Q1 2020 Earnings Call
Ladies and gentlemen think understanding buying in bulk into the Dunkin' brands first quarter 2020 earnings call at this time all participants aren't list.
No we mode. After the speakers presentation, there will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone as a reminder, today's program 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.
On today's call will be Dunkin' brands, Chief Executive Officer, Dave Hoffman.
President of Dunkin' Americas, Scott Murphy.
I think in brand Chief Financial Officer Kate.
Following prepared remarks, well open the call to question.
Todays 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 statements included in our earnings release also applies to our comments made during the call.
I'd like to know that were practicing social distancing. So please bear with us if there any technical issues during the call.
I release can be found on our website investor Dunkin' brands Dotcom, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measure.
With that I'll turn the call oversee Dave Hoffman.
Thanks, Stacy and thanks, everyone for joining today.
You know, it's hard not to notice how different todays call feels rule, we normally do.
I want to take a moment upfront to give a heartfelt. Thank you to everyone listening in working from home.
And say I hope you're healthier well please stay vigilant, we will get through this together.
You know like all of you we've had to make decisions without perfect information.
Well to serve this leadership team well navigating through this and.
And all of you I think no my years internationally, having been in almost every crisis management foxhole possible.
Early on we rallied around or phrase that no one would remember an overreaction.
But they will certainly never forget it under reaction.
Our response to co that started early based on lessons learned from what we were seeing abroad.
From day, one our goal our duty or obligation has been quite simply to do the right thing.
Nothing is more important to us than safety.
The decisions we've had to make over the last month.
Uncharted.
Well, we've moved quickly to do what's right in the face of uncertainty.
Chosen to do always timely over what was flawless.
We protected people over dollars.
We haven't been perfect, but we've done everything we can to look out for our employees our franchisees their families their crew.
Of course, our customers.
Together with our franchisees, we did what was right in our restaurants to protect dedicated crew members and loyal customers.
Our franchisees went the extra mile to keep their restaurants open and their people employed wherever they could.
We instituted new brand standards face masks plexiglas of the counters latex gloves and this week ship infrared thermometers <unk> every location in the U.S.
We removed dining room tables, and chairs and evolve the model already built for speed into one build for new social distancing protocols.
We had curbside pickup expanded delivery options and gave incentives for customers to use contact list mobile ordering through our out.
Together with our suppliers and other partners. We did what was right for our franchisees to protect their cash flow and preserve their businesses.
That they built with their families.
We'd like to refer to the partnership among our brand franchisees and suppliers as a three legged stool and are proud to see all three legs standing strong through this crisis.
We extended payment terms on royalties and the advertising fun deferred rent in the corporate properties, we control and worked with vendors lenders and suppliers to provide additional flexibility to protect franchisee liquidity.
The average Duncan franchisee in our system has around 150 employees.
As independent business owners many of them have successfully applied for loans under the federal payroll protection program.
We want to make it clear that as 100% franchisee owned and operated system Dunkin brands has needs are applied for nor received any loans from this program.
However, we are very grateful for the additional support provided directly to our franchisees through measures such as the cares Act.
Lastly, we did what was right for our Dunkin' brands employees.
I'm proud that we have avoided furloughs since the crisis started instead, we identified 45 million NGL day, and Capex savings to preserve cash while protecting our workforce.
We cut back on operating expenses suspended discretionary matching contributions of four one k. retirement plans and made changes to other employee benefits as well.
We created a gig program to allow employees with rolls impacted by coded to be reallocated to other critical functional areas.
Today, our board of Directors also announced that we have suspended our regular dividend program.
We believe that a temporary suspension of our dividend is the prudent and responsible thing to do.
This management team and our board remain committed to paying dividends over the long term, we expect to reinstitute that program when it is appropriate to do so.
Additionally, our senior leadership team as voluntarily offering reductions in their base salaries from May to August of this year.
Our board of Directors has also agreed to a reduction in their cash compensation.
These savings will be contributed to the Dunkin' brands family Fund, which supports Duncan and Baskin Robbins crew members in times of crisis, such as now.
We've got your back is more than just the saying around here.
Being in the QSR industry is first and foremost about serving others service runs in our blood.
Whether that's behind the counter at the drive through or in hospitals in school parking lots during times of crisis. That's why we're doing everything we can as a company to serve the needs of our franchisees employees and communities. During these challenging times.
It's not just about preserving liquidity or our reputation it's simply about doing the right thing.
I'm touched by the acts of kindness, we see everyday from our franchisees to support the people in the communities, where they live and work.
I want to give just a few examples that speak the heart and soul of our system.
Lou and Julie Kabral are assisting children, who may not know where their next mill will come from by offering them a free drink sandwich and donated at their nine Duncan shops in Richmond, Virginia.
Jerry Fives has turned the dining room of one of his restaurants into a slowing room, whereas employees are slowing face masks for the local senior center in Dixon City, Pennsylvania.
In San Diego franchisee tally burden is recognizing medical staff and first responders with free beverages in the California Highway patrol is helping bring them to local health care facilities.
There are also compelling stories of franchisees, hoping to other franchisees in their communities.
For example, in New York City franchisees are temporarily hiring crew members from other Duncan restaurants that have closed until they can reopen again.
We all know the saying Youre judge by the company that you keep.
I'm very proud of the company we've kept through this crisis.
Oh, thank all of the crew guest franchisees suppliers.
Of course, our Dunkin' brands employees, you have demonstrated resilience commitment and loyalty and we greatly greatly appreciate all that you have done to help our restaurants continue to operate.
