Dunkin' Brands Group's (DNKN) Nigel Travis on Q2 2016 Results - Earnings Call Transcript

| About: Dunkin' Brands (DNKN)

Dunkin’ Brands Group, Inc (NASDAQ:DNKN)

Q2 2016 Earnings Conference Call

July 21, 2016, 08:00 AM ET

Executives

Stacey Caravella - Director of Investor Relations

Nigel Travis - Chairman & Chief Executive Officer

Paul C. Carbone - Chief Financial Officer

Paul E. Twohig - President, Dunkin' Donuts U.S. and Canada

Christopher Fuqua - Senior Vice President of Dunkin' Donuts Brand Marketing, Global Consumer Insights and Product Innovation, Dunkin' Donuts LLC

Scott Hudler - Chief Digital Officer

Analysts

John Ivankoe - J.P. Morgan Securities LLC

John Glass - Morgan Stanley & Co. LLC

Joseph Buckley - Bank of America Merrill Lynch

Andrew Barish - Jefferies LLC

Sharon Zackfia - William Blair & Co. LLC

Karen Holthouse - Goldman Sachs & Co.

Nicole Miller - Piper Jaffray & Co.

Jeffrey Bernstein - Barclays Capital, Inc.

David Tarantino - Robert W. Baird & Co., Inc.

William Slabaugh - Stephens Inc.

Jason West - Credit Suisse Securities LLC

Matthew DiFrisco - Guggenheim Securities LLC

Operator

Good day, ladies and gentlemen and welcome to the Dunkin’ Brands Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time [Operator Instructions] as a reminder, this conference is being recorded.

I would now like to turn the conference over to Stacey Caravella, Director of Investor Relations. Ma'am, you may begin.

Stacey Caravella

Thank you, operator and good morning, everyone. With me today, are Dunkin’ Brands Chairman and Chief Executive Officer, Nigel Travis and Dunkin’ Brands Chief Financial Officer, Paul Carbone. Additionally, Paul Twohig, President, Dunkin’ Donuts U.S. and Canada; Chris Fuqua, Senior Vice President of Brand Marketing, Global Consumer Insights and Product Innovation for Dunkin’ Donuts; and Scott Hudler, Chief Digital Officer, are here and will 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. As a reminder, our Q3 earnings call is tentatively scheduled for October 20, 2016.

Before I hand the call over to Nigel, I would like to remind everyone that the language on Forward-Looking Statements included in our earnings release also applies to the comments on today's call. Our release can be found on our website, investor.Dunkin’brands.com along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Now, I would like to turn the call over to Nigel.

Nigel Travis

Thank you, Stacey and thanks to everyone for joining today's call to discuss our second quarter 2016 results. While, we are disappointed with our top-line revenue growth in the second quarter. We are pleased that we were able to growth both operating income and earnings per share at a significantly faster rate than revenue.

What is more important for our future is that we also made significant progress with our five-part Dunkin’ Donuts U.S. plan. Specifically for the quarter, we achieved 2.3% revenue growth driven by system wide sales on licensing fees from the sales of Dunkin’ K-Cups in the retail channel. Excluding company stores in both years, the equivalent revenue growth is 3.9%.

We delivered 8.1% of adjusted operating income growth, as a result of revenue growth and relatively flat expenses year-over-year. We achieved 14% adjusted earnings per share growth driven by an increase in adjusted net income and a decrease in shares outstanding and our franchisees and licensees around the world opened nearly 200 restaurants across both brands.

As we discussed on our last call, we began executing against a five-part plan designed to drive comp store sales of 0% to 2% in 2016. We are on-track to do this and we believe this plan will deliver long-term sustainable growth in the years ahead.

To remind you, this plan consists of driving our coffee leadership, fastest market product innovation, targeted value offerings and everyday smart pricing, increased use of digital technologies and an improved restaurant experience. We knew this plan would take time to deliver consistent results and coming off our first quarter comps of 2% for the second quarter, we delivered 0.5% Dunkin’ Donuts U.S. comps giving us a 1.2% comp for the first half of the year.

In the second quarter, tickets was approximately 290 basis points and traffic was negated to 140 basis points, pricing was 380 basis points, which was comprised of slightly less than 300 basis points in price offset by less discounting year-over-year. The decrease in discounting was primarily a result of the elimination of combo meals on our menu boards as a result of the redesign that we did in Q1. By the way, the response by our guests for the new menu board design has been overwhelmingly positive.

We are pleased that we achieved posted comps, but disappointed with the level of negative transactions that we experienced in the quarter, particularly in the afternoon. We believe this traffic deceleration was in part amplified by the well documented softening in the QSR and restaurant marketplace. However, to drive sales in the latter half of the year, we remain totally focused on our five-part strategy. In particular, we remain focused on driving a coffee culture.

In the second quarter we had strong beverage category growth included double-digit growth in espresso-based beverages and at the end of June, we announced the launch of Cold Brew Coffee in New York and Los Angeles. Dunkin’ Cold Brew is a handcrafted product made daily at our stores in small batches. The longer brewing process extracts the flavors differently from our famous iced coffee and provides guests with a rich smooth coffee with an inherently sweeter flavor.

Cold Brew really appeals to the millennial customer and early results suggests that sales of this product are incremental to sales of our regular iced coffee. It also had a very strong repurchase rate by our guests. We will be launching Cold Brew nationally by the end of the summer and believe it’s one of the most important products we have introduced in the past decade.

