Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Dunkin' Brands' fourth quarter of fits in fiscal year end 2019 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one.
On your telephone.
Just a reminder, today's program may be recorded I would now like to introduce your host for todays program Stacey Caravella Senior Director Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone.
Speaking on today's call will be Dunkin' brands, Chief Executive Officer, Dave Hoffman.
President of Dunkin' Americas, Scott Murphy.
And Dunkin' brands Chief Financial Officer came on.
Following prepared remarks, well open the call into question.
Today's call is being webcast live and recorded for replay.
Before I turn the call over today I'd like to remind everyone that.
The language on forward looking.
<unk> earnings release also applies to our comments made during the call.
Our lease can be found on our website investor Dot Dunkin' brands Dotcom, along with any reconciliation of non-GAAP financial mentioned measures mentioned on today's call.
With their corresponding GAAP measures.
Now I'll turn the call over today.
Okay. Thanks, Stacy and thanks to everyone for joining todays call to discuss our fourth quarter in fiscal year 2019 results.
We're pleased with our performance in 2019, and the progress, we're making to transform or to below 70.
Plus year old brands around the world.
Our full year results continue to demonstrate the strength of our asset light hundred percent franchise business model.
Each business segment is focused on delivering against the strategic plan. Each specifically designed with the goal of delivering a more modern guest experience through.
Operational excellence everyday value and exciting new menu innovation.
And while each segment is at a different stage and the execution of its plan all three segments delivered positive comparable store sales in the fourth quarter and for the full year, reflecting broad based momentum across the system.
As a global system, we are embracing change in moving quickly to stay modern and relevant for the next generation of consumers.
Our relationship with our franchisees has never been stronger as evidence of this Duncan and Baskin Robbins were ranked the number one and number 13 brands in this year's franchise five.
Hundred issue a bunch of a newer magazine.
All right now into Duncan U.S., a key pillar within our blueprint for growth strategy is centered around beverage leadership food innovation and consistent value.
These three areas worked hard for us in 2019, driving 2.8% comparable store sales.
Sales growth in the fourth quarter, the highest quarterly comp in six years and driving our full year comp to the highest point in seven years.
Our success was also enabled by the strategic investments, we made into our espresso and digital platforms. In 2018. These investments are not driving topline results.
And delivering a better guest experience.
It's Brussels sales grew by nearly 40% year over year spreads so beverages represent approximately 10% of our sales mix. The category was led by holiday innovation for our signature lot todays paired with the compelling value of our two dollar espresso.
M. break from two to six pm.
The return of our fan favorite Peppermint mocha, coupled with new holiday flavors lifted the category and drove a premium ticket with nearly 70% attachment.
Innovation will continue to grow the category for Valentine's Day, we released our new.
Velvet Macchiato and signature Latte and this spring, we will launch milk latte nationally and that's just a preview of some of the great tasting on trend innovation guess, we'll see in our restaurants in 2020.
Beyond sausage Sandwich, and example of premium food innovation had tremendous media.
I was supporting high consumer trial and repurchase rates it attached well with premium price cold brew and espresso beverages, delivering an average check north of $9.
It also reached a new consumer and drove incremental occasions for existing guess.
Duncan is a menu driven brand and it is important to give our.
Consumers on trend choices democratizing trends like we did with plant based proteins espresso is a key tenant to our 2020 marketing strategy.
Not a value last year was the first time in recent history that we featured 12 months of national value messaging.
Our go to platform offered choice based value with full price beverage attachment, while our PM breaks were effective in driving after new traffic and an underserved daypart.
And while our traffic for the fourth quarter and full year remain negative traffic comps were the best we've experienced in five years, despite a challenging competitive.
Firemen.
Obviously, we are not declaring victory, but we feel the business is moving in the right direction and we plan to build on this momentum in 2020.
As far as our investment into the digital side of our business, we began to reap the benefits in the fourth quarter.
Beginning in October we gave DD perks members.
Nationwide the ability to earn reward points no matter, how they paid including cash credit debit or a duncan gift card.
This represents the first major change to our loyalty program in five years and as we saw when we tested multi tender earlier in the year by making the program more flexible we drive enrollment.
And participation in the program.
We ended the year with more than 13 million loyalty members, representing 38% year over year growth contributing approximately 13% of rooftop sales, which is a 140 basis point expansion from 2018.
In Q4, we also opened up our digital ecosystem by allowing any customer to use our mobile on the go ordering which was previously exclusive to DD perks members.
This feature allows any customer not just perks members to place a mobile order and their points regardless of their preferred method of payment. These.
This combined with INAP enhancements has continued our push towards a frictionless digital experience at the speed and convenience of Duncan of course.
As a result of this on the go mobile ordering increased to nearly 5% of rooftop transactions for Q4.
We processed.
More than 20 million on the go orders in the fourth quarter, a new milestone for us represented a 25% increase year over year.
By giving broader guest access to mobile ordering we believe we can build this base to drive further growth in our digital ecosystem.
Now I would like to ask Scott Murphy, our newly appointed President of Duncan Americas to take you through our restaurant growth plans strategic investments, we're making this year as we'll ever as well as our CPG achievements Scott.
Thanks, Dave in 2019, our franchisees and licensees 385 net new.
New units globally, including 211, net new Duncan U.S. locations, 100% of which were outside of our core northeast markets.
Our commitment to quality restaurant growth is paying off.
New Duncan U.S. restaurants opened last year contributed almost $140 million to system wide sales.
Prioritizing quality over quantity as a key tenant for the operations and development teams and we expect new restaurants opened this year to contribute more than 140 million to Dunkin' system wide sales.