I'm incredibly proud of the solidarity within our system.
All right now on to Q1 results.
For the full quarter Dunkin' U.S comparable store sales were down 2% versus the prior year.
The rapid onset of coded reversed strong momentum across the system that kick started the year.
During the first 10 weeks for the quarter Dunkin' Us had 3.5% comparable store sales on track to deliver the highest quarterly comp since Q3 of 2013.
You also had positive traffic for the first time in four years.
You asked comps only declined during the final three weeks of the quarter as shelter in place mandates and social dispensing practices spread across the country.
Average weekly sales have leveled off through the first four weeks so the second quarter and we're starting to see slight increases week over week.
At the end of March and into early April comparable store sales were down by 35%.
More recently declines are hovering around 25%.
With customers daily morning routines disrupted we're seeing a shift in sales across day parts.
Sales volumes in the early morning are down but have picked up from 10 am to two PM as people venture out for a break.
Approximately 90% of our Dunkin' U.S system remains open for off premise consumption.
The thousand or so restaurants that are temporarily closed are primarily located in transportation hubs college campuses and the dense urban centers like New York City in Philadelphia.
Over the past few weeks the closure rate has slowed and the number of open stores has been increasing.
As we continue to serve our guest during this crisis. We're also focused on ways to quickly bring back morning rituals in the post endemic world.
We believe our high frequency low touch affordable ticket business model will serve us very well and the new reality.
Now moving to basket Baskin Robbins US also delivered solid results during the first quarter with comparable store sales up 1.8%.
Through the first 10 weeks of the quarter Baskin had 11% comparable store sales and positive traffic.
We're pleased to see the quarter close with positive results. Despite the impact to sales and traffic from cobot more than 90% of us locations remain open today.
Our international business was also on track to deliver significant gains in Q1.
Through the end of February Dunkin' International has 7.2% comps and Baskin International had 7% comps.
They ended the first quarter with a minus 7.1% and a positive 2.5% comps respectively.
Many of our international markets remain completely shut down and others continue to be restricted by curfews or our delivery only.
In total approximately 50% of our international portfolio is open.
The closures are split about equally between both brands.
Undoubtedly the world will be a different place when the cobot pandemic is over.
Until that time, we will continue to do what we've always done stay true to our values of being strong smart and kind.
We'll do the best we can with the information in front of us and feel confident going we've done the right thing.
In the face of adversity.
We think people need a little joy in their lives right now and we're proud to play a role in providing that safely.
Once again I want to thank all of the crew members guess franchisees suppliers and Dunkin' brands employees, who have had our backs during this crisis.
And now I will hand, it over to Scott to cover the Dunkin' us business in more depth.
Scott.
Thanks, Dave These are truly unprecedented times for our industry, our franchisees in our communities, but I've never been prouder of how we've come together with our franchisees than in this time of crisis.
We've been guided by four key principles.
One ensure the safety of our franchisees crew and customers.
To provide flexibility to simplify the operations in restaurant.
Three support our franchisees with financial assistance where possible.
And for empower quick field based decision, making as conditions change.
As I talk about each one of these it's important to note that everything we've done over the past seven weeks has been done in concert with our franchisee leadership.
And I want to publicly thank them for their tireless efforts as we stand shoulder to shoulder in this crisis.
Ensuring the safety of our crew and customers will remain our top priority.
We quickly made a series of decisions as the Covance situation escalated.
It started with more frequent handwashing and required hygiene videos.
Progressed, a single use gloves face masks and plexiglas yield at the front counter.
We remove tables and chairs and converted the entire system to take out and drive through only.
We mark six foot increment on the floor tile to encourage social distancing went in line and suspended our refillable mud program.
We encouraged paying with our mobile App and saw a nice growth in our on the go platform as people sought out our contact list option in store.
Our independent franchisee owned supply chain co op implemented touchless delivery of supplies in the back room with new digital receipt technology.
And we have ordered infrared thermometers for each store and we'll continue to follow the CDC guidelines for essential workers as they evolve in the coming weeks.
Providing flexibility to franchisees was our next step.
With the widespread stay at home orders and significant reductions in restaurant traffic, we saw as many as 1200 restaurants temporarily closed.
We offered franchisees the opportunity to shrink core operating hours and most stores are now closing by seven pm.
This allowed for more time at night for rigorous cleaning and importantly allowed crew to spend time with their family.
Almost 2000 stores closed their front lobby entirely in focused exclusively on the drive through as customer showed a preference for staying in their vehicles.
We offered curbside ordering through our App and it's already generating about 2% of transactions for the almost thousand stores using this feature.
Delivery through Grubhub Overeat and other partners is now available at more than 4000 restaurants across the country.
And since March 12 delivery sales have grown steadily now 1.4% of sales at participating restaurants with over three times our normal ticket.
We also limited certain varieties of products to improve speed and reduce complexity at the restaurant.
And we've gone as far as to develop a radically reduced menu called the essential menu that is a great alternative for a franchisee who may only have access to a limited staff.
But still wants to serve our guests.
As Kate will discuss further in the initial weeks of the outbreak we worked hard to provide financial relief to franchisees to help them preserve cash flow by extending payment terms on royalties and add fees as well as rent on the 900 corporate properties we control.
Many of our franchisees have been in our system for years or even decades, but they still appreciated it when we engage external experts and hosted a series of Webinars to provide recommendations and share best practices on how to negotiate with their own landlords and banks on deferment and how to apply for cares Act loans.
Recently, we created tools to help them track the loans and uses of funds to stay within forgiveness guidelines.