Importantly, it’s being very well received by franchisees as well and Cold Brew is yet another example of the beverages we are introducing that further establishes Dunkin’ as a coffee authority and drive sales.

I would also like to note that this past week, we announced the in keeping with our goal of being a socially responsible coffee company, all Dunkin’ Donuts espresso beverages in the U.S. and 16 of our international markets will be made with 100% Rainforest Alliance Certified Coffee Beans. The Rainforest Alliance works around the world to support sustainable farming practices.

As for the second pillar of our plan through the innovation, the GranDDe Burrito, a highly successful limited time offer that we launched in Q1 continues to perform well in Q2 along with the newly launched Bacon Supreme Omelet LTO.

We are also continuing to work on improving our core menu including the higher quality better tasting eggs that we will roll into the system in this quarter. A reformulated bagel that we will likely put into test by the end of the year and we are revamping our bacon with a focus on better tasting more robust product.

One of the key findings in our consumer research, indicates that great tasting authentic products matter more than ever. Especially, to youngest consumers. As a result, our menu will continue to evolve in the months and years ahead to offer the best quality, best tasting products in each of our core categories.

As for the third pillar of the plan, value and pricing. We have made significant progress with our franchises on understanding the need to deliver value in today's quick service restaurant environment. We are focused on small not blanketed discounting. Our goal is to provide our guests with targeted offers through our Perks Loyalty Program that are relevant to them to drive visits and tickets.

Additionally, we have worked closely with our franchisees to strike the right balance between a select number of national and local value based promotions in 2016. We have a couple of national promotions planned for the balance of the year and we will continue to provide a appropriate local office in order to drive transactions. We have also worked closely with our franchisees on price and we were pleased that we saw no price increases in the last few weeks of the second quarter.

As for our fourth and fifth pillars of the plan, digital technology and guest experience. We continue to evolve customer service in our restaurants through the use of mobile and digital technology. In mid June, we launched On-The-Go mobile ordering nationally, which is available exclusively for members of the Dunkin’ Perks Rewards Program.

Let's now turn to Dunkin’ Perks Members. We now have 4.9 million and they can now order, pay in advance with a swipe of a finger on their phone then skip the line in order to pick up their favorite menu items. A major feature of our App is that it allows customers to save their favorite locations and products. Some customers for example, are already saving multiple menu options based on their lifestyle and buying pattern. An example is that they order in the morning rush may be a very different from their order while visiting another store at the weekend with their kids.

On-The-Go Ordering, plus our newly relaunched App represents one of the most exciting and important advances of the brand. With the national launch of this program early in June, we can now offer an entirely new level of speed and convenience for our busy guests. To promote the national launch of On-The-Go Ordering at Dunkin’, we debuted and advertising spot featuring the world’s fastest wing suit base jumper Ellen Brenan flying off a fountain to retrieve her Dunkin’ order with a #WTFast.

The ad was recognized by Adweek as the Ad of the Day and Fast Company as the ad of the week and in less than four weeks the #WTFast digital videos amassed an amazing 155 million views across all social platforms, making it the most watched digital video campaign we have done to-date. We have also launched the #KeepOn campaign, which is in the next phase of the America Runs On Dunkin’ theme, which has been in place for over 10-years.

The #KeepOn campaign focuses on the Dunkin’ brand and the ways in which our customers use us as appose to just focusing on our limited time offer products. Both the #WTFast spot and the #KeepOn campaign demonstrates that are continuing to evolve our brand positioning, keeping us relevant with today’s consumer and reinforcing our positioning that Dunkin’ is a brand that keeps everyday Americans running.

And specifically on the guest experience, during the quarter, we saw a steady year-over-year improvement in guest satisfaction scores. We continue to have a relentless focus on speed, accuracy, product availability and cleanliness.

We have done a whole lot of efforts to improve the guest experience and we recently completed a round of meetings for restaurant managers across the country, emphasizing these focus areas and saw great engagement from crew members. An engaged crew typically drives a great restaurant culture, which of course lowers like the turnover and improves operations, which in turn drives profitable top-line sales.

So, we continue to make great progress with our five-part plan for Dunkin’ U.S., but it is not an overnight solution and there will be ups and downs in our performance as we work to best position the brand for quality long-term growth. I think it is also important to note that despite the comp challenges we faced over the past few quarters and in a raising labor cost environment, franchises average store profitability for all stores remains strong.

As for other initiatives, this week we made the exciting announcement that in the first year since Dunkin’ K-Cup pods again being sold at retail outlets nationwide through our partners JM Smucker Company and Keurig Green Mountain. Consumers have purchased more than 300 million of our K-Cups with retail sales totaling nearly $220 million.

Now to put that in perspective, according to IRI, a market research company focused on the consumer packaged goods industry, over 10,000 new CPG products hit retail shelves every year with generally less than 10 new products capturing more than $100 million in their first year of sales.

I will just repeat those numbers, if you are writing them down. 10,000 new CPG products, less than 10 new products hit the $100 million mark in their first year of sales and off that 10, only about half reached the $200 million mark, so remember we hit $220 million. As a results of the tremendous success of the launch, IRI listed Dunkin’ K-Cup pods as one of the rising stars in foods and beverage.

Our processing grocery stores has further strengthened Dunkin’ Donuts’ position as a pod house coffee brand in the U.S. and with the number of single cup households expected to continue to grow, we believe there is considerable long-term upside to our channel business. And while discussing CPG, we are encouraged by the year-on-year growth of Baskin-Robbins products in grocery stores.