As we announced in our press release. This morning, Weve reached an agreement with speedway to exit the approximately 450.
Speedway owned and operated limited menu Dunkin' locations, along the East coast.
These points of distribution or lower volume units in total representing less than 0.5% of Dunkin' us system wide sales in 2019.
By exiting these sites, we're confident we'll be better positioned to.
To serve many of these trade areas with future Duncan restaurants that reflect a full expression of our next generation restaurant design.
Guests are continually asking us for a spread so cold beverages from the top system sandwiches, and even access to perks and mobile ordering.
All of which are available in next gen.
We expect that this closing process will be materially complete by the end of the fiscal year and as a result of this strategic decision. We will report our development results, both with and without the speedway closures until it is completed.
So excluding speedway closings, we expect to add between 200 200.
The net new restaurants in 2020.
We also expect that franchisees will remodel approximately 500 restaurants.
Which brings me to another important component of our blueprint for growth the rollout of Duncan next Gen.
We ended the year with 525, new and remodeled.
Next gen restaurants across the country.
And collectively we're very pleased with the results we are seeing.
The lift in sales and traffic has exceeded our initial targets.
Speed customer satisfaction, and importantly, franchisee profitability are all better than previous remodel cycles.
And there's a natural momentum with next gen.
Once a franchisee has a couple of units open and has worked out any operational kinks. They love it the crew loves it and importantly, the customers love it.
Next Gen represents our best comp and traffic driver in our system.
But we continue to.
Engineer the costs identify appropriate levels of scope for different locations and work with franchisees and contractors to minimize downtime and to reopen with pride.
We finished last year with 525 next gens and with gross openings and Remodels in 2020, we expect to end this year with.
1400 total next gen locations more than double our 2019 count.
The transformation of this Duncan brand is well underway.
Our mission our reason for being.
His great coffee fast.
And last year QSR magazine named US the fastest drive through.
But we're not resting we're continuing to innovate ways to deliver great quality at the speed of Duncan.
As you know in 2018, we worked with our franchisees to successfully revamp our spreads so platform by installing new machines at more than 9000 Duncan locations.
And in 2019, we worked with our.
He is to install new iced coffee Brewers nationwide.
Dunkin' franchisees proudly claim they invented ice coffee and we're taking meaningful steps to grow our market share and maintain our leadership position.
And now in 2020, we're investing in our core hot coffee platform.
Dunkin brands will make an investment of approximately $60 million in new state of the our high volume brewing equipment for all Dunkin' us restaurants.
And similar to the previous beverage equipment investments, our franchisees will make an equal or even larger contribution.
The high volume Brewers will enable us to expand.
In a variety of drip coffee blends increase operational efficiencies reduce waste and enhance the quality and consistency across the system.
And we know based upon test that it will also help with restaurants simplification and crew satisfaction.
We're already seeing promising results in.
Our next Gen restaurants, where this equipment is in place today.
Importantly, this equipment like the espresso machine is a part of the next Gen image.
So when franchisees remodel locations they will have to critical pieces of the next gen beverage platform already in place.
These investments are helping us to.
Great key components of next Gen. Two the entire fleet.
Better quality enabled by better equipment is a cornerstone of the blueprint for growth and foundational to our great coffee fast strategy.
Kate will provide more details on the financial impact from this investment later on.
And lastly, our commitment to beverage leadership extends outside the walls of our restaurants too.
Our total CPG portfolio across both brands delivered approximately 940 million in retail sales last year, including more than $150 million and ready to drink bottled iced coffee according to IRI.
Dunkin' K cups continue to outpace the category growing more than 7%.
Duncan recently surpassed Maxwell House and is now the number three coffee brand across us retail with our packaged coffee and K cups, now representing nearly 8%. So the total coffee category.
So the blueprint for growth is working.
We are opening higher quality higher volume restaurants.
Next Gen is on track and even accelerating.
Restaurants are improving speed and accuracy.
Franchisee profitability remains healthy.
And as always we're working hand in hand with our.
Franchisees to transform this brand for the future.
Now back to date.
Alright, Thanks, Scott and I will take you through the last two segments here Baskin Robbins US finished the year strong with comparable store sales growth of 4.1% and.
In the fourth quarter performance was led by Cups, and cones and was supported by our great flavors, including the introduction of our first non dairy and vacant friendly coffee caramel chunk as our November flavor of the month, great job, Jason peering ice cream and coffee together with caramel.
For the full year Baskin posted its best annual comparable store sales growth since 2015, we elevated the brand with smart marketing and partnerships in 2019, including the launch of our non dairy flavors that I just mentioned as well as the partnership with Netflix hit show Stranger things. It was a game changer given the.
Consumer an opportunity to reevaluate baskin, and we've seen great momentum coming off of that promotion.
In addition, we have an entirely new leadership team under Jason to SITA, which has the franchisees excited and putting us in a great position to win in 2020.
All right, let me pivot to international.
There is also great momentum across both brands with Dunkin' and Baskin post in Q4 comparable store sales growth of 6.9% and 3.2% respectively Q4 marked the 10th consecutive quarter of positive comp store sales growth for Dunkin' International and the six positive quarter.
Two years for Baskin Robbins International.
Results reflect the progress, we're making with our international strategy, which is focused on enhancing the in store experience, establishing a strong delivery infrastructure and growing non traditional sales channels.
For Dunkin' Weve ignited a new base of consumers in places.
Like the Netherlands, Germany, and Spain, where we've rolled out our coffee forward image.
We are strengthening our connection with consumers and delivering a more modern experience.