And I must say I'm impressed with how the extended Duncan family of vendors and partners came through with assistance to our franchisees in this time of neat.
It was the very support these small business owner franchisees needed for March and April.
We're also giving more flexibility on the timing of other franchisee capital expenditure commitments, such as the purchase of equipment Remodels and new restaurant bills.
We have reached out to every single remodel or new store that is planned for the next two quarters to offer flexibility in dates.
While it's still too early to predict overall numbers. Many franchisees have asked for some extra time, while others have expressed a desire to continue.
Some are choosing to preserve cash in the short term, while some are taking advantage of slower restaurants to conduct a remodel.
It is fair to say, however, that we will see a temporary slowdown in remodels and new store development as we navigate this crisis.
But we've already started brainstorming on how remodels and Newbuilds should look in this post coded world.
We've also slowed down our installations of the new Smart Brewer Hot coffee machines to respect to stay at home orders in many states, but plan to resume installations next month.
And finally remember our franchisees also share in the profits of our CPG business in the United States, which had a solid quarter, particularly in March with K Cup bagged coffee and ready to drink coffee sales through our partners cured Dr. Pepper, JM Smucker and the Coca Cola Company.
Our last principles around staying nimble and making quick decisions.
We have scaled back our national media spend and paused on launching new potentially complex limited time offers.
We have thoughtfully started to return to media with appropriate messaging thanking our first responders and our crew members through our raise a cup campaign.
You will see a rotating suite of content on our social channels and increasingly in traditional media as well.
Our marketing leadership team continues to create assess and refine a phased approach for Relaunching our brand responsibly at the right time as the state governors signal a return to normalcy.
In the meantime, you'll see us smartly rely on digital marketing as it has proven to most nimble and effective tool during code.
And by the way, it's worth noting that all of these efforts are not just for Dunkin' us but are happening at baskin as well.
So these four principals have served us well and we'll continue to get guide our decision making moving forward.
Although times have been tough our model is strong.
Great coffee fast in a high frequency low touch environment is what we're all about even before cobot.
Our franchisees are strong they are eagerly serving their communities across the country and can't wait to do more.
So proud of all the work of our teams are partners and mostly our franchisees and crew members have accomplished.
And while I know this is just the beginning and we have a lot of work ahead of US I can't think of a better group to partner with than our Duncan and Baskin franchisees.
And with that I will turn it over to Kate to cover our financials and liquidity.
Okay.
Thanks Scott.
Well my commentary will primarily be around the current state of the business. Let me quickly take you through the results of the first quarter.
In the first quarter Dunkin' brands franchisees and licensees opened 38 net new restaurants globally.
This included seven net new Duncan you asked locations inclusive of the closure of 12 Speedway locations.
14, Baskin Robbins international locations.
And 23, Dunkin' international locations offset by net closures of six Baskin Robbins U.S. locations.
Additionally, Dunkin' us franchisees remodeled 32, restaurants, and Baskin Robbins U.S. franchisees remodeled six restaurants during the first quarter.
Revenues for the first quarter increased approximately $4 million, a 1.3% compared to the prior year period due to an increase in sales of ice cream and other products.
Well as an increase in other revenues.
Been primarily by license fees related to Dunkin' K Cup pod and retail packaged coffee.
Q1, operating income and adjusted operating income of approximately 101 million and 106 million, respectively were relatively flat compared to the prior year period as increases in net margin on ice cream and other products and net income from our joint ventures as well as the increase.
These and other revenues were offset by an increase in DNA expense.
The increase in DNA expense was primarily due to an increase in training expenses.
Shaded with the rollout of new high volume Brewers, and an increase on reserves for uncollectible receivables.
Net income and adjusted net income for Q1, a 52.1 million and 55.5 million, respectively were relatively flat compared to the prior year period.
Diluted earnings per share in diluted adjusted earnings per share of 63 cents and 67 cents, respectively. Also remained flat compared to the prior year period.
We should note that first quarter adjusted operating income included approximately $7 million.
Estimated impact related to cope with 19.
Including the impact of royalties bad debt reserves, and DNA expenses relating to the safety materials and training.
Although we deferred royalty advertising fee rent and other cash collections. The last few weeks of the first quarter, we continued to recognize revenue.
It's in times like these that we appreciate the low cash needs of our business model we.
We also ended fiscal 2019 with one of the highest cash balances since we became a public company in 2011.
We returned 97 million in cash to shareholders during the quarter, including 33 million and dividends and 64 million through open market share repurchases.
Let me be clear, we stopped repurchasing shares under our share repurchase program as soon as it became clear that we would be unable to predict the immediate impact of covered 19 on our business.
Given the market uncertainty arising from cobot 19 and to ensure we could continue to have access to funds. We took a precautionary measure in March and borrowed the remaining 116 million under our variable funding notes.
This step was taken to further strengthen our financial flexibility to help navigate this challenging situation.
Excluding cash reserves for gift cards, and advertising phones of 195 million. We ended the quarter with 381 million unrestricted cash held domestically and 25 million held in accounts outside of the United States.
As required under our debt agreements our restricted cash reserve of 73 million include approximately three months of debt service amounts, including principal and interest.
And as Dave mentioned earlier we.
We announced that our board of directors have suspended our regular dividend program.
The suspension of our Q2 2020 dividends will result in cash savings of approximately 33 million and will reinforce our already strong balance sheet position.
We believe that temporary suspension of our dividend is the prudent and responsible thing to do.
