, not in the highly penetrated areas like Boston and Providence. Our franchisees completed 98 remodels during the quarter. The rollout of our new store design called Fresh Brew continues to go well, and we have nearly 300 Fresh Brew stores across the country.

Now to Baskin-Robbins U.S. development. The Baskin-Robbins U.S. franchisees added one net new unit during the third quarter versus one store net unit decline last year. This marked the third straight quarter of positive net store development for Baskin-Robbins U.S. Our target full year range for net development for Baskin-Robbins is negative 30 to flat. We now expect that we will end closer to flat than the lower end of that range.

Baskin-Robbins International added 73 net new restaurants versus 74 last year. Growth was primarily in the Middle East and Southeast Asia. Dunkin' Donuts International added 67 net new restaurants versus 36 last year. Growth was primarily in Europe and Southeast Asia. Year-to-date through the end of the third quarter, we have closed 40 Dunkin' Donuts restaurants in Greater China, including 19 locations in Taiwan, which occurred earlier this year when we made the decision to exit that market.

Additionally, we have closed 21 locations in Mainland China as part of our ongoing efforts to consolidate our store base and properly position our business before adding others. We currently have 39 locations in Mainland China, and that number could go down in the future. However, we are absolutely focused on getting China right in the short term and continue to strongly believe that there is long-term opportunity for the Dunkin' Donuts brand in China.

All right. So now let me turn to our financial results for the quarter. Revenues for the third quarter increased 8.5% compared to the prior year, primarily from increased royalty income due to the increase in systemwide sales, increased franchise fees due to favorable development mix, which I spoke to earlier, and incremental franchise renewals and increased sales of ice cream products.

Operating income for the third quarter increased $11.9 million or 16.9% from the prior year, primarily as a result of the increases in royalty income and franchise fees, as well as additional depreciation in costs incurred in the prior year related to the closure of our ice cream manufacturing plant in Canada. These increases were offset by a $3.7 million write-down related to our debt and equity investments in the Dunkin' Donuts Spain joint venture.

On the face of our P&L, of this write-down, $2.8 million is in G&A related to the reserves on notes receivable and $873,000 in impairment charges within the JV net income line. In total, the write-downs resulted in a negative impact of approximately $0.02 to the third quarter adjusted EPS.

Adjusted operating income increased $3.9 million or 4.6% from the third quarter of 2012 as a result of the increases in royalty income and franchise fees, offset by the write-downs related to the Spain joint venture and incremental general and administrative costs. Adjusted operating income margin was 47.9%, roughly flat to last year. Excluding the impact from Spain, adjusted operating income margin was 50%.

Net income for the third quarter increased by $10.7 million or 36.2% compared to the prior year, primarily as a result of the $11.9 million increase in operating income, as well as the $4.4 million loss in debt extinguishment and refinancing transactions incurred in the third quarter of 2012, offset by a $4.5 million increase in income tax expense and a $0.9 million increase in interest expense.

Adjusted net income increased by $2.4 million or 5.6% compared to the third quarter of 2012 as a result of the increase in adjusted operating income, offset by increases in interest expense and income tax expense. Diluted adjusted earnings per share increased by 10.8% to $0.41 for the third quarter of 2013 as a result of the increase in adjusted net income, as well as the decline in shares outstanding due to the repurchase of 15 million shares back in August of 2012 and approximately 400,000 shares repurchased during 2013.

Our diluted weighted average shares for the quarter were 108.2 million. At the end of the third quarter, we had debt to adjusted EBITDA ratio of 4.8:1. We continue to monitor the credit markets for an opportunity to reprice our current outstanding debt or possibly take our leverage above our target range of 4.5% to 5.5%. Both options are very interesting to us as we continue to focus on ensuring the best possible return to our shareholders.

There are current stipulations within our credit agreement that require us to reprice all of our outstanding debt if we take on additional debt and the terms are greater than 50 basis points favorable to the new holders. Therefore, there is a fairly limited window of opportunity in which we could execute a deal that delivers shareholder value without repricing our existing debt. But we continue to monitor the markets for the interim opportunity to both relever and reprice.