And on the Baskin side, we've done a tremendous job elevating the brand with smart marketing.
Tie ups doing some interesting things with movies.
And ice cream flavors.
I spent a lot of time in the Korea.
In Japan markets and believe really both of these markets are some of the very finest expressions of the brand anywhere in the world and Theyre producing great results for us.
Lastly, we recently announced.
The appointment of three international Vice Presidents, which mirrors changes we've made to the domestic side of our business, we're working to make Duncan and basket morefield centric.
For greater diversity of thought leadership, and so that our decision making processes are more nimble occur closer to the consumer and in.
Our alignment with our franchisees.
All right before turn it over to Kate I finally, when it too.
Take a minute to address the Corona virus.
I know all of you know I lived over in Asia for 12 years had a big impression on me.
And as a global.
Yes, our company, we have all hands on Dec monitoring the outbreak.
Safe safety of course is our top priority, we have formed global task force to closely monitor this issue around the globe and report regular updates on the status of this outbreak and while we have limited presence in China.
We believe it's our responsibility to protect our employees of course.
So our partners and guests and our share in new information with their teams.
As it becomes available and so.
All of us.
I know in this room on this call have a lot of friends and colleagues over there and while it's a smaller part of our business.
I think you'd agree it's a big part of our concern in our Hearts and I'll just leave it at that so.
Anywhere, our our prayers and wishes to the folks over there and with that I'll turn it over to Kate.
Thanks, Dave.
Revenues in Q4 increased 16.3 million or just over.
5% compared to the prior year period, due primarily to increases in royalty income and advertising.
As a result of Dunkin' us system wide sales growth.
Well as an increase in rental income offset by decreases and franchise fees and sales of ice cream and other products.
The.
Increase in rental income resulted from the adoption of the new lease accounting standard in the first quarter fiscal 2019.
Which requires gross presentation of certain lease costs that we pass through to our franchisees.
The decrease in franchise fees was primarily due to franchisee incentives.
Incentives, including investments to support the Duncan U.S. blueprint for growth.
Which are being recognized over the remaining term of each respective franchise agreement.
Operating income and adjusted operating income for the fourth quarter increased 9.1 million or 9.4%.
And 8.3 million or 8.1%, respectively compared to the prior year, primarily as a result of the increase in royalty income.
And a decrease NGL expense.
Offset by the decrease in franchise fees.
Q4, net income and adjusted.
Net income increased by 4.5 million or 8.5%.
And 3.9 million or 6.8% respectively.
Compared to the prior year.
Primarily as a result of the increases in operating income and adjusted operating income.
Offset by an increase an income tax.
Thanks.
The increase an income tax expense was driven primarily by the increase in income in the current year period, and excess tax benefits of $3.2 million in the prior year period.
Offset by evaluation allowance recorded on foreign tax.
Carry forwards of 1.8 million in the prior year period.
Diluted earnings per share and diluted adjusted earnings per share for the fourth quarter increased by 7.8% to 69 cents.
7.4% to 73 cents respectively.
I'm here to the prior year period as a result of the increases in net income and adjusted net income.
Excluding the impact of recognized excess tax benefits.
Diluted earnings per share and diluted adjusted earnings per share would have been lower by approximately four cents for Q4.
2018.
Recognize excess tax benefits had no impact.
Diluted earnings per share and diluted adjusted earnings per share for the fourth quarter of fiscal year 2019.
At the end of the fourth quarter, we had a debt to adjusted EBITDA ratio of.
4.8 to one.
During the quarter, we generated approximately 67 million in free cash flow.
We returned 36 million in cash to our shareholders during the quarter, including 31 million and dividends and 5 million through open market share repurchases.
Excluding cash reserved for gift cards and advertising funds of 242 million.
We ended the quarter with 353 million in unrestricted cash held in the United States.
Of which 60 million has been earmarked for the high volume Burger investment that Scott mentioned earlier.
In regards to the investment approximately 80% will be attributed to equipment.
Under the new revenue recognition rules.
Franchisee incentives for equipment I recognized on the piano as Contra revenue through reduction of our franchise fees over the remaining life of each respective franchisee contract.
We expect the remaining approximate 20% of the investment could be recorded as DNA expense on our piano this year as the costs are incurred.
We expect all of the cash associated with the investment to be deployed by the end of the first quarter of fiscal 2021.
Lastly, we announced this morning that the board of directors increased our quarterly dividend by 7.3% compared to the prior quarter.
We also announced that our board of directors approved a new program for the repurchase of up to 250 million of the company's common stock.
That authorization is good for a period.
Good of two years.
Now to our fiscal 2020 targets that we provided in our press release this morning.
Which are reflective of our high volume Brewer investments.
They are.
Low single digit comp store sales growth for both Dunkin' us.
And Baskin Robbins use.
We expect Duncan you asked franchisees to open between 202 50 net new units.
Excluding the impact from the closure of Speedway, which was previously discussed.
We expect that the new Duncan U.S. restaurants can be opened in fiscal 2020.
Contribute greater than $140 million to our system wide sales.
We expect Baskin Robbins U.S. franchisees to close approximately 25 net units.
The net decline being driven primarily by continued strategic closures of restaurants as Baskin us works to optimize it store base.
We expect low to mid single digit percent revenue growth.
Internationally, we expect ice cream margin dollars to be flat when compared to fiscal 2019 from a profit dollar standpoint.
And we expect that JV net income will also be flat compared to fiscal 2019.
We will return to low single digit percent growth for DNA expenses.
And mid single digit present operating and adjusted operating income growth.
As a result of the 60 million dollar investment we will expect that our fiscal 2020 operating income growth will be at the low.