As Dave noted the board of directors remains committed to paying dividends over the long term and we expect to reinstitute. The program when it is appropriate to do so.
Given our strong balance sheet, our low capital expenditures and our ability to leverage DNA. We anticipate that we will have sufficient cash to cover our debt obligations and to cover operating cost even if current conditions were to remain for a prolonged period.
We will continue to manage our liquidity very closely by controlling our operating and capital expenditures and have ceased nearly all nonessential spending.
We have also been able to work with many of our landlords and vendors to either reduce or defer payment and have significantly scaled back our marketing spend to retain AD fund balances.
By making smart tactical decisions around reducing or delaying certain expenses.
We've been able to significantly reduce our outlay of cash while also managing the business for the long term and ensuring we best position ourselves for the future.
The beauty of our model is our ability to leverage our DNA and we will continue to do so until the business normalizes.
Our average monthly DNA and Capex cash burn prior to the pandemic was approximately 20 to 25 million.
We estimate with current conditions and the steps we've taken to protect our liquidity our revised average monthly DNA and capital expenditure cash burn will be approximately 15 to 20 million until the business returns to normal.
Again that is outgoing funds for DNA and capital expenditures only.
On top of that we also expect to save approximately $6 million in taxes in fiscal 2020 as a result of the Cures Act.
Moving to our leverage we ended the first quarter with the debt to adjusted EBITDA ratio of five to one.
As a reminder, our leverage is calculated net of cash.
Based on the leverage ratios specified in our debt agreement and where we ended Q1, we are not required to make and do not plan to make our Q2 2020 principal payment.
This helps us to conserve approximately 8 million of cash outflow in the second quarter of 2020.
It is also important to note that we do not have any maturities coming due on our debt until February of 2024.
Turning to debt covenants.
The primary financial Covenant under our securitization is a debt service coverage ratio.
The ratio was calculated at the end of each quarter on a trailing 12 month basis.
There are various covenant triggers based on this coverage ratio the first of which would result in 50% of our excess cash flows being segregated and a separate account for debt repayment purposes.
This cash trapping event would occur only if our debt service coverage ratio fell below 1.75 times.
We finished the first quarter of fiscal 2020 with a debt service coverage ratio of 3.27 times.
Therefore, our trailing 12 month cash flows would need to fall by nearly 50% before reaching the first trigger of this covenant.
Based on extensive scenario modeling, we do not expect that current business results coupled with any of the actions we've taken such as the extension of franchisee payment terms will impact our ability to meet cash needs and the ordinary course or to comply with the covenants under our securitization.
We do have the ability and available capacity under our securitization agreement to take on additional debt both within and outside of the securitization market should we choose.
However, we do not currently have plans to seek additional financing at this time.
Due to the evolving nature and uncertainty related to covert 19 at impact on financial and operational results. We are withdrawing our fiscal year 2020 target issued on February six and our long term growth targets issued on February seven 2019.
Now more than ever it's about supporting our franchisees our relationships with our franchisees are incredibly strong and collectively our franchisee system and financially healthy.
We are working hard to ensure operators have the financial resources and store level liquidity to get through these challenging time.
To this end, we temporarily extended payment terms for royalties and advertising fees for franchisees in the United States in Canada.
Hi them with more financial flexibility to enable them to better support their employees and guest.
Specifically for 60 days, we extended franchisee payment terms on royalties and add fees from 12 days to 45 days.
We've also waived rental payments for one month and allow them to defer rental payments for two months on our approximately 900 properties for which we are the landlord.
And we worked with countless third party service vendors to defer payments such as technologies equipment of Rollins software fees and other service contracts.
We have recently engaged encouraging discussions with our franchisees and licensees regarding a transition back to standard payment terms that will meet both of our needs and should ensure we receive cash collections from the majority of our system for much of the second quarter.
Dunkin brands and our franchisees have long standing productive relationships with many of the lenders with whom we work collectively we have weathered tough times before as many have conducted business with our franchisees for more than 30 years.
Early on we began hosting multiple calls with our franchisee lender banks reminding them of the small business nature of our franchisees and that in conjunction with what we were committed to do from a franchise or perspective, they would also need their partnership.
Most lenders have been extremely supportive many deferring principal and interest payments extending lines of credit when requested and continuing to lend to franchisees, who choose to advance with their remodels and new store development.
We've also been in constant contact with our franchisees and have engaged external experts to help them navigate areas such as approaching landlords and to request rent relief managing staffing levels determining what operating hours would be best for their restaurant given their individual circumstances adhering to local local government regulations.
And accessing federal assistance.
Additionally, we've been in frequent communication with our franchisees on the care that and the potential support and benefits that they were eligible to access.
Throughout the process. We've continued to work closely with our franchisee to ensure that they are well educated on the loan application process had the proper information on hand as required to apply for the loans.
Our prepared to manage their payroll and occupancy data to ensure they maximize the benefits of the programs.
Well, we don't typically discuss the average Dunkin' us franchisee I think it's important to give some more color around their cash flow.
We expect that the average traditional Dunkin' restaurant franchisees operating cash flow for the full year will be down significantly as a result of depressed sales.
However, the majority of our franchisees quickly flexed operating hours payroll and food costs to match comp trends and reduced operating costs and capital expenditures as much as possible.
Keeping all six costs. The same then layering in the funding the average franchisee could receive from the Cures Act programs.
We anticipate franchisee operating cash flow by the end of fiscal 2022 approximate approximate 80% of where we expected it to be at the beginning of year.
Even with significantly lower sales projection.
The 80% reflects a representative estimate.