In the longer term, we continue to believe our asset-light, nearly 100% franchise business enables us to have a flexible balance sheet, and we are committed to maintaining our leverage ratio within our target range. Our effective tax rate for the quarter was 36%.

During the quarter, we generated $50.8 million in free cash flow. We ended the quarter with $210 million of cash on our balance sheet. And of this $210 million, $91 million represents cash associated with our gift card programs and marketing fund balances. We used $20 million in cash during the quarter to pay our Q3 cash dividend to shareholders.

And before I finish, I want to provide a couple of full year 2013 guidance updates. First, on G&A growth. We've talked in previous quarters about making opportunistic investments in our International business using the savings from our February refinancing, as well part of the -- as well as part of the proceeds from our Australian Baskin-Robbins business last quarter. We've also made some additional investments in International throughout the year. Because of these investments and the impact from the Spain write-down this quarter, we now expect full year G&A growth to be just under 6%. Additionally, because of the impact of the Spain write-down, we now expect to be at the low end of our full year adjusted earnings per share range of $1.50 to $1.53.

So now let me turn the call back over to the operator to give instructions on Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question in queue is from John Glass of Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First of all, following up on your G&A question. I mean, so operating income -- adjusted operating income, excluding the Spain charge, was -- essentially, the margin was essentially flat year-over-year. And you mentioned these G&A costs. So first of all, how much of that is in this quarter versus maybe the fourth? And how much do you anticipate going into next year if International continues to be a focus for you?

Paul C. Carbone

Yes, so let me start. John, thanks for the question. Let me start with your second question first. So as we look to the -- to next year, we expect G&A to continue to grow in that 3% to 4% range as we talked about off of where we end in 2012. And then for -- 2013, sorry. And then for your first question, as you look year-to-date, most of those costs in international are baked into the actuals, although we do have some additional investments we're going to make in the third -- in the fourth quarter and, again, expect to end slightly below 6% growth for the year.

John S. Glass - Morgan Stanley, Research Division

And just one other question. Can you maybe talk a little bit about Texas? You've highlighted that now as a market. You've got a little more time there, so unlike California, there's some actual results. How -- can you maybe talk about how good the numbers you're seeing are maybe, particularly including the airport locations and things that may be high traffic but volume expectations you think or potential sort of the next year or 2 there as you start to build that out?

Nigel Travis

Yes. Having lived 7 years in Texas, I realize not only how big it is, but in many ways how important it is. And I think that was highlighted extremely well in an article in TIME Magazine last Friday. Just a bit of history, which I know, John, you know, but for other people on the call, my first week here, I had problems in Texas with our franchisees. We stepped in. We consolidated the franchisees. We then bought it back, and we then did a deal with the Dallas Cowboys, well, to be exact, Jerry Jones and Troy Aikman, who I've known from my days at Papa John's. We feel very good about that joint venture. And I think when I look back, that move was very important because it kind of opened up the West. If Dallas had failed, which it could have done, I think that would have held us back in going west, but it's now turning around to be very successful. The recent store openings we've had in that joint venture are excellent. We just opened up in Houston. And Paul Twohig, who runs our U.S. business, came back really excited about that. He was also excited about San Antonio. In front of me I'm looking at the recent openings in El Paso, and they're way above the sort of average numbers that we expect for the whole system. The unit economics are obviously helped by the flat pricing that we're taking out west as a result with the -- a result of a deal we did 2 years ago with the DCP. And Paul Twohig was even -- he's not always the most optimistic person, but he came back from Texas and said, "I think we'll have 1,000 stores in Texas one day." So we feel good about Texas. I think it will continue to build. I think the joint venture, we talked last week about how to make it more Dallas Cowboys centric. We're doing that. That seems to be having a real effect. And just to give you some updated information, on last week's numbers, on Friday and Saturday, taking the average daily sales for any DMA in the whole country, Dallas was #1. So we're kind of excited about what's happening in Texas.

Operator

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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Paul, can we just clarify on the G&A if you're looking at the full year, I think you said it'd be up slightly less than 6%. Does that imply about $80 million in G&A in the fourth quarter?