End of our mid to high single digit percent growth target.
We expect a full year effective tax rate of approximately 27%.
The tax rate guidance excludes any potential future impact from material excess tax benefits.
We expect net interest.
First expense of approximately 121 million.
And we expect full year weighted average shares outstanding to be approximately 84 million.
So let me repeat those and we expect net interest expense of approximately 121 million this year.
And that our full year weighted average shares outstanding will be approximately.
84 million.
This guidance leads us to project GAAP diluted earnings per share of Q nine $2, a 96 cents to $2 to $3.05 excuse me. So thats GAAP diluted earnings per share of $2, a 96 cents to $3.05.
And adjusted earnings per share.
Of $3.16 to $3.21.
Lastly, we expect capital expenditures will be approximately $40 million.
And with that I'll now turn the call back over to the operator to open our line for Q and <unk>.
Certainly once again, ladies and.
Gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key our first question comes in the line of John Ivankoe from JP Morgan Your question. Please.
Hi, great. Thank you so much yes. The question is on capital deployment.
The cash you have the cash you're generating I'm engine and I'm, just really trying to reconcile a few different things I want to ask a strategic question as well I think if I heard correctly 353 million of unrestricted stock I heard you on the buyback, but you're actually guiding to a similar number of shares in fiscal 20, then you actually had in the fourth quarter of 19.
So that would imply you're not getting much in terms of up.
Back to buyback in fiscal 20.
So I guess, there's a number of different signaling implications around that but one possible signal is that that $60 million of.
Franchisee.
Coinvestment that you're making in fiscal 2000 could potentially.
The.
It's higher number in the out years, especially as you all are complete fiscal 20 with basically the need of 8000, Dunkin' U.S stores in the United States that have yet to be.
Remodeled if you will to the next generation remodel. So could you comment I know I hit on a lot of different things there in terms.
Comes up at the potential use us some of that cash to really start to attack on some of those 8000 stores at the end of fiscal 20 that have yet to be remodeled too.
To the next Gen remodel, yes sure. John This is K great question. So you're correct. We do have just about 350 million of cash that would be available.
Of which 60 million has already been earmarked for that investment so ill call. It another 290.
I have never ever factored in any share repurchase rather than offsetting option dilution and then.
That is not any different than what we've done so not signaling I either way I think we're always evaluating the best use of our cash and.
We have a history of returning both via dividends and share repurchase and reinvesting in the business as we've done. However at this time, we don't anticipate additional investment into the business. We remain committed to returning excess cash to our shareholders over time and continue to work with the board on what the best way to do that is so for.
For the near future the $60 million the investment, we're making and Scott I think would tell you. He believes that he has what he needs now and we're getting the key components into the system from a beverage basis.
And maybe it's a little bit early to comment on this but in terms of your kind of.
Hitting that 8000 remaining.
Stores at the end of fiscal 2000, or do you expect to have a very material increase and the number of remodels in fiscal 2001 or does that happen in fiscal 2002 or should we just suspected over the life of typical tenure type of franchise agreement.
Hey, John It's Scott I think the number will accelerate we essentially did 100 remodels last year, we're saying.
We will do 500, this year and we will probably do more than that 500. The year. After what we're doing is building spending this year building the exact infrastructure to support that acceleration that will happen in the out years.
Thank you.
They do you aren't next question comes from line of John Glass.
From Morgan Stanley Your question. Please.
Thanks, very much just going off of the comments on the next Gen. Remodels. So can you just talk about where you do stand on the capital investment required now that you've got some more experience I know, it's a work in progress, but maybe a waypoint on how much a cost in the next gen and what kind of lifts youre experiencing it sounds like it is.
Your best traffic and comp driver in the system and so thats exciting long term, but but can you dimensionalize that at all.
Yes ill give it a little qualitative answer John So we've we've only got about 100 of those Remodels done we've collected cost information on about two thirds of those so far and I'll tell you a couple of things it is a little more expensive than the previous.
Duration of Remodels no doubt if you think about the incremental things were including whether it's the top system, whether its digital drive through menu boards, whether at some of the technology components that are included those things cost money as to the new Duncan signage, when we remodel, but I will tell you. The returns we're seeing so positive sales.
If traffic and an improvement in profitability, it's actually showing that the return on this is faster than the previous iteration of Remodels cycles. Now I will tell you that we continue to look to value engineering and every remodel that we're doing is coming in a little lower in cost.
But the thing I always caution people on is our 10000 stores out there, they're all sort of a snowflake. They all have a slightly different footprint and to this probably isn't going to be one size fits all we're going to have slightly different scopes and what we're looking at now is figuring out exactly which pieces of those of the design drive the biggest return and make sure we.
Get those out there the quickest as possible.
Thank you if I could just follow up to Dave It's well telegraphed that Wendy's is entering the breakfast business at the ended the quarter.
Do you prepare the bit how do you prepare your business for that how do you assess what the potential impact is from their entry from Ken competitive response.
How do you understand how consumers might use those your brand in their brand together or less likely to use your brand versus their brand in the breakfast daypart.
Yes, John.
We've been very focused on gathering that Intel.
Our footprint doesn't overlay perfectly with them, but we.
So we've been using our.
Our customer intercept.
Work that we've been doing and we've been able to micro target some things around how their footprint overlays with ours, but you don't really our focus in what we've talked about with the franchisees is just to stay true to our competitive advantage, which is we have both quality coffee and great food.
But at the speed of Duncan and we think we're the only one that can stay claimed to that trifecta. So look whether its breakfast wars or coffee wars, it's highly competitive out there and we're fighting everyday. So we just look at it we're not minimize in it but.