For a traditional Duncan Standalone restaurant that received government assistance.
This estimate also does not include any other relief that our franchisees may receive from their banks landlords or vendors.
It's also worth noting that the cures act included a retroactive technical correction to the depreciation treatment of qualified improvement property that was missed in the original tax overhaul.
The correction allows franchisees to take a 100% depreciation unqualified remodels completed in 2018, and 2019 immediately as opposed to depreciating them over 39 years.
We expect the average franchisee who completed remodels in those years to amend their fiscal 2018 tax returns and apply the correction to remodels within their 2019 tax returns.
We estimate that this will result in additional cash benefit of approximately 10000 to 40000 per remodel.
Given these measures and the flexibility on the timing of franchisee capital expenditure commitments, such as the purchase of equipment Remodels and new restaurant builds.
We're very confident in the financial health of our franchisees.
In closing.
Strong franchisee relationships will gas through this crisis, we're all in this together we've got each other's back.
Now I'll turn it back to the operator for queuing.
Operator.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one and you touched on telephone. If your question has been answered and you'd like to remove 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, Thank you so much I hope everyone as well.
Yeah, I just wanted to talk about some of that the franchise economics, if I could even up or down 20% same store sales I would think that most of your franchisees would make money at the store level make cash at the store level maybe even.
At M- relative to some other companies thats a substantial amount of money at the store level. So you just kind of walk us through what you see franchise store level breakeven is your I guess relative to 2019 average unit volume and I guess using that as a starting point you talk about weather.
Deferral of rents deferral of royalties something that you that you would anticipate having to do it all.
Going forward I guess is the first point and secondly, considering that you have you done some of this and franchisees have successfully applied for PPP. If there has been a review of the leverage levels at the franchise at the front franchise organization level that may be influencing their cash flow at the organization level and if theres an opportunity.
Longer term to begin to work with them to start to rein in some of those.
Yes, those leverage levels that have gotten higher over time. Thank you so much.
Yes, Thanks John.
Good to hear from you.
You got to a lot in that question there let me start with.
Franchisee economics in the first one there.
Look Scott and Cage team put together, what I thought was a really smart tool that they sent out to the franchisees to show various break points with the.
Comp sales.
Going negative and so there was a break point to your to your.
Comment there was a break point at.
Negative EBITDA, but then there was a breakpoint further down.
That.
In order to cover fixed cost. So I think this allowed each franchisee to evaluate where they were at.
There there are fixed costs needs around whether it was rent and utilities.
In debt and things like that and how far they could go down so we modeled that out and it was a tremendous tool to help the franchisees say you know even if you got to the negative EBITDA level, you are still better off staying open.
And we never had a touch that point, but it was a really well deliver tool and I think gut do your comment yes.
Weve, whether well even at those.
Aggressive negative comp numbers, we've seen some uptake recently, there's a whole bunch of factors that you can imagine run that whether that stimulus or.
Markets opening up et cetera. So that's been one that I think has been really good for us as the with the health of our franchisees on the deferral program. We've just introduced are a program on how we're going to collect that.
It was in collaboration a partnership with our with our franchisees and so it's got various.
Levers to pull for the franchisee to help them with their liquidity some are stronger than others, but we wanted to escape said in the inner comments. This was all about making sure that we protected the financial health of our franchisees have made sure that there were strong during all of this so.
We're not going to give out too much details around that but our franchisees are pleased with.
Our extended rent payments are extended.
Franchisee fee in marketing fee payments, so we feel good about that and.
I think let me leave it there unless you have another follow up John.
The question was also on the for leverage at the franchisee organization level and yes, I know I hit on a couple of big topic, Sarah I mean, if that's your that's something that Youve kind of had the chance to go back and look at and maybe reducing some of those leverage levels that probably have ticked up as they have for the rest of the industry whether.
Reducing some of those leverage levels might make sense for some of the franchisees over time in other words, if youre kind of taking this crisis and making it kind of a broader cut broader conversation around capital structure at the franchisee level.
Yes, John This is Kate Great question, I would say one of the the best things that's come out of this if theres anything is.
We've proven that our relationships with our franchisee lenders are strong and enhance those.
So I actually feel like our franchisees. The majority of them are very good place. Obviously some are more levered than others are those that just good new store openings or remodels in the past few years tend to have a little bit more leverage and obviously the larger the organization. They may have more leverage, but we feel very good about the health of our franchisees are lenders stepped in.
Very quickly to help differ principal and interest or work through what the franchisees are they also continue to lend to our franchisees that have decided to pursue their remodels and openings, which I think is a great sign of their beliefs and the health of our system and so while we are working with our franchisees. There's very few that maybe in a distressed situation we have a.
Group, that's working with them on helping them get through these situations. It's it's a smaller population than I think you believe and I think we have great ability to work with those lenders.
Thank you so much thanks for the color. Thank you.
Operator next question.
Our next question comes on line of David Palmer from Evercore ISI. Your question. Please.
Thanks, Good morning, and great opening remarks, this morning I.
And here you guys are doing a great job out there in terms of outside support one into.
Ask about that you're thinking about the pace of recovery.
And where I'm going with this is there's been these these in this income that that consumers have gotten.
From the checks that started coming through on April 15 lot of restaurants out there got a big boost from that and the boost hasn't been is great for some of the coffee players and it kind of shows where coffee fit in People's lives. It really comes from being on the go. So you you guys need people to get back to work and so we're going to have unemployment.
Actors were going to have the social distancing factors.
