April 13, 2015 / 3:38 PM / 3 years ago

Frozen assets? Weather issue looms for Dunkin' Donuts in first quarter

NEW YORK (Reuters) - Dunkin’ Donuts is a favorite of Bostonians and New Yorkers, but its regional popularity may have worked against it in the first quarter, when many of its customers may have been too cold and snowbound to make it to their stores.

A drink and a doughnut are seen at a Dunkin' Donuts location in the Chicago suburb of Niles, Illinois, February 4, 2015. REUTERS/Jim Young

The record snowfall that buried the U.S. Northeast this past winter could shave 1 to 1.6 percentage points off first quarter same-store sales of Dunkin Brands Group Inc (DNKN.O), said Nick Setyan, a senior vice president of equity research at Wedbush Securities in Los Angeles.

“I don’t think the stock is fully pricing in the impact of the weather,” he said.

Weather will have an impact on the U.S. economy as a whole - Goldman Sachs cut its first-quarter GDP outlook by 0.2 percentage points in February on account of it - but Dunkin’ Donuts, which is owned by Dunkin’ Brands, suffers disproportionately. Dunkin’ Brands, which declined to comment on the impact weather could have on its sales, is scheduled to report its first-quarter earnings on April 20.

Of the chain’s 8,082 U.S. stores, 4,030 are in the snow-heavy Northeast, according to December data provided by the company, with a large percentage also in Pennsylvania, northern Michigan and other winter-weary areas. It is the most popular national chain in New York City, according to New York-based think tank the Center for an Urban Future. While weather rarely keeps intrepid New Yorkers from their doughnuts, Boston saw the snowiest winter in its recorded history this year, which forced road closures and stalled public transit.

“That is the reality of being in a business where people have to leave their homes and go to restaurants,” Nigel Travis, Dunkin’ Brands chief executive said in a Feb. 5 conference call. Weather is “a challenge we constantly face.”

PLANS TO DIVERSIFY

The impact won’t be fully mitigated by Baskin Robbins, the ice cream chain also owned by Dunkin’ Brands. While Baskin’s 2,484 locations have a larger presence in the West Coast, where Dunkin’ Donuts are few, cold winter temperatures may have dampened consumer appetites for ice cream even in areas such as the Midwest, where snow was a smaller factor.

Dunkin’ has taken moves to diversify geographically. In December, it announced a partnership with the Philippines’ Jollibee Foods to open 1,400 stores in China over the next 20 years, with the first opening in late 2015, and it has a long-term goal of 1,000 restaurants in California (up from its December total of 458 Baskin Robbins locations and eight Dunkin’ Donuts).

Investors seeing sunny days ahead have bid the stock up 15.5 percent in 2015 and it currently trades at 25.15 times earnings, about even with its peers.

Analysts expect Dunkin’ Brands to grow earnings by 7.9 percent in the first quarter, with revenue up 5.1 percent, according to Thomson Reuters data. Both represent a deceleration from the year-ago period, when it reported profit growth of 13.8 percent and sales growth of 6.2 percent.

Over the past 30 days, two of the 17 analysts who cover Dunkin’ lowered their first-quarter revenue forecasts, with an average decline of 0.6 percentage points.

In the first quarter of 2014, the winter of the cold but less snowy “polar vortex,” Dunkin’ reported same-store sales growth of 1.2 percent, compared with the 1.7 percent growth rate in the first quarter of 2013.

The first quarter of 2015 could be the iciest yet, suggested Efraim Levy, senior equity analyst at S&P Capital IQ in New York, who covers Dunkin’. “There’s an annual assumption of bad weather that gets factored into analyses, but some years are better and some are worse. This one was bad.”

Editing by Linda Stern and Ted Botha

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