Paul C. Carbone

We are looking at the full year being slightly under 6%.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

You're just saying up 6%. Is that up slightly less than 6% year-over-year or are you referring to percent of sales or revenues?

Paul C. Carbone

Yes -- no, up 6% year-over-year. So we said our -- our long-term range is growing G&A 3% to 4%. We see now 2013 full year off of a 2012 number that we've gone through at the beginning of this year, up slightly under 6%.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. So it's a big increase in the fourth quarter is what you're telling us?

Paul C. Carbone

Joe, we can go through that offline, but it's not that big of an increase.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Sure, okay. And just a question on the recap limitations. How limiting are the limitations? What -- sort of tell us what you're thinking now in terms of where you might go in terms of the leverage ratio. And so what has to happen for you to pull the trigger and move on it?

Paul C. Carbone

Yes. So in the credit agreement, which goes back to November of 2010, there's a provision, the most favored nation provision in there that says if we issue new debt greater than 50 basis points above our original, our current debt, we have to reprice all the current debt. So currently, in that a spread of 2.75% with a 1% floor. So if I were to take on new debt at 3.25% spread, I would have to reprice the original $1.8 billion, and that really isn't very interesting to us. So it leaves me a couple of options. It leaves me pricing it at 300, which what -- as we've gone out and talked to people that hold our debt, what we've heard is that there may be a little bit of pressure for us to reprice the original debt while not contractually required, reprice if we do a new deal at 300, if we upsize. So where I see the window is to upsize the 2.75%, and that window hasn't really opened to us yet at that level. So we repriced last February at 2.75%. It was a couple of weeks post that where some deals got done at 2.50%. So we have to find a very aggressive or very favorable market conditions to go out there and lever up. So that's kind of how we're thinking about the lever up. And we would take it to the 5.5% to 6% range if we were to do that. And then on the repricing, I find that interesting as well. So if that window opens and we could reprice something at 250 basis points, my existing debt, as we did earlier in the year to save 25 basis points. That's a $4.5 million to $5 million savings annualized in interest. So that's also interesting. So we're really looking at both of what to do to really maximize the capital structure of the company.

Operator

Our next question is from Greg Badishkanian of Citigroup.

Gregory R. Badishkanian - Citigroup Inc, Research Division

There are 2 questions. First is you mentioned the competitive environment is pretty intense, I think, on the Dunkin' side, and just wondering how that's changed maybe versus what you were seeing in the first half of the year.

Nigel Travis

Yes. I'm not sure it's really changed. It's probably just increased in intensity somewhat. I mean, clearly, you've got a group of burger competitors, which sometimes people forget but are major competitors of ours being put under some pressure by the results. And we obviously look at the whole industry on a weekly basis. So we see what's happening, and essentially, the segment is sort of, let's say, in the flat to 1 range. And you see that from some of the results that have come out from major competitors, some of whom have announced earlier this week. You also have, I think in our segment, some very sophisticated competitors who are doing some very good things for their business. So I think they are the 2 squeezes. And then I think people see coffee as a growth segment. People believe breakfast is a growth segment. You've obviously had Wendy's move out of breakfast. You got Taco Bell coming in. So it continues to move, but I think the good news, turning your question around to what's the good news, is our franchisees have become increasingly aware and understanding with our leadership, particularly with the leadership of the marketing group from John Costello, of the competitive set. And they've become much more responsive in a strategic way. I think there's 2 ways of being responsive. You either have a knee-jerk or you think about it and you have a strategic response. We've taken the second and our franchisees are now great partners. They strolled with this approach originally, but they're much more aligned with our strategic competitive responses. And I think also, we sometimes decide that certain competitors have weaknesses that we want to take advantage of. And using my favorite sports analogy, we identify those weaknesses and go after them. So I think it's getting increasingly competitive. Clearly, the economy has been choppy this year. Think about sequestration. Think about what happened with the debt ceiling debacle. It's all been difficult for the consumer. Income tax is effectively up. So everyone's under some pressure. You then have the industry not performing as well as some people would like. So that increases the competitive pressure on us, but I think our response has been very positive, very strategic, and the good thing is our results are spectacular.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Right. And just to follow on to that. Your same-store sales did accelerate a little bit in the third quarter, very solid. And you mentioned a few drivers. What stood out as being the biggest impact of the different drivers that you talked about?