How do you think about this in terms of your pace to of recovery through 2020 in and how are you thinking about ways to come back the inevitable lingering unemployment that we're going to have as we go into 21.
Yes, Thanks, David and.
Let me good Nuggets in there as well I would say to the first thing.
In terms of what the new reality is going to look like the way we're preparing for that however, sooner long. It takes to get there is look it's going to be around safety of course, and then how to access brands.
In a big way and we've made a lot of investments in that but we're continuing to accelerate that so on the safety side. We don't look at these as cost we look at these investments. So we've got a brand standard around gloves mass Plexiglas guards in just this past week, Scott and team have shipped infrared thermometers to every restaurant Duncan and B.
Our in the us and so those are investments that we made that we think is going to be critical.
Do I feel safe as an employee do I feel safe as customer and they're going to be looking for trusted brands to deliver against that I think the second thing that you touch on is access to brands, we've actually seen and look whether its stimulus checks or probably a host of other factors.
You heard us talk about.
In March minus 35% comps was probably the the deepest now we're hovering around minus 20 to minus 25% somewhere in that range and and again.
It's all it's going to be about how can you create greater access to your brands before the crisis, 90% of our traffic with some form of takeaway so is easier for us to accelerate into this but.
Drive-thrus, we've added a thousand curbside locations. During this delivery we've doubled our footprint from 2000 to 4000 stores digital you know we are making a lot of investments and stefani's on the line. She can talk about.
One in five transactions now or through a loyalty member on the go is doubled during this and even channel.
While we're at habitual brand.
You know channel, we do a billion dollars of retail sales through channel and in the grocery our bagged coffee in our K cups are up around 20% to 30% in outperforming the category. So we feel good about that.
You're right about the high unemployment numbers.
And value is going to play a part and that has been one of.
The strong pillars of our triangle office, which was all about beverage and menu innovation of value and digital acceleration and so value will continue to play a major rule in whatever that new reality looks like so we think we're well positioned in this is a business model that we've been refining for 70 years and and again.
I think next Gen and what we're doing around that just continues to fit in that new reality. Thanks, David.
Thanks, guys.
Thank you. Our next question comes from the line of John Glass from Morgan Stanley. Your question. Please.
Hi, Thanks, good morning from Boston, and Weve pivoted to an asshole model here too. We've got the biggest can have dunkin' coffee I think I've ever seen in our kitchen counter so helping those 20% at home business grow.
On on first on the on the business right. So.
This is a morning business and since the work from home and disruption that that routine is going to be disruptive for time being how do you think about how you can drive business.
Outside of the traditional morning hours are you already thinking about either promotional activity or operational changes that could get people through in the non traditional hours and then I had a follow up on.
A follow up on the franchisee health please.
And thanks for the Duncan Love in home, we want to be there for you or however, you want to use us.
John what as you know and David said this earlier.
We get people started in the morning, and so we do well when people are moving about we've seen the decline in those six say in the nine am.
Part of the business, but we've seen a nice uptick on the 10 am the two P.M. So were positive in that timeframe. So whether thats a people are getting a little cabin fever, and they want to come out after the cup of coffee or whatever but we feel like we've been able to capture that and if you remember our approach your has always been to move into that said.
Good day part in the afternoon, we had our happy hour promotion. So customers have started to become accustomed to us. The expressvault played very well to that some of the snacking that weve been working on we've got croissants Stuffers and.
The restaurants right now.
Played to that sort of afternoon occasionally we think are.
There's a lot of simplicity in the preparation of those for the franchisees, but they also pair very well with our spreads so in and iced beverages. So we think we can make that appropriate shift, but again I I keep coming back to the first priority is.
Customers are going to seek out trusted brands and and we are one of those trusted brands and then we've made I think smart strategic investments and into safety, but then it's going to be about access and we've been really heavily vigilant on expanding our access and accentuating that whether that's again digital.
Acceleration drive through delivery curbside channels et cetera, we're continuing to double down on that we're very pleased with what we're seeing out a digital we've got 400000.
New members will be color, our 90 day.
Active users we've we've grown that by 400000, new users from Q4 to Q1 Soi a nice number on our base and on the go has doubled in many of our non dry through locations. It's even.
Greater than that Fourx fivex that so we feel really good on how we're positioned and how we're going to win in that new reality.
Can you just as good just a very simple follow up what portion of the 7 million. I think you said that include a number of items, but including bad debt what was the bad debt and they don't I know, there's an accounting change or what is the comparable number and what percentage of your franchisees now or in arrears on payments that would reflect.
Yes, so I'll take the latter first.
So right now, we're just coming out of the deferral period for our franchisees. So.
We actually don't have anybody in arrears, because they're just coming out of that deferral period I would say the majority of our franchisees, we do a direct Paul from their their bank account. So it's very rare that there would be anybody in arrears and then internationally, we work specifically with our licensees, they're typically on a longer payment terms, but are typically come.
Client with those payment term.
Then the seven the 7 million.
The impact of bad debt is very low I would call it somewhere around a million dollars. So that that number consists primarily of our estimate of royalty impact.
Increase in DNA things like training and equipment for safety gloves, and training programs around hygiene to the stores et cetera.
And then is offset by a reduction obviously in our bonus Sci program, So bad debt as a small portion of that.
Thank you.
Okay.
Thank you. Our next question comes in the line of Jeffrey Bernstein from Barclays. Your question. Please.
Great. Thank you very much.
Just wanted to.
As a broader question, Dave I know you mentioned that you've often been in crisis management throughout your career.
So obviously some good perspective.
It does seem like from an independent restaurant standpoint.