We're really focused on our competitive advantage and doing what we do best.
Thank you.
Thank you. Our next question comes from the line of Jeffrey Bernstein from Barclays. Your question. Please.
Great. Thank you very much.
Two questions on the Dunkin' U.S store base. The first one just a follow up on the next gen topic.
Just wondering if.
It seems like maybe similar with an uptick from a 500 units so you're going to remodel this year going into 2021, but with a system of 9000, obviously that could be many years coming before you accomplish the ultimate goal I'm just wondering if there's ever any discussion from one of the investment we made with franchise equipment as to accelerating through franchise.
Yes.
No different varieties again, just to to accelerate what you think of most exciting comp driver for you.
I had one follow up.
Yes, I would just say on next Gen. The 500 couple of points one the 500 Remodels that we're doing this year, our some of our biggest highest performing stores right. There are some of the strongest from an eight of the U.S. and from an.
At a standpoint, so we started with that biggest base working with our franchisees to attack those first and like I mentioned earlier two points. One is there some interesting momentum that naturally happens with us. So every time a franchisee does one remodel they get really excited about the next one so we're counting on that pull demand that will come and then third when we think about.
You know sort of an incremental investment for next gen to further accelerate I actually think of the fact that were sort of doing that already right. When I think about the investments in the espresso machine the investment in the high volume Brewers the things we did for ice coffee.
Last year those are all consistent with that nexgen image and in theory reduces the cost.
Cost of the remodel down the road because that equipment will stay so that's how we're thinking about additional investment at this time.
Got it and then they'll question would just on the.
The new unit growth.
With improved comps and it seems like with systems excited I'm just wondering whether there is.
Franchise interest to terminate accelerate the.
Yes openings I know, you're now hitting the two inch to 250 per year.
Two years ago was much higher than that so im just wondering whether the inhibitor to faster growth is a lack of demand from the franchisee side, perhaps due to the cost pressures, we often talk about or whether there on your end your tempering. It as you mentioned earlier just quality over quantity.
I think we're seeing strong demand the unit economics are healthy everyone seems very excited about the business model, especially outside the core if you think about our net development for last year and 100%. If it was outside of new England. So the brand is is alive and well and doing extremely well out there and I think.
Our focus is just making sure quality over quantity you said it I want every one of those openings for us to be extremely proud of the real estate the asset and how we execute in those restaurants to make sure we have a healthy business.
Thank you.
Thank you aren't next question comes from the line of Matt Difrisco.
From Guggenheim Securities. Your question. Please.
Thank you just looking through would be a sort of the math here on the.
Espresso growth, 10% of sales, 40% growth I would imply almost the majority of your comp came from a spread so can you sort of just how does that reconcile with sort of what you saw throughout your.
Dayparts was there one day part stronger or weaker given that a espresso seem to have been the strongest contributor to the comp.
Yes, Matt we are very pleased with the investment that we've made into is for us. So and we felt like this was all part of as Scott laid out this long term strategy of really improving our coffee.
Polity credentials, but it wasn't just one thing as you heard me say it was all about the triangle office premium beverages with the signature lot today's food and innovation with beyond compelling value with go twos all of that underpinned by better operations and execution and as Stephanie is in the room here to talk about it.
Really.
Greater loyalty through digital as well so it's not just one thing we're happy about this but you can't be so one dimensional.
In the marketplace and again, we're very happy what you're going to see with US going forward is more premium offerings, we love what we're doing with the pink Velvet Macchiato in the marketplace.
We're the first big National brand to get out there with owed milk lataif.
And then returning the March.
Irish Creme is going to be a returning favorite. So these are things that only Duncan can do.
Okay, and then just a follow up question with respect to digital can you give us some metrics on out where do you sit now as far as.
Perks membership or percentage of sales dumb through the through your digital art.
Hi, its Stephanie Meltzer, Paul I can answer that so right now we're at 13.6 million perks members.
We are at 13% of sales were really excited about our growth and digital.
The introduction of multi tender.
Near the end of the year definitely accelerated that new membership growth and we're looking forward to.
Leading off the year strong with activation engagement of our members for continued growth going forward.
Excellent and then last question just the 200 to 250.
Net openings are there or are they going to be similar to 2019.
Are you said I think it was 100% were outside of the northeast.
Yes, they will.
Excellent. Thank you so much thank you.
Thank you aren't next question comes from the line of David Tarantino from Baird. Your question. Please.
Hi, Good morning, I'm, just I just want to come back to the capital allocation question.
Because I think this is a key issue on investors' minds.
I guess on the two investments you've made the and this breadth of platform and now now. These brewers are you viewing is kind of one off type investments.
Or do think as you look out at the next several years or longer term that youre.
Continue to make these types of investments in the system.
Thats, maybe the first part of my question and then then I have a follow up sure. David This is Kate ill take that we do see them as one off obviously, maybe to us, but as Scott mentioned earlier. These we see as investing in the next gen right. So.
There everything around Nexgen is beverage led and by getting the espresso equipment and now the high volume grew as Scott mentioned, we have the ice coffee equipment as well into the system, although the system hasnt completely transformed into the remodel questions you're asking we believe we now we'll have the key components of the beverage strategy and the stores and so thats why we.
These investments we believe that they would actually provide a return and help accelerate that that process, where we can actually shutdown in football is toys overnight. So that's why we made those investments as I said before we don't anticipate additional investments into the business at this point.
So we are.
Committed to returning excess cash to shareholders overtime.