In fact, year-to-date retail sales are up 65%, the Baskin CPG business will never be as big as the Dunkin’ opportunity, but is vital in driving the relevance of the Baskin-Robbins brand. In talking about that brand, let’s turn to Baskin-Robbins U.S. Baskin-Robbins U.S. had 0.6% comp growth for the second quarter. On a two-year basis, there was an impressive 4.8% and growth was driven by ticket offset by decline in traffic.

From a category perspective, Cups and Cones led the way driven by in part by our new Warm Cookie Ice Cream Sandwiches, which launched on March 1st. We also saw good results from our Grab-N-Go Cookies and online cake sales were strong with mid single-digit growth. Looking forward, our new Polar Pizza platform launched on July 1st and our mobile App launches system wide later this year.

Now to international, it is another tough quarter for comp - internationally with Dunkin’ Donuts international comps of negative 3.1% and Baskin-Robbins negative comps of 6.6 both brands faced challenges especially heat and ice across key markets such as, South Korea, Saudi Arabia and Germany.

Bill Mitchell, our president of international and his team are focused on several key initiatives to drive sales internationally for both Dunkin’ and Baskin, including refining the position of our brands to drive top-line sales, improving our financials models to increase franchisee profitability and making our brands more convenient and accessible for customers to country specific delivery, mobile and loyalty programs.

For example, Baskin-Robbins Korea rolled out its Happy Delivery Programs at 600 restaurants representing more than half of its store base in that country and Dunkin’ Donuts in Germany successfully launched its mobile App in June.

And with that, I will now pass it over to Paul.

Paul C. Carbone

Great, thanks Nigel, and good morning, everyone. Let me start with our store development results for the second quarter. In Q3, Dunkin’ Donuts U.S. franchisees opened 82 net new restaurants. This excludes nine Speedway closures versus 87 net new units last year excluding seven Speedway closures in that period. For the quarter by region, 15% of net development was in the core, 51% in established markets, 21% in emerging, and 13% in the West. Those percentages are all excluding the Speedway closures I mentioned.

In the second quarter, Baskin-Robbins U.S. had 12 net store opening versus two net new store openings last year. What is very encouraging is that some of the recent openings have seen sales levels nearly double above the system average weekly sales levels. Baskin-Robbins International had 78 net store openings, versus 59 net store openings last year and Dunkin’ Donuts International had 35 net store openings, versus [30] (Ph) net store opening in the second quarter of the prior year.

Now let me move to our financials. Revenues for the second quarter increased 2.3%, compared to the prior year period due primarily to increased royalty income as a result of system-wide sales growth and an increase in other revenues due primarily to the increased license fees recognizing connection with the Dunkin’ K-Cup pod licensing agreement and an increase in transfer fee income. These increases in revenue were offset by a decrease in sales at Company operated restaurants, driven by a net decrease in the number of Company operated restaurants, as well as the decrease in sales of ice cream and other products.

Operating income and adjusted operating income for the second quarter increased $13.6 million or 14.6% and $8.3 million or 8.1% respectively from the prior year period. Primarily as a result of the increase in revenues offset by a decrease in net margin on ice cream and other products. The decrease in margin year-over-year was primarily driven by increasing commodities. Additionally, operating income in the prior year period was unfavorably impacted by cost incurred related to the final settlement of our Canadian pension plan as a result of the closure of our Canadian ice cream manufacturing plant in fiscal year 2012.

Net income and adjusted net income for the second quarter increased by $7.3 million or 17.2% and $4.1 million or 8.5% respectively compared to the prior year period, primarily as a result of increases in operating income and adjusted operating income offset by an increase in income tax expense. Diluted earnings per share and diluted adjusted earnings per share increased by 22.7% to $0.54 and 14% to $0.57 respectively for the second quarter compared to the prior year period, as a result of the increase in net income and adjusted net income, as well as a decrease in shares outstanding.

The decrease in shares outstanding from the prior year period is due primarily to the repurchase of shares since the second quarter of 2015, offset by the exercise of stock options. At the end of the second quarter this year, we had a debt to adjusted EBITDA ratio of 5.0 to 1. Our effective tax rate for the quarter was 38.9%, and during the quarter, we generated approximately $65 million in free cash flow.

We ended the quarter with $320 million in cash and short-term restricted cash on the balance sheet and of that $320 million, a $123 million represents cash associated with the gift card programs and marketing fund balances. We used $27 million in cash during the quarter to pay our Q2 cash dividend to shareholders.

Now, let me address our guidance. As you likely saw in our press release this morning, we updated and reiterated certain targets regarding our 2016 expectations. Our comp store sales guidance remains unchanged, we continue to expect Dunkin’ Donuts U.S. comp store sales growth of between 0% and 2% and Baskin-Robbins U.S. comp store sales growth of between 1% and 3%.

Our development targets also remain unchanged. We continue to expect between 430 and 460 net new Dunkin’ Donuts U.S. restaurants excluding the closure of approximately 30 speedway self-service coffee stations. Between 5 and 10 net new Baskins-Robbins U.S. restaurants and approximately 200 net new restaurants across the 2 brands internationally. We also continue to expect net income of equity method investments to be slightly less than our 2015 full-year results.