This is somewhat of an existential crisis, just wondering how you think about the future for the industry. The supply demand imbalance that has perhaps existed maybe that eases.
And on the heels of that weather in the future. If your franchisees demand is still strong whether you'd see better real estate opportunities post some of these closures or market share opportunity. How do you think about one the broader industry and then two duncan positioning within that come out stronger on perhaps grow faster on the heels of it.
Yes, Thanks, Jeff and good morning.
Part of the first have to step back with all the the things when you get into these situations and they are all unique. These these different crisis management situations, but I think you have to evaluate your business model and say, where you strong at I. I guess I come back to.
90% of our transactions prior to the crisis, where some form of take away. So.
We were we are and we've been our franchisees have been.
Refining a model that I think as adaptable and we'll win and whatever the new reality looks like and that's been low touch high frequency affordable ticket I I.
Firmly believe.
Thats, a winning formula for a trusted brand that's been around for for 70 years and so.
The the only other thing I would say that we're focused on right now.
That we've done a lot of really great work led by Scott and Cade in a whole bunch of people behind the scenes with our franchisees and whether Thats Webinars weekly calls we've been very tight as system.
And making sure that all three legs of the stool. Our franchisees are branded our suppliers are all equal. So we are solidarity was great before it has never been better than it is right now and so we're heavily focused on come out of this the one thing I would say is we've got a separate team called the green team that was.
It is very focused there they're.
Completely separate from the daily crisis management team and this was from some of my learnings, where you get them off they evaluate the business model. They look at what our opportunities our real estate as you're talking about as one of them, but also how we're going to emerge from this.
In multiple phases are right now, we're making investments in safety and brand Trust, we think thats the right place to be the next phase is going to be.
Sort of a scrappy ramp up phase for us and then finally.
Look we're going to follow.
The science with the CDC and local health officials in.
And it may be piecemeal across the country, but we were going to have a breakout at some point in so that green team is efforting through all of that.
Also taking a look at where we can where we can be opportunistic in terms of real estate plays and things like that so I think the real estate comment is spot on Jeff as you know, where we have white space in can grow. So I think thats one that we feel also fits into the opportunity set for us as well. Thank you.
Thank you.
Thank you. Our next question comes from the line of David Tarantino from Baird. Your question. Please.
Hi, Good morning, hope everyone's doing well I had a couple of questions first I was wondering if you could frame up.
The risk that you might see some store closures.
Yes.
All the sales weakness, we're seeing here I know you did a great job outlining average franchisee profitability, but I'm, specifically wondering if you had some marginal performers coming in.
Those those units are those franchises might be at risk of closing more permanently.
Anyway to frame that up at this point in that I have a follow up question. Thanks.
Yes, Hey, David It's Scott, It's a great question in something we started working on as part of that Green team that Dave mentioned.
We've got about 1000 temp closed stores now and we're looking at every single one of them with our franchisee because you're absolutely right, maybe some of those low performing or marginal performing stores. Maybe there is an opportunity to to consolidate to reload to add to drive through in a better location and we're having that we're starting to have those conversations with the franchisees now little too early to put our.
Arms around exactly how many but we're having those conversations right now.
Great Great. Thank you and then the second question I had was related to the morning day part.
It's a lot of kind of routines and routine behavior and I guess those consumers have been knocked out of the routine for a prolonged period and it might be and even longer period.
Just wondering your thoughts on how you how you get them back on the routine of go into Duncan daily in what levers you plan to pull the try to drive that business.
Yes, David on that one you're right, we're very much a habitual brand and look is what the team is working on whether that's in the the ramp up for the breakout phase.
Value is going to play a big part in that and sort of a welcome back. Thank you to America.
Type of.
Campaigns. So we think were because we have been strong in that area, we think thats going to play very well.
Our guests have really appreciated that we've been open we've been very focused they said on safety, but.
We've been trying to do the right thing in the communities that we serve stay open.
Serve those first responders healthcare workers all the people that are keeping the communities running right now and we've been doing that in our franchisees have been incredible with the restaurant cruise.
During all of this so.
And we have to look at what's the mindset of the consumer going forward in terms of tranche.
You know it that the starting our for the commute may go earlier, if people are driving more than they are taking public transportation. They may have to start earlier so we.
We think we're nimble enough we've been very flexible with our franchisees on hours of operations limited menu as you heard from Scott, but we think we've got a business model that is nimble.
And is built for what the new reality whatever is going to look like we're ready to adapt and win in that environment.
Great. Thank you.
Thank you. Our next question comes in the line of Matt Difrisco from Guggenheim. Your question. Please.
Thank you.
With respect to you for all that detail on the cash flows and Thats important understand that just wanted to understand how many stores potentially could fit in there how many what percent of your franchisees.
Roughly receive the cares Act and then if you could just remind us looking back in 18 to 19 on those remodels, how many stores have the potential ups or how many franchisees sort of fallen and getting that potential of the tend to 40 K. cash benefit also.
Yes on the carriers Act, we haven't actually collected how many of our franchisees have applied I would you say the majority of our.
Baskin franchisees on less than Q stores on average.
And so that was clearly a great program for them and then on the Duncan side. The average franchisee employs about 150 crew members.
So also a great program for them. So they had relationships already with many of the lenders and banks that helps them work through the FDA process.
We believe ERP was the program that they preferred through the cures Act, but I.
I think the majority would be eligible and would qualify for the payroll.
Waiver that would come out of that but unfortunately, we don't have data collected on how many of them received from the majority I'm expecting have.