We did increase our dividend announced in the increase in our our dividend. This morning, and then obviously as you know we've historically returned to other excess cash via share repurchases, but as we have to continue to work with our board on that the timing in the share price in the best use of cash we don't commit to any of those in our guidance and have not included those in our guidance.
Obviously.
And David Let me just reiterate from from my Chair, which I think is important in maybe sometimes.
In the room, but I am a.
Staunch supporter and believer in the asset light model, 100% franchise the capital structure that we have in place so.
So.
Love the full flow through that we're doing so book these investments that we made there were the best use and the best investments that we can make at the time so.
Don't don't over read into this or think that were doing something different and.
Trying to hold back we solidly are behind the asset light model.
And what was put in place and it's a brilliant model and you can see it through the flow through and we understand how were valued and so I just want you to hear from me.
Great. Thank thank you for that perspective, and then on on the birth themselves.
You mentioned some some of the operational benefits, but are you seeing a topline.
Benefit directly from implementing those singer.
Hello.
Yes, I would you say too early to tell when we think about what we've seen in test. We've really we're really excited about the operational the quality that consistency those things I mentioned, there are actually smart Brewers right. So there are if I'd enabled and Wi Fi enabled so we can get all sorts of data on the.
Gains and make sure they've got the preventive maintenance and whatnot, but I think the topline will come when we think about the future expansion into varieties that we talked about earlier.
And the other thing David just to to throw a nice book. It's Scott. This has been part of his strategy and journey to take the organization from.
Payments and espresso, we havent talked much about but we've made a total overhaul in the ice Brewers as well and we all know the importance of iced beverages. So that was number two and now.
This is the next net natural evolution to to go after these high volume Brewers, So I love, what they're doing around capacity levels of doing around productivity and making.
It easier for the crew and we think that's going to be a nice unlocked for us around variety as well so that's really the thought behind it.
Great. Thank you very much.
Thanks, David.
Q aren't next question comes from the line of cancer and focus from Goldman Sachs. Your question. Please.
Thank you.
A few questions here first of all on.
The guidance that you are giving for the U.S. comp low single digits are you guys I'm expecting oriented painting any kind of shift in the competitive landscape.
Maybe not exactly in response to.
Just one single.
No competitor moving.
And at breakfast that maybe eight overall.
You know more competition around around coffee and if ever to tashi, especially from kind of the largest stat largest restaurant in the system and then on the Nuvera is that you're putting in place.
Could you quantify how much of a throughput benefit that has been.
Thank you.
Yes, Thanks, Catherine update the first when we give Scott the second one look we we often talk here internally you know we've got momentum momentum is hard to get easy to lose.
And we know there's a potential headwinds out there just like everybody else has seen.
These past couple of weeks and in the industry, but we're very focused.
Focused on the Duncan side, we're very focused on this triangle offense, which we think is.
Gives us a competitive advantage, which is premium beverages.
And innovation around the signature lots A's and look when we did the simplification a couple of years ago that was all about where we are today, which is creating room for growth the food innovation.
Beyond sausage Sandwich, and you guys know I've got a nice relationship with Ethan Brown over there and we continue to talk about.
Waste to extend that but when we have beverage innovation of food innovation, coupled with compelling value.
And we like what we're seeing now to go twos that continues to be work hard for us and we do all.
Of that and.
He is on the room, but recall owning the rvps are executing with the franchisees.
Better than we ever had been before and you know Stephanie right here is.
Look she's done a lot of work on infrastructure in putting technologies and removing friction in the app to make it a easier for the customers.
Use and I think this year you grocers seen us.
Really go after.
Customer engagement like we never had before so.
Again lot of work to do third year the blueprint.
We love, where we stand right now with progress and there were making against it and again the franchisees are with US which is the key here.
And I would just say on the Brewers, let me just get a little contexts around that this new technology does this new equipment is really exciting and from a throughput standpoint, the advantages come from a couple places one is just simply a reduction in waste, which at which helps the franchisee.
EBITDA profitability, so we've got a longer shelf life in a holding mechanism.
To keep the quality coffee and that's an important piece. These really help with the consistency in the quality of our hot drip coffee. So they are easier to calibrate they're easier to clean they hold calibration longer and then more importantly from accrue standpoint, they are significantly fewer Bruce cycles, a week, so theres less room for error behind the.
Counter and we've got a better tasting higher quality more consistent product that we conserve faster to our customers.
Thank you. Our next question comes on line of Gregory Francfort from Bank of America. Your question. Please.
Hey, I just had two.
Questions the first.
I think you said, a 20% of the 60 million dollar investment flow Suji in a is that complement or contemplated within the low single digit guidance already and then the other question I had was just.
I think a few quarters ago, you talked about operationally rejiggering some of the stores a little bit more for mobile ordering.
Where do you stand in that journey today. Thanks.
Hey, Greg educate I'll take the first part of that question, yes that approximately 20% of the 60 million dollar investment is included in our guidance. What that's why we would be on the slightly higher end of that guide. This year that includes things like.
And the rollout of the equipment similar to what we incurred for espresso. So that is included in that guide.
And then in terms of mobile ordering Theres a lot we are doing to take friction out of the transaction for our customers just like stefani's doing a lot with the app to remove buttons and make it simpler to order, we're trying to make it simpler to pick up in store. So if you go into.
Next Gen store, you'll see a much bigger dedicated space you may actually seen order confirmation board hanging above that that says your name and that your orders ready in traditional stores. We started four years ago with a simple pink, Matt and we've now grown too.
Hartson sort of other hardware to organize those we've got some alphabetical.
Separators to to make it very clear where to pick up your product versus another.