From a revenue perspective, we now expect growth of between 3% and 5% as a result of the sale of company-owned stores in the second quarter as well as the anticipated future sales of company-owned stores in the balance of 2016. During the second quarter, we sold 12 points-of-distribution in Dallas and by the end of July, we expect that we will have sold the remaining 23 points-of-distribution in the Dallas market. We anticipate that by the end of the year we will have fewer than five company-owned stores remain. While the sale of these stores impacts our revenue and thus the lower revenue guidance there is no material impact on our profits.

Beginning this quarter, we are also providing performance targets or guidance for GAAP operating income and GAAP earnings per share. For 2016, we expect GAAP operating income growth of between 27% and 30% and we expect GAAP earnings per share of $2.2 to $2.8 on a 53-week basis. A major driver of the significant year-over-year GAAP operating income growth that we will be rolling over the Japan and impairment that we recorded last year.

We are reaffirming our targets for adjusted operating income growth of between 8% and 10% and adjusted earnings per share of $2.20 to $2.22 on a 53-week basis. We are also updating our full-year share comp guidance to 93 million shares outstanding, previously it was 94 million and we continue to expect a 38.5% tax rate. And as a reminder, our fiscal year 2016 is a 53-week year for the company. The target range is for revenue, GAAP, operating income growth and adjusted operating income growth applicable on both a 52 and 53-week basis. The impact of the 53rd week on GAAP earnings per share and adjusted earnings per share is approximately $0.03.

And with that, I would like to turn it over to the operator to give instruction on the Q&Q. Operator.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question is from John Ivankoe with J.P. Morgan. Your may begin.

John Ivankoe

Hi, thank you very much. The question is on fiscal 2017 development, just so we are on the same page here. Obviously, comps are still within your range, but at the lower end of your range and you mentioned higher labor costs, which is still happening in 2016 and all likelihood will happen in 2017 and clearly understanding that that average franchise store profitability is still strong. What type of implications are the current comp and costs environment making for the potential outlook on 2017 development?

Nigel Travis

John, good morning and I will get Paul Twohig to talk about that.

Paul E. Twohig

Hey John, great question. As we are in the middle of the year, we are beginning to look at what 2017 looks like for development. But as we have said before, it's all about for many of our franchisees the level of uncertainty, whether it be in the political front, minimum wage, different bills being introduced that may impact their profitability.

That concern still exist for many and while we remain pretty confident in not only in this year but going into next year about our development growth. No big surprise, there is some concern amongst our franchisees, but I expect that we will have a better number for you later in the year as to where we are headed, but I think we are going to be in good shape towards 2017.

John Ivankoe

I am sorry, go ahead.

Nigel Travis

Yes John, just to add to that. We have a very disciplined process, it’s early in the process for us to nail it down and just so it pulls uncertainty. We talked to franchises, what they say is and I think in one particular state where we did some lobbying, you go there and they say I’m thinking about say 3 stores next year.

I’m pretty certain on this one, I’m pretty certain on that one, the other one I would have done, but we have got so much regulation, as political uncertainty, we are not sure who is going to be in-charge in this state or nationally. So that’s sitting on fence on some of these sites. So we need some certainty, which is why we talked about the uncertainty as being if you like a big question mark in coming out with our numbers.

John Ivankoe

And is your best guess at this point that you stay within 4% to 6% or might 2017 potentially be a year where we could potentially break the lower end of that 4% to 6% annual growth.

Paul E. Twohig

Yes John, our long-term guidance is 4% to 6%, you know this year we are slightly over 5% and you know our process is we will give guidance in February as we report fourth quarter earnings.

John Ivankoe

Okay, fair enough. Thank you.

Paul E. Twohig

Thanks John.

Paul C. Carbone

Next question please.

Operator

Our next question is from John Glass with from Morgan Stanley. You may begin.

John Glass

Thanks, good morning. First just a follow-up on that question and then another question. Is the uncertainty around openings manifested more in the newer markets where it consists less certainty about how the brand performs anyway or are you seeing that uncertainty across all of your markets and then if I could ask another question?

Nigel Travis

I would actually say, it’s probably the reverse. I mean I think the uncertainty goes across the country, but many of the states have got a lot of regulation in our core markets. So I would say, I never thought about it that way before John, but I would say that that is predominantly in the markets that have a lot of regulation being placed and it’s not just the things that Paul listed out, it’s some local stuff as well.

So to try and get rid of regulation is one of the goals that we are very focused on and I think, when we go back and talk about franchise economics, we feel we are doing all the right things. I think clearly a year ago, we have minimum wage, if you like hitting us a bit like a rock, I think we responded extremely positively, franchisees have responded positively.

Yes some of them has taken too much price, we will talk about that I’m sure later, but I think we have got that under control now, but I think we have done an awful lot to mitigate the labor increases being seen across the country. We have put in place some very expensive improvements through simplification, energy management and I think we have all been helped and it’s not just this Company, but other companies by the relatively benign commodity environment.

John Glass

Can I just ask Nigel on the roadmap for this new brand positioning, maybe what the reasonable timeframe is to start to see the result. And I guess just what the tagline is to the consumer now right, because as you move towards Starbucks, right and espresso and Cold Brew, is it Starbucks quality at Dunkin’ prices or what is the value proposition that you changed the model towards what I think they do best.

Nigel Travis

Okay, so a lot of work going on, in fact one of the things if you like a little bit color commentary, since last call we have done a lot more research, we feel even more excited about the strategy that we have. We think we are making great progress particularly on focus I referenced in my remarks. But to take your question specifically, and then I will pass the other to Chris Fuqua who lives with it day-in, day-out.