Nigel Travis

I think I kind of covered it, Greg, and I've -- just to go through it again, I think, Beverages, it was great. We're always pleased to see Beverages because if you go throughout 3 tiers or 4 tiers of margins, they basically go beverages, sandwiches, bakery and then other items we sell. So Beverages has been the highest margin. It's always great for franchise profitability. We then have had spectacular breakfast sales. Just to preempt another question that may come up as a result of the [indiscernible], Breakfast Sandwiches really are, as we discussed about 3 [ph] earnings calls again putting pressure on our sandwich station. We continue to reengineer that to find ways of increasing our throughput. But our Breakfast Sandwiches are spectacular, having eaten one on the way to work this morning. So I think that's the real highlight. People understand we're about breakfast, and I think they're also increasingly understanding that we have great offerings in the afternoon. The Pretzel Roast Beef Sandwich, which I mentioned earlier, was terrific. I think this quarter, the wrap, the Angus Beef (sic) [Steak] Wrap with barbecue sauce, I think more and more people are liking that. So I think they're the highlights, but there's a lot of things we're pleased with beyond those highlights.

Operator

Our next question is from Matthew DiFrisco of Lazard Capital.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Change a little bit in topic here. You're talking about the DD Perks and how you look forward to that. It seems like it's one of the more domestically focused comp drivers going ahead or potentially to be that as you roll it out nationally. I just want to verify. You have all of the stores, all the franchisees, would it be near 100% have the capability now to use digital on the phones?

John H. Costello

Yes. The system is -- this is John. The system is driven, synced up with our Radiant POS system. There are a small percentage of nontraditional restaurants that don't have the Radiant POS system, but all of our traditional restaurants do have it. And all of those restaurants can take advantage of both the mobile offers that we're serving up today, as well as DD Perks as it rolls out.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

And when you roll out DD Perks, what are you seeing as far as or what is a reasonable balance in average check that you would suspect? I would guess when people use mobile payments or cards rather than cash, the average check seems to go up a little bit, as well as Perks seem to, with other loyalty programs, have built the check meaningfully at some of your competitors, like Starbucks and Panera in the past.

John H. Costello

Yes. Even today, guests using our current DD card on the mobile app have a higher average check than guests who do not. So we would expect check to increase as DD -- as the mobile app penetration increases. As we mentioned, we had another strong quarter of growth and topped $4 million. And the DD Perks, on top of the DD card, will accelerate that further. So really a few things working.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Right. Can you give some numbers around that? I'm just curious as far as penetration today of the DD card and also sort of the difference in check, potentially.

Nigel Travis

Okay. So we're not willing to reveal the numbers for the difference right now because we want to validate our numbers over a longer period. What I will tell you is when I was at Papa John's, we used to talk about online ordering being at a 10% difference. It's beyond that, but we want to validate the numbers. And as I say, we're not going to give you any actual numbers until we've gone through a further period. And of course, there may be some difference because there may be something in the Perks program that may make it different, like increased frequency.

John H. Costello

Yes. So I think that you see -- really what you'll see, to build on Nigel's, is you'll see a check -- what's really driving -- first, we step back, what's really driving it is differentiated product, a great guest experience and the innovative marketing. You layer on that a higher check associated with mobile with the use of the card, a higher check associated with loyalty. And to Nigel's point, as we build purchase history with each customer, we'll be able to tailor one-to-one marketing to drive the behavior of each of those customers, which generates the most profitable sales increases for our franchisees.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Excellent. Is it just safe to say there or to assume that the impact was de minimis so far to date in the 4% comp from the overall digital and the lift from average check in the DD Perks program, given it was only in a select few markets?

John H. Costello

That's correct.

