Dunkin’s lower-income consumers still feel squeezed

Inside A Dunkin' Donuts Store As Group Plans German Expansion
Doughnuts sit displayed for sale inside a Dunkin' Donuts store, operated by Dunkin' Brands Group Inc., in Berlin, Germany, on Monday, Aug. 19, 2013. Dunkin' Brands Group plans to bring its colorful Baskin-Robbins ice-cream cakes to Germany next year and open more Dunkin' Donuts stores in Europe as it sees the region bouncing back from the recession. Photographer: Krisztian Bocsi/Bloomberg via Getty Images
Photograph by Krisztian Bocsi — Bloomberg/Getty Images

Dunkin’ Donuts said the coffee chain’s lower-income U.S. consumers remain pinched by macroeconomic challenges, which led to muted same-store sales growth in the second quarter.

Unseasonably cold weather in early spring, as well as heightened competition as more restaurants and retailers jump into the beverages business, were also blamed for the disappointing 1.8% increase in U.S. same-store sales at Dunkin’ (DNKN) restaurants. The coffee chain is struggling this year despite some successful new product launches, hurt by severe winter weather early this year and a sales improvement later in the year that didn’t accelerate as fast as the company’s executives had anticipated.

“The consumer, particularly at the lower end, is in a tough spot,” Dunkin’ Brands Chairman and Chief Executive Nigel Travis said during a conference call with analysts.

Travis said lower-income households were hit hardest by the recession, and they are still struggling amid a number of negative macroeconomic factors including a reduction in government programs, job growth that is failing to meaningfully improve, and lackluster gross domestic product growth.

“There appears to be a mix of many macroeconomic factors negatively impacting a significant segment of the consumer population, and we believe this is affecting not only our business but many other quick-serve restaurants and other concepts,” Travis said.

A key theme that has surfaced this earnings season is that while many consumer-focused brands, not all players are losing out. Chipotle Mexican Grill (CMG) this week reported second-quarter same-store sales leapt 17% from a year ago, with overall sales rising 29% to $1.05 billion. Dunkin’ rival Starbucks (SBUX) is projected to report an 11% increase in overall revenue for its latest quarter when results are issued later Thursday.

“The second-quarter earnings story is a story of ‘haves’ and ‘have nots,’” Morningstar analyst R.J. Hottovy said.

“Brands that cater to lower- and middle-income consumers in both quick-service restaurants and more traditional casual dining restaurants are finding the second quarter, and possibly the rest of the year, to be challenging,” Hottovy said.

Dunkin’ is finding itself in the same boat as McDonald’s (MCD), which reported same-store sales in the U.S. slid 1.5% in the second quarter.

“We were hopeful that as the weather improved, sales growth would bounce back, and that we would be able to get back to the 3%-4% [growth] range for the year,” Travis said. “Unfortunately, sales momentum didn’t accelerate as fast or to the degree that we anticipated.”

Disappointing growth in the first half of 2014 led Dunkin’ to trim its expectations for the full year, now seeing U.S. same-store sales climbing 2% to 3%, down from the prior target of 3% to 4% growth. The adjusted earnings outlook was also lowered.

Because of the weak growth in the beginning of 2014, Dunkin’ will need to perform well in the back half of the year to reach its new financial targets.

John Costello, president of global marketing and innovation at Dunkin’, said the company was encouraged about the second half of the year as it rolls out new menu items including a steak breakfast burrito and a steady stream of limited-time offers for both food and beverage items. More new product launches are anticipated for later this year, and Dunkin’ is also seeing benefits from a rewards program called DD Perks.

Because Dunkin Brands operates a business model that is nearly 100% franchised, the parent company’s revenue is mostly tied to franchise fees and royalty income. Overall, revenue climbed 4.6% to $190.9 million in the latest quarter. Net income rose to $46.2 million from $40.8 million.

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