Christopher Fuqua

Good morning, John. Thanks for the question. So, I think we are trying to be the best Dunkin’ that we can be. We are not necessarily trying to copy somebody else's strategy. We are, a brand based on positive energy, we are brand based on energizing, inspiring and rewarding our guests. And we are really going to make sure that we go back to the core of what Dunkin’ is to its consumer every single day. Our research is confirming that and the plan is all built to run that idea of delivering it every day and really being what our guest wants it to be.

John Glass

Okay, thank you.

Paul C. Carbone

Thanks John. Next question please.

Operator

Our next question is from Joe Buckley with Bank of America Merrill Lynch. You may begin.

Joseph Buckley

Thank you. Question on the pricing, Nigel I know you just said you feel like you are getting it more under control. Were you still showing big percentage price increases in a highly competitive environment? Can you talk a little bit about the franchisee expense inflation, like what are they seeing on wages, wage inflation and what they are seeing on the commodity side that is still leading to this pre high level of pricing? And can it be as simple as that in terms of the lack of traction in the same-store sales that the pricing is still [indiscernible].

Nigel Travis

Okay. So, so if I think what you said. I mean clearly just to summarize the commodities are benign, I think there are two concerns about labor, one is finding labor, I mean if you ask franchisees what the biggest issues they have right now is finding people and we did a lot of work earlier in the week on that.

And I’m puzzled by two things, and I have said this repeatedly for a couple of years, we have decreasing unemployment, which is good news we all think that's the right thing for the country. So that brings to a many markets labor shortage. But you have still got very high youth employment, 10.4% as of May that's something that I can't quite put the two together, because this is an industry that brings younger people in and then trains them we have discussed that before.

So, but the thing is the franchisees have perhaps sometimes go ahead of themselves into increasing prices, because they see minimum wage going up, they also have pressures from this labor shortage. So that put pressure and I think having talked to many people in other companies, the natural reaction for franchisees and I know that is right is to increase profit, they look at that profit, so they increase profits

I think the great achievement of this quarter is we firmly believe we have got it under control. And I want to credit particularly Scott Murphy and his team in operations with Chris Fuqua who really discussed this in a very energetic and active way with the franchisees and at the end of the quarter, I think we went five consecutive weeks with no price increases that's a trend that I think we will see continues into Q3.

The franchisee leadership have said we went too far on price increases and we got to get it under control. So, we have a strong consensus that increasing prices is no good for transactions, I think we psychologically turned the corner on this and I feel very good about that part of the business. And the last thing I will say on this, if I go back two, three years I continually said, our franchisees were great of not increasing prices on core products. I think minimum wage for everyone rater I just stated this time last year, I think we have got through that phase and I feel good about pricing going forward.

Joseph Buckley

Thank you.

Paul C. Carbone

Thanks Joe, next question please.

Operator

Our next question is from Andy Barish with Jefferies. Your may begin.

Andrew Barish

Hey guys can you give us maybe an early read on what you are seeing on the go type of stores that are benefitting the most you know those kind of color - a little bit of color on that please.

Nigel Travis

I will then ask to Scott Hudler, who is most mind of it to talk about it.

Scott Hudler

Sure. Thanks Andy. So, really pleased with what we are seeing from On-the-Go so far, we launched in May in New York, our biggest market launched in the rest of the country in June a bit ahead of schedule. So what we are seeing? We are seeing a lot of usage in the morning, which we think this plays into two of our key strategies against being a leader in digital and improving the restaurant experience of giving the guest the chance to avoid the line during that busy morning.

And as you know unlike many other concepts we have a high concentration of good traffic that comes in the morning. So for those guest and we are seeing it from heavy and medium Perks members, great satisfaction to be able to get in and out of our stores in a faster manner. We are seeing obviously some of the more urban locations are benefitting from this, but surprisingly we are also seeing some suburban locations at key entrance points to highways and things like that where there is a strong commuting population, they are seeing the benefit of this in the early days.

Andrew Barish

Thank you.

Nigel Travis

Thanks Andy.

Operator

Our next question is from Sharon Zackfia with William Blair. You may begin.

Sharon Zackfia

Hi, good morning. Just a few questions, I guess Paul could you quantify refranchising gain was in the quarter and then Nigel I think you mentioned that the afternoon was weaker and maybe was the weakest day part. I’m wondering how the morning holds up and if there was any difference between kind of beverages or food.

Paul E. Twohig

Yes, so when we take the refranchising gain, that was sale of restaurants in our Dallas market. So roughly $2.1 million in the quarter. So that was the sale of the restaurants.

Paul C. Carbone

Sharon I will take the second question. The morning was a little bit stronger than the afternoon I would say not significantly stronger, the difference was beverages in the morning were stronger than they were in the afternoon. And I think as you look at the five-part strategy, the beverage pipeline is really focused on beverages across all day part, so we feel some confidence that we can improve the afternoon with the beverage led strategy.

Sharon Zackfia

Can you give an update as well given the push into espresso, what espresso is as a percent of your beverage mix at this point, maybe relative to a year or two ago?

Nigel Travis

Well it’s obviously improving, but we never breakdown the sense of products, I think the only thing we did, when we first launch K-Cups. What I would say is important about espresso is two things, it brings in a different consumer base and the attachment, which I think we talked about two earnings call ago is much higher that is on both ice coffee and our original drip coffee. So it’s a strong push to espresso-based products and we will continue I think to grow that category very well. So we feel pleased with our progress and it’s a major part of our market.