And then we're doing some innovation in the drive through with technology to make sure that it's as seamless as possible and as quick as possible. When you do that so we've got a host of solutions that we're bringing to different stores out there today.
And they said 13% digital.
Is that primarily in the store today or.
I think a big question for the industry for years ago was how you get digital mobile to work through the drive through it have you been able to find success and is or is that mix kind of more skewed to the in store business. Thanks.
Hi, This is definitely we see about a third of all of our PERC sales coming through mobile ordering and Thats definitely.
Fueling that 25% year over year growth via mobile ordering and.
Hitting that 20 million mobile order transaction count for Q4 with huge for us and it just shows how much are perks members are adopting mobile ordering.
We see half of all of our perks members consistently using.
Mobile ordering during their lifecycle as the perks member.
Thank you.
Thank you. Our next question comes on line of Eric Gonzalez from Keybanc Capital. Your question. Please.
Hey, Thanks for taking my question you had a decent step up in your perks membership to 13.6 million members.
Which you said it accounted for 13% of sales during the quarter.
Compare that to your your Seattle based competitor, which generates over 40% of sales on on the roughly 19 million members. So the question is you've done a great job acquiring the customers. How do you drive more sales are incrementality from that existing base and are there other technology enhancements. In addition to multi tender guest.
Checkout that each made or additional capabilities that can be unlock the bridge that gap and then lastly, as you think about 2020 is the focus on customer acquisition or is it engagement with those existing users. Thanks.
Hi, This is Stephanie I'll answer your last question first on its both we definitely want new members into the final we're being very aggressive with our acquisition.
What signage in store.
Promotion, we plan to have a lot of news out there this year to gain excitement to get new members working with our stores to promote it to get new sign ups is off very key for us but for every number we bring in the engagement side of it. It's key multi tender is a big unlock the when members.
They don't feel constrained that they have to constantly be preloading funds. So we feel that will be a big unlock for us. This year also leaning into our marketing calendar I'm doing a lot of rich promotions point based we definitely gained a lot of learnings last year around this and making perks buzzworthy and our consumers are perks members.
Our reacting to those that we tend to be leaning into that even more this year.
As you aren't next question comes on line of Andy Barish from Jefferies. Your question. Please.
I'm wondering if.
You could dive into.
Beyond a little bit more you talked about.
Espresso and cold brew attached is that.
Indicative of kind of a new customer or are you seeing trade up just a little bit more context around.
Early successes with beyond.
Yes and look.
It's both of those but we were really pleased with.
The new customers that we brought in and that were coming in and Reappraising Duncan for the first time, we saw that in Manhattan and that continue to be the case.
As we scale it and look.
We think our core offer is beverages rate and so.
Bringing the interesting food that pair as well with that we like how the beyond peers, well with cold brew and espresso and and we saw that average check I mentioned earlier was around $9, but.
Things like that that are on trend, where a brand a big brand that could democratize those trends and we want to use our platform to do that so we're very.
The please.
Again, this was a strategic relationship with beyond and and Ethan Brown over there and and we continue to have discussions on how we.
Look at different types of innovation with their products and our platform.
Thanks, and then just one quick follow up on a little bit more color on the traffic.
You said that it certainly improved or the areas of weakness still kind of in the in the core hot nice that that you're obviously addressing with what some of the equipment stuff.
You know it.
Look and just to take a step back we're maniacal, we focused on on traffic and it's really underpins the blueprint for growth.
As I said this our best traffic in five years, it's still negative we like how it's performing we like the two year stack over and 19 over the two year stack and 18 significant improvements.
But it's not just going to be one thing.
That really takes us into.
As of its going to be that again I come back to that triangle, often so it's going to be about premium beverages, food innovation and compelling value all underpinned by a better customer experience in the in the restaurant and so that is what we're focused on.
And.
We're seeing the improvements right now your three of the blueprint.
Thank you.
Thank you. Our next question comes from the line that David Palmer from Evercore ISI. Your question. Please.
Thanks, Good morning, and congrats on the improving comps.
A question to every modeling.
You could you just speak to what the average investment is on next.
And our you developing multiple tiers as you go through this thinking about flexibility and perhaps getting a sense of what's gives you that best ratio in return for those franchisees.
And then just related lean.
Even thinking about this philosophically is this a something where you're getting.
Discrete store by store comp boost such that in a year from now you will be able to look back and say what we got the X.
Points of comp contribution from Reimaging or is this kind of one of those things where we don't do this the brand dies and if we do do it will get a brand Halo eventually just trust US we've got all do this.
Skies, and it's not really that much of a comp benefit per store and I have a quick follow up.
Sure David as Scott I'll take a ill take a crack at that.
In the first thing I'd say is weve.
The remodels are a little more expensive than the previous set of Remodels and thats because of the new equipment that we're asking franchisees to invest in.
But it's actually a smart investment its returning nicely for them from a profitability standpoint, and based on what we're pro forming on these remodels. These early ones that we've seen they're returning faster than previous remodel cycles I will say the 500 that we started with this year, our some of our biggest cws and profitability.
80 stores, so they're going to have all those bells and whistles of all those components and I get often asked the question is every store going to have the exact same thing and the answer is no and that's what we're really doing on this next phase of Remodels, where we're testing maybe a slightly smaller scope being very aware and cognizant of franchisee balance sheet, and making sure we're making smart investments.
And what I'd say to you on the last question of whether we're seeing a discrete uptick.
I will tell you the remodels were tracking we're seeing an improvement in sales and traffic and thats relative to their control stores and thats relative to the markets broadly that their end. So we feel really good about the results and I think in past iterations of our remodel design image.