Paul C. Carbone

Great, thank you. And operator, before the next question, I want to go back to Joe Buckley's question on G&A. Because -- and we can follow up after, but just to get the numbers out there for everyone because I know we'll be talking about it. So on the G&A growth, last year, on the face of the P&L, G&A was $239.6 million. We had $30.5 million of adjustments, which we can go through one-on-one if people want to of what those were last year, the -- our plant closure up in Canada, the follow-on costs, et cetera. So the base for 2012 was $209.1 million. Grow that at 6%, that would give you a target of $221.6 million. Year-to-date, on the face of the P&L, I have $174 million of -- $174.3 million of G&A. There's about $8.2 million of adjustments that would come out of that. So my net is $166 million year-to-date. So my target is $221 million. My year-to-date is $166 million, just that math would give you about $56 million of G&A in the fourth quarter, which has generally been our run rate. So happy to talk. I know we have calls with most people the rest of the day, the details behind that, but kind of just wanted to lay out what we're seeing in the fourth quarter from a G&A perspective, roughly $55 million to $56 million.

Operator

Our next question is from Jeffrey Bernstein of Barclays Capital.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Great. I appreciate that clarification, Paul. I have a few questions for you, actually just 2. One, the Spain JV unusual, I'm just wondering why, perhaps, that wouldn't be excluded. I didn't know if there -- you anticipate other markets like Spain or does it leave you maybe more cautious on future investments in international markets? Just trying to size that up because it does seem like that's the driver of your kind of lower end of guidance.

Nigel Travis

Okay. Jeff, on the Spanish JV, I think it's important, as the Chairman, to say that we're very focused on reporting our results in a straightforward manner. We took the gain on Australia. We as a board decided very clearly, initiated by Paul, that this should be treated in a consistent manner, and that's why it went into the numbers. So Australia went in; this went in. If you guys decide to run your own models, that's what you do yourself, but we want to be very transparent, very consistent, and that's very important to all of us.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Understood. But does it -- it doesn't leave you any more cautious or change your view in terms of future investments based on what happened?

Nigel Travis

Oh, no, no, no. I mean, just a bit of history, again, I'm sorry if we go back to history. When I got here, we had no company-operated stores. We now have over 30. We had -- obviously, the investments in Japan and Korea, which go back, as we say in England, donkey's years. So that's like 30-odd years. So no, I think if Spain goes up again, I'd do it again. I think one thing I probably didn't make clear enough, we're actually excited about what's happening in Spain. I was there for a day in August. I came back feeling we had a great management team. I came back feeling that Spain will turn around fairly quickly. In fact, tourism in Spain was a record high this summer. You've seen other people invest in Spain this week, significant investments in Spain this week. So no, no. We're not shy at all. And I think something I want everyone to understand is we aren't just going to make investments for the short term. We're about building the business for the long term, which is what I think our shareholders tell us they want, and we believe that's the right thing for building a sustainable business over the very long term.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Understood. And then just the other question specific to California or maybe as you think about going to markets, I would think you enter into most new markets, perhaps, with slightly lower average sales or maybe less profitable sales until the coffee line gets full appreciation. And with that as a backdrop, I mean, specific to California, how are your franchisees maybe thinking about the fact that in addition to that, you have the headwinds of obviously elevated real estate and what seems to be elevated minimum wage coming? Is there any kind of advice you give to them or support or incentive or whatnot? Or how do they anticipate handling that, at least, in the early years when it's still kind of getting going?

Nigel Travis

Well, it's interesting. Two weeks ago, I was in Dallas for what I call coffee chats with franchisees. I had all the Western franchisees. The West actually opens up far higher than our more traditional markets. A lot of it is donut sales, but -- and what's interesting, we hang on to those sales at a rate that we never used to see. You're right that over time, you migrate to more beverage. But the thing that everyone always forgets is if you like the meat in the sandwich, it's the sandwich. I mean, these margins, by any other measure, are phenomenally high margins. So we've now started looking at the whole business. We've started looking at the whole business slightly differently. We talk about high margin products, which are basically sandwiches and beverage. And we find that builds; we're very focused on that. All that is backed up, of course, when we go into these newer markets by our national TV that's been out there for what, John, 2 years? The brand awareness from that. The pound of coffee in California is the highest state in terms of pound of coffee sales. The response we've had is amazing. So I'm very confident, and so are our franchisees, who now are much more operationally focused than they used to be years ago, that we're going to have great success in terms of franchise margins, opening sales. Sure, the competition's going to come after us, but they do that everywhere. And that's why America's great. It's a very competitive country, but we feel very confident about what we're going to do there, and that's backed up with all the success we're having in places like Denver, Utah, Texas, et cetera. And I think, look forward to 2015. It's going to be great.