Sharon Zackfia

Okay great. Thank you.

Operator

Our next question is from Karen Holthouse with Goldman Sachs. You may begin.

Karen Holthouse

Hi. Thank you for taking the question. Looking at the traffic deceleration we saw in the quarter, can you give any color on how you sort of think of drivers between the industry softening throughout the quarter versus a reaction to the pricing side of things versus anything also on the product or promotional front? And then tied to that as you think about pricing getting to a more normalized level, when would we expect to see that, is that at the beginning of 2016, beginning of 2017 story? And based on your experience how quickly can consumers react to this sort of a better value proposition or pricing rolling off?

Christopher Fuqua

Yes, so I think there are lot of questions in that one question. The real story is I think there is some softness in the overall environment that have an impact on transactions. We saw a relatively flat comps through the quarter, so we feel pretty good about that. We do think that our focus on targeted value with Perks offer is going to be an effective strategy going forward, which is why acquisition is so important. We also believe that the national promotion and local promotion mix is going to be much more targeted going forward.

So we will look at strategic, strategic value offers in a local market that might be more effective driving strategic items than there would be at the national level. I also think, as Nigel mentioned we feel like we have a much better hand on pricing than we did may be six or nine months ago, our franchisees are actively engaged in the conversation. The 380 basis point impacts from price is really a cumulative impact over the quarter.

So it's not like they went and took 300 basis points just this quarter, it will have to roll off over the next few quarters. So I think the impact of price will start to go down as we go forward and with the targeted value approach as well I think you will see a subsequent increase in transactions as well. So, this is not just a one quarter gain this is a long-term gain to get the brand going back in the right direction.

Karen Holthouse

Okay. Thank you.

Paul C. Carbone

Thanks Karen. Next question please.

Operator

Our next question is from Nicole Miller with Piper Jaffray.

Nicole Miller

Thank you, good morning. With the change in the menu boards, what is the attended versus actual results from a gross profit margin perspective? And then did they rotate and I was just wondering if there is a pattern to the rotation of the new menu boards?

Paul E. Twohig

Sure. Nicole, ask that first part of that question again.

Nicole Miller

When you have gone more towards coffee and removed the combos from a franchisee perspective, what is the result to gross profit or store of a margin overall however you look at it? And did you intended to change? Is it different than the actual result?

Paul E. Twohig

Right. So on a margin basis obviously the beverages have significantly higher margins, I know we set there in the 80% range it is gross margin, food or breakfast sandwiches in the 70% and then I think many retailers and certainly my past would long for the worse margin products that were in the 60%. So great margin stack up across the product.

What I would say is that the combo discount in many restaurants was de minimis right. So, may be a 1% discount, a 2% discount, so the discounts in our combo was very low. So decoupling the combos really wasn't a factor in driving higher profit, because the discount really wasn't there. The idea behind it and I’m going to turn it over to Chris.

The idea behind this is really of the combos took up 75% of the real estate on the menu board and representing in slightly more than double-digit percent of sales. So we were autograph between real estate on the menu boards and percent of sales and when we taking the combos off let us feature the beverages, and let us feature the food separately and really making it more appealing to the consumer.

Scott Hudler

And Nicole this is Scott, on your second part of the question on the rotations. So obviously we have made a big effort over the last few years to leverage the technology of digital menu boards in our stores, over 50% of our stores now have digital menu boars and it is brand standard for every new build or remodel. If they don’t have digital menu boards, they must transition to that and part of the reason we do that is, one is it’s a better experience for the consumer and then secondly from a marketing flexibility, it allows us to be timely and be relevant with our marketing messages.

So we obviously change it every marketing window, but we can change it to a allow for things like the weather. If we see it’s going to be raining for a few days, if it’s going to be extremely hot for a few days, we can make those adjustments, we can make adjustments based on specific products. We do provide a bit of local control to franchisees to promote a local in-store discount or product promotion offer. And it’s a great vehicle for us to use as a driver of key marketing messages. So we do have quite a bit of rotation with that content and that’s how we think about it.

Nicole Miller

Thank you.

Scott Hudler

Great.

Paul C. Carbone

Thanks Nicole. Next question please.

Operator

Our next question is from Jeffrey Bernstein with Barclays. You may begin.

Jeffrey Bernstein

Great, thank you very much. Actually just one quick follow-up and then a question. My follow-up was on the value side of things and I know you mentioned that the pricing will ease as we move to the back-half for the year, from no additional increase they are taking. I'm just wondering do you have any metrics you can offer in terms of value scores, whether you have seen the consumer actually give you push-back from a value perspective where that was versus where that is? And my main question was on the QSR category in general. I know you mentioned that it seemed like the category softened in the second quarter, I was wondering if you have any detail you could provide behind that, whether or not we are seeing any more or less discounting and bundling going on by the competition that might have had any kind of impact? Thanks.

Nigel Travis

Okay, so Jeff firstly on your second question which I will take, much of my information comes from [indiscernible] but I think the consensus based on your, very well all the pieces of work all of you, is that there was a slowdown. I have also been to various industry meetings and heard the same and I meet people all the time. So I think it’s pretty clear there is a slowdown, I'm not quite sure why, but the consumer seem to go into a little bit of a funk during in the quarter. So clearly, that was a concern.