It was really just kind of you had to do it and it was kind of the cost of doing business I think what we're seeing here, it's not just that but it's also one of our best comp in traffic drivers and I think thats why you're starting to see the pull demand from the franchisees.
And just to follow up just on regions.
We hear about all the different.
Costs hitting different areas, obviously minimum wage, it's one area or another.
And as you're doing the ask making these asks for spending obviously unit growth that where that's happening and where the Riyadh remodels are happening could you just talk about that battle. You know you see certain areas that have gotten hit on.
For stability is the reimaging happening as quickly there is a unit growth happening.
In one region or another faster and I'll pass it on thank you.
Sure and I would say, it's an interesting cost environment out there for our franchisees I think the good news our franchisee owned co op has done a nice job on food cost and.
Looking forward on commodity costs to make sure we manage the PML and a lot of cases over the last year, that's helped offset some late.
That we've seen through minimum wage and other increases whether it be sustainability improvements in packaging or regulatory things that are hitting their RPM now and I would say overall.
Some.
Kits are getting hit harder than other markets, but in general the Remodels that we have opened so far in that we will continue to open of the 500 are across the us and they're they're performing just as well everywhere.
David My Mike My color on this and what the team has really done a remarkable job on is.
Look.
As we go into the blueprint and transforming a seven year old brand the the equipment investments the investments that we're making and people the remodels. The new stores. These executives cost that you just referenced a look we're this is part of BNS a light we're working with.
Franchisees managing their PNM on their balance.
At the same time, but.
Look this is the best Thats why we continue to say this is the best alignment with our franchisees that we ever have they are solidly with us but.
There's a lot that goes into transformative brand, but it's not.
Next Gen isn't the panel see it's one of the elements of the blueprint, but there is.
Great work as you saw in Q4, Thats going on where we can win in the marketplace.
Thank you.
Thank you aren't next question comes from the line Sharon's Akcea from William Blair. Your question. Please.
Hi, Good morning, I wanted to ask another question on digital I think.
The perks membership sign ups in the quarter might have been.
The higher so we've seen in quite a while also as you start to get what I guess I would call increasing scale on perks I mean, how do you think about transitioning away from more open promotional offers towards more targeted app based offers and.
Also.
That cadence of sign ups is that something that we should continue to expect on an elevated pace over the next few quarters.
Hi, Sharon at Stephanie.
We're feeling really good around sign up and as I mentioned previously we are going very aggressive we're trying to bring new members into the final, especially educating them around the.
Back that we now are multi tender.
A lot of customers might have tried to sign up years ago and realize that they had to load funds of getting that word out is very important to drive new members and from a promotional standpoint, we leaned in both Q broad promotions that are open for everyone and did a lot of targeted marketing this year.
Our plan for 2020 do both big Buzzworthy promotions that whether their offer based point based on our members love those and they're really in poor and for for new members on in terms of educating them around our benefit but then we are leaning into personalization in a very big way.
Both from backend what type of systems and technology, we need to be able to do that at scale and then the learnings on that type of promotions, whether its trip they spend based driving daypart is all that we're leaning into.
Okay.
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Thank you and our final question for today comes from the line of Andrew Charles from Cowen and company. Your question. Please.
Hi, This is actually a Andrew crespo on friend or Charles and just piggybacking on an earlier question about beyond what are your early learnings with who the plant based customer is.
Today's skew more digital or these.
More lapsed users coming back to the brand and I guess im speculating here, but the loyalty adds it did these skew towards the ended the quarter, meaning that the beyond launch really brought a younger consumer back to the brand or was it really about the tender agnostic approach and the other reason modifications that drove the growth.
Yes on the on the.
Form with beyond.
Skews it definitely skews younger.
It also skewed what we're seeing on our early reads it skews more female and male and.
Obviously skews more on the coast.
As well so very pleased with with the performance.
That's why we did the again the significant re hit.
In January as well, so very pleased with that and that as it relates to.
Your question around digital.
Look I'll answer for 70, but she would say it's more around tender agnostic.
And what we did there the multi tender approach.
Beyond helps anytime we can get new customers and again, the blueprint was all about broadening our sweet spot.
As well with different customer segmentation.
John happens to touch on one that we're going after which is health aware in a budget and we think our power platform. The bowls beyond what you're seeing around milk lot days, we've got to power.
Our muffin coming up we think those are that power platform is with speaks to that consumer and beyond plays a role in there, but it's not the only offering and so we like how the consumer is responding we like new customers a prison us and again when they do.
Skews younger they're looking at what the Stefani's doing on the digital side.
And getting into our digital ecosystem. So this is that boomerang effect is what's going on.
But again more work to be done here.
Thank you.
Thank you and I'd like to hand, the program back to department for any further remarks, Okay just briefly.
Thanks, everyone for accommodating us on this time change.
At 10 o'clock here I also.
I know theres, a number of franchisees that listen and I want to thank our franchisees in the us but also around the world.
Like I said to David's question. This is the best alignment.
That we've ever had.
And I'm really.
Pleased and proud.
That both brands in all three segments.
Delivered and these were these are some of the best numbers since 2013 a big.
Tribute to that was the smart investments that we made.
Again, we announced the second and.
Investment this year and look we're in the third year of the blueprint and it's all about deliberate intentional smart sequencing and thats, what you've seen out of us in the past and Thats. What you will continue to see with us going forward. So again, thanks very much for the time and look forward to the post calls take care everyone.
Thank you, ladies and gentlemen fuel.
Participation in today's conference. This does conclude the program you may now disconnect good day.
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