Operator

Our next question in queue is from Andy Barish of Jefferies.

Andrew M. Barish - Jefferies LLC, Research Division

Maybe one for John on just to look at marketing next year, as you grow the top line, how the total rating points kind of change? And any shift in -- as you focus more on digital, any shift away from the national or does everything kind of grow here?

John H. Costello

Yes. Our marketing is driven by the 5% contribution that franchisees make. So marketing next year as -- the dollar increase in marketing will be in line with the expectation of revenue gain that the company has provided. So you will see a nice increase in marketing. And what you'll see next year is pretty broad-based increase across all elements. And within that, you'll continue to see an increase in national TV, which is giving us leverage not only in existing markets but also in our core markets as well. You'll also see an increase in digital spend as we continue to see an increase in penetration of our mobile app and as we roll out our loyalty program. We're unique among some brands in that traditional marketing continues to work very well for us, as well as new media. So to kind of summarize, total marketing will increase in line with the sales increase we've provided in guidance, see broad-based increase with increased national TV and increased digital spend. As we touched on earlier, our differentiated products are a key driver of the business. So you'll continue to see solid increase in support of all of those differentiated new products. We continue to have a 2-year pipeline in development and feel fairly good about that. Does that kind of answer the guidance on marketing?

Andrew M. Barish - Jefferies LLC, Research Division

Yes, much appreciated.

Operator

Our next question is from Nicole Miller of Piper Jaffray.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I appreciate the color around the competitive set. Could you talk a little bit about if you're seeing anything going on at convenience stores and any impact there?

Nigel Travis

Okay. So it's an interesting question. I mean, we are -- we have a world-class competitive intelligence operation here that really gives us -- makes us think about everyone all the time. And we're in a very competitive business. And clearly, if you look at some convenience trends, you'll see that gas is down. Clearly, cigarettes are down, though electronic cigarettes is probably helping them somewhat. So they're coming under pressure. So we do see convenience chains thinking about food and beverage. That's something we're very aware of. Most of these competitors are very good. They've invested new concepts. You've seen that from everyone from Racetrac, Wawa, 7-Eleven. We're aware of all these. Our franchisees are highly aware of them, and we talk about competitors like these all the time with our franchisees. So yes, I mean, everyone's attracted by food. Everyone's attracted by breakfast. Everyone's particularly attracted by coffee. But at the end of the day, our job is to do even better. I think we have, in my view, America's best coffee. We had a great product innovation and new news. We have world-class marketing. But what underpins it all is fantastic operations. And I actually think our operations have improved dramatically in the last few years, and that will be why we will continue to win against the increasing competitive set.

John H. Costello

Maybe add one thing, there's no doubt that QSR and breakfast has been and will continue to be very, very competitive. As Nigel mentioned, while we study competition, we deeply believe in that the best defense is a strong offense, that we really think the combination of the operational excellence that Nigel talked about, continued differentiated products and innovative marketing is a strong offense. And we'll continue to stay on the offense in the face of the strong competitive environment.

Paul C. Carbone

Thanks, Nicole. I know Stacey and I will be talking to many of you during the day today, so some of you we didn't get into the queue so I apologize. I know we have calls set up with most of you. Let me turn it over to Nigel now.

Nigel Travis

Yes. So I'd like to thank you for coming on the call today. And I probably don't do this enough, but I'd like to thank our franchisees and our employees for the partnership that they have. I think the quarter was absolutely fantastic. I think we really worked hard in a fairly difficult environment. But the partnership between franchisees and employees was tremendous, and that's why we did so well. So with that, thank you for your time today, and we'll talk to some of you later.

Operator

Thank you. Again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.

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Dunkin Brands (DNKN): Q3 EPS of $0.41 misses by $0.02. Revenue of $186.3M (+8.5% Y/Y) beats by $3.36M. (PR)