On what I also have heard, and I have heard this from franchisees in other brands is there is now a bit of a struggle going on about how other brands who had very strong comps on the back of very aggressive value promotions are now comping against those values promotions. So I think it’s going to be an interesting three or four months, we didn’t go right into those pricing wars, I think the deliver aspect of it and as I said on the last earnings call there is a difference between us and the other.

I mean we are on-track to open the 430, 460 restaurants this year, many of the people involved in value pricing haven’t got that growth that revenues coming from development. They are focused on comps, so comps is even more important to them than it is for us. We take comps incredibly seriously that you personally know, but we also have the balance development and development is always a major part of that revenue.

So, we have to be balanced, we have to think about franchisee margins and I think it's going to be interesting seeing some of the broader competitive set of what they do with their profitability of franchisee level. Because I have heard through discussing with various people a drive down on store margins just to go against last year's value promotion. So that's a general statement. Regarding that I’m going to pass it over to Chris Fuqua.

Christopher Fuqua

Yes. So thanks for the question. I think when you look at value metrics, we really look at it as what is the right mix of national versus local value and what is working for the consumer. So, a national value promotion will be put in place to drive one of the key components of our strategy a focus on coffee based beverages, a focus on driving that guest to get an afternoon beverage. On a local promotional value offer, we would do something like a team win view in promotion or a something targeted attachment in the afternoon that might be more appropriate in one market versus another.

We think we are making good progress with our franchisees. We are seeing positive results in the value offers that we are trying in different parts of the country. And I think it's really important to remember this is just one part of a five-part strategy and everything has to work together. We have to protect our franchisees margins to get them to continue to grow stores and we think we are all moving forward together in the right direction.

Paul C. Carbone

Thanks Jeff. Next question please.

Operator

Our next question is from David Tarantino with RBC. You may begin.

David Tarantino

Thanks. I will follow-up on that and then a question. On your value marketing strategy you are just talking about in the test, your search for price constructs that you can advertise nationally. What have you learned so far in your test generally speaking and when do you think you could introduce something more impactful that is advertised?

Christopher Fuqua

So we did an advertised national promotion in May with a cool lot of promotion, it helped us kick off the frozen beverage season in a good way and it’s been one of the drivers of our business over the last couple of months. I think when we look seasonally throughout the year, we will look at specific product categories that we would have national price points on, but a national value offer doesn't always work for our system.

So, I wouldn't say that we are driving towards a 100% national in anyway, often times our local promotion is much more effective and we can be more targeted. Also, as Perks continues to gain prominence in our system and we continue to gain more and more members, we are really trying to get to the wholly grilled one-to-one marketing, which is a much more effective way of actually driving the business. So, growing Perks, targeted national promotions that drive our overall strategy and then local promotions that are supported and makes sense for the local market is kind of the three-part strategy that we are employing on value.

Nigel Travis

And I think something earlier in the week we had a discussion about the percent of let's say [indiscernible] offers, Scott and I can’t remember percentage of the offers that go out to consumers what level would you describe as the one-to-one marketing.

Scott Hudler

Yes, I think so we look at much like Chris talked about it with national offers. We look at purchase there are some offers that probably roughly a third are going to go out based on all Perks members, a third of those are going to from regional basis and then a third are going to be very targeted based on behavior of the individual consumers.

David Tarantino

And just a question on K-Cups and you do a postmortem on that first year over 300 million cups is a huge number. Have you done research about how cannibalistic these sales might have been to your in-store traffic over the last year? Do you think that’s a meaningful thing that you are going to be lapping in the next year ahead?

Paul E. Twohig

Yes. Thanks for the question. So we did source of volume, we are working with IRI and as you would expect most of the volume came from other K-Cup brands, which is what we expected. You know we did see a little bit coming out of the store, hard to bifurcate the general trend of K-Cups moving to grocery versus when we introduced. So we expect with the rollover to pick up a little bit, but we didn’t think it was material last year, so as we are rolling over we don’t think it’s a material pickup or acceleration in the comps this year.

Nigel Travis

I think it’s worth saying though that we didn’t call out in the scripts as we have before, because there was still a small negative K-Cup effect year-over-year, but we stopped reporting it because it is not now material or incorrect. I think was it last quarter it 0.8 or something?

Paul C. Carbone

Yes.

Nigel Travis

And its below the 0.5 threshold so we don’t report it anymore.

David Tarantino

Thank you.

Paul C. Carbone

Great. Thanks David. Next question please.

Operator

Our next question is from Will Slabaugh with Stephens. You may begin.

William Slabaugh

Yes thanks guys. Sticking with the Dunkin U.S. business, it sounds like you have been pretty happy with the success of your menu innovation there ranging from food healthier that you mentioned earlier to espresso-based beverages. [technical difficulty] I’m curious where you may not be as enthusiastic about what you are seeing and maybe see some room for improvement going forward?

Nigel Travis

Well the first thing I would say is we always have room for improvement and we talked about it every week and probably every day. Chris.

Christopher Fuqua

Yes. So we do think we have some room for improvement and one of the things we called out in this script was the core menu improvement. So how do we look at our existing ingredients to make sure that we are offering the best possible breakfast sandwich with all the different components of the breakfast sandwich.

So a great bagel or a great carrier as we would call the bread, an improved egg and improved protein an improved cheese. I think there is a lot of opportunity when we look across our menu at improving the basic ingredients and it seems working hard on getting those into test and into market in the months ahead.

So that’s an area where I think we have some opportunity and we will see it flood into the system in the future. On the very positive side, I look at the beverage tests that we are doing across the country right now, seeing very encouraging results and I really think that we have the engine going in the right direction to put this strategy in place and have it really be led by beverages.

Nigel Travis

And I think what I will add to that Chris is as we drive beverages all day an additional snacking grouping in the afternoon will be helpful, because it gives us a natural attachment to our sandwiches.

Christopher Fuqua

Absolutely and focus on snacking is well underway as well, we are working with some outside parties on identifying and testing snacking products and I think that’s like you said Nigel that’s an important part of what we are doing.

William Slabaugh

Great, thank you.

Paul C. Carbone

Thanks. Well next question please.

Operator

Our next question is from Jason West with Credit Suisse.

Jason West

Yes, thanks guys. Just I guess going back to the plan here for the back half of the year, you mentioned there is two more national promotions planned. Are you thinking you know you want to really focus on value to drive business with those type of promotions or are you still thinking more of a innovation pipeline type messaging? And I guess just overall as you are thinking about the back half of the year, would your expectation be that the combination of easier comparisons and less drags in the K-Cups in the stores. I know there were some one-off issues last year around things like the egg promotions, I mean would those sort of backdrop that you could get back to more meaningfully positive comps here in the back half? Thanks.

Christopher Fuqua

Thanks for the question. This is Chris, I will take it. So, number one, I would say we are maintaining guidance for the back half of the year or for the entire year. So, I think we are on plan and we think we are headed in the right direction. And then on what we are concentrating on, it's not one part of the five-part strategy it's all five parts. So, all five-parts have to be working.

Building our coffee culture, we have great innovation around coffee, we are very excited about some of the products that are coming. Faster improved innovation, you will still see some food LTOs coming, targeted value and smart pricing holding price with a couple targeted national promotions on price will be a key component of where we go. We will continue to build the Perks program and be a leader in digital and a constant focus on improving the restaurant experience. All five of those have to be working and we do think the seeds are in place to grow the business.

Jason West

Thank you.

Paul C. Carbone

Great. Thanks Jason. Next question please.

Operator

Our next question is from Matthew DiFrisco with Guggenheim Securities,

Matthew DiFrisco

Thank you. I might have some follow-up questions with the guidance and the comp there. Can you tell us how much the price rolls off or how much you are expecting to carry off price relative to the 3% you just had in the 2Q for the second half?

Paul C. Carbone

Yes, so we had 380 basis points in 2Q of this year and we said for the full-year we expect price to be a little bit north of 300 basis points right that's kind of full-year blended. And then lastly, if you go back to last year and you look at second quarter and third quarter I think we kicked up about a 125 basis points last year between second quarter and third quarter, many years about a 100 basis points between second quarter and third quarter of last year. So, that will roll off if we hold pricing that should roll off as we think about and get us to roughly the 300 a little bit north of 300 basis points on a full-year basis.

Matthew DiFrisco

And then your 0% to 2% guidance that's still for the full-year, but is that also implying then remaining positive for the second half given the significant easier year ago comparison, or is there wiggle room and your guidance will imply a wider range sort of for the second half of negative 1% to 3% potentially?

Paul C. Carbone

So, good question. Here is what I would tell you is we initiated guidance at 0% to 2%. We continue to maintain that guidance, we are roughly 1.2% year-to-date I think Nigel mentioned in the script. You can surely do the math on that I think that's what you are doing. We were on plan the first half of the year and continue to maintain that 0% to 2%.

And to your point the compares do get easier in the back half of the year and that said if you do the math of 0% to 2% as you have outlined, you certainly could come up with that indication. But we aren’t changing our point of view in the back half of the year sitting here today versus where we were sitting back in February when we initiated guidance.

Matthew DiFrisco

Okay. Thank you.

Paul C. Carbone

Alright, thanks. Operator let’s take one last question as we are coming up to the top of the hour.

Operator

Our last question is from David Tarantino with Baird. You may begin.

David E. Tarantino

Hi, good morning. My question falls on the balance sheet, I think you mentioned the debt to EBITDA ratio five times which is in the earlier range. So just wondering what your current thoughts are in terms of when you think the next relevering event might be and is there any interest in employing that forward given the interest rate environment we have right now?

Paul C. Carbone

Yes, so we look at this obviously all the time internally and the way we think about and this really hasn’t changed. To your point, we set out the range that we are comfortable at this 4.5 to 5.5 we did end the quarter at five. We delevered naturally about a half a turn a year, so again this time next year we are going to be in the 4.5 range. You know we look at it both is there an opportunity to relever at attractive rates, we also look at it as you remember when we relevered the balance sheet now a year and a half ago.

We put both seven-year debt and four-year debt on the balance sheet. and think about as we talk about then and continue to think about this as refinancing that four-year and relevering the balance sheet. So that would indicate another year as before we do something like that. But it is something that we look at continuously, we have that opportunity to add to the leverage and it's something that you know again we continue to manage the balance sheet to drive shareholder returns and shareholder value.

Nigel Travis

Okay, so thank you all for your questions. So I think in my promotion, I would say is a solid quarter with excellent profit flow through. Hopefully, we have communicated to you today our excitement about the five-part strategy for Dunkin U.S. and the potential it offers for the future. So with that, thank you for tuning in today and we will speak to you again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.

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