And then on the remodel side, how many sort of get that tend to 40% accelerated depreciation benefit that was not included in your 80% cash flow metrics that would be on top.
It is actually included in there.
At the lower end, so we put the 10000.
There's hundreds of stores that have gone through the remodel process and actually Baskin U.S. would also have some of those as well so hundreds of franchisees bacon actually.
Amended their 2018 tax returns as well as applied in 2019, and then take advantage now as we go into 2020.
Okay. Thank you so much new welcome.
Thank you. Our next question comes from the line of Air consoles from Keybanc. Your question. Please.
Hey, Thanks, and let everyone down, but they are doing well.
I appreciate the commentary on on same store sales trends, but as you can maybe clarify whether you remove the temporary store closures from the comp base I think in the release it said that the down 25% was excluding the store closures and then I have a follow up question on parks.
Yes, that's a great question. So the way that our comp works is if a store reported a sale any sale in the weak and this year versus last year. It will be included in that comp base. So for the weeks that they closed. They are included in there if they've been completely closed through the week. They are removed so that.
Guide that that Dave was referring to approximately 20 to 20, 25%.
Excludes the majority of the approximately 1000 temp closed we anticipate if you put that in its probably about another five basis points.
The downturn that is down 35% number that you spoke about at the trough does that include closures were exclude the closures.
I'm, sorry could you repeat I couldn't you cut out in the middle there could you repeat that that the negative 35% that the trough comp decline in the late in late March did that encompass the thousand stores closed over that time period.
No I wouldn't it was consistent the exact way that I just described that so at the store was opened for any day during the week it was and if it was clear.
Okay.
Can you help.
Yes.
Okay on on perks.
I don't think there was a lot of commentary paired remarks that needed a little bit culinary, but I was wondering the crisis in opportunity to extend the usage of the extend the usage of the mobile App and perhaps drive user growth. If you could talk about like the percentage of digital orders either before and after the crisis began whether you saw on increasing more acceleration user growth.
Yes, Stefani's online year, Yeah go ahead Stephanie.
Hi, Thanks, Dave Hi, Eric It's definitely multiple Paul Yes, we've really pleased with our performance on for.
We're up about 300 basis points just from March to April So right now posted there is around 18% of thousand 20% of transaction and it's growing every week as Dave mentioned previously or on the go with doubling were up to 7% of rooftop sale coming from mobile ordering we definitely leaning into our marketing.
And.
Being able to acquire 400000, new active members quarter over quarter. So we're gaining a lot of new and reactive Nate we activated members during that time.
And we feel really good about our perks program and the marketing that we're doing and how that helping drive customers into our stores during that time globally, we're still looking for their Duncan.
Thanks appreciate it.
Thank you. Our next question comes from the line No Assurance Act from William Blair. Your question. Please.
Hi, Good morning, I was hoping you could talk about about an 800 divergence you're seeing in the comp trend between drive through a non drive through location.
And then secondarily.
In terms of menu innovation I know you had a pretty good pipeline of menu innovation that for this year does the current.
Disruption kind of change your thoughts on how you pursue menu innovation and 2020.
Hey, Sharon, it's Scott drive through obviously as a big part of our business almost 70% of the store.
And as you might imagine performing significantly better than the non drive through stores, So probably three times better and it's interesting note stores that have a drive through almost 90, 495% of the sales are going through the drive through so it speaks to how powerful that drive through his and not surprisingly the markets that have.
Predominant drive throughs are doing better than those that don't.
Dave mentioned, curbside, which is sort of a drive through for the non drive through if you will and we're seeing some nice growth.
For stores that don't have a drive through when they've adding when they've started to add curbside. So it's a good way for the consumers to get that product without having to come in the store.
As far as innovation, we do have a strong pipeline lined up moving forward, but we are looking at it exactly as you mentioned, what as as the consumer behavior, probably changes a little bit as that daypart shifts a little to the middle of the debt.
As people start to maybe do a little more bulk ordering or even on the go.
We are looking at different products for different Dayparts. So that is part of the pipeline in the innovation work that we're looking at.
Okay.
<unk>.
Thank you. Our next question comes from the line of Dennis Geiger from Yes. Your question. Please.
Great. Thanks for the question, Dave you touched briefly a bit I think on some of the potential future white space opportunities that could arise emerging from this just wondering if the if you could talk a bit more about some of the puts and takes around unit growth considerations looking out over the over the next couple of years maybe.
Recognizing you don't have a crystal ball, but how do you think about maybe some of the incremental opportunities that could arise and then kind of thinking about some of the how difficult maybe access to capital may be I think all the color on the health of the franchisees is great, but just anything more David you could provide on kind of some of those those puts and takes looking ahead, knowing what you know right now.
Thanks, Yes, and yes, thanks for that Dennis.
Look if I step back and take a look at the next gen.
Model that we've got out there.
You know again that is built I think for this new reality and when I talk about access and having great access we may accentuate that certain things, but it's a heavy focus on drive through its a heavy focus on on the go and expanding that to a higher level. So there may be more things that we accentuated as part of this but we think that.
Thats a model that plays well going forward, we're really pleased not not able to share at this point, but we're pleased with the willingness of the franchisees.
In the to reaffirm their their determination to continue to grow and remodel.
And I think the future has gotten a little bit more clear over the last month, but we're pleased with what we're hearing out of the early signs of the franchisees and their willingness to go after growth and and look.
You got to balance the fine line between doing the right by your system and and doing right by communities if there's opportunities.
Makes sense for us on the real estate side, we will pursue those but you also want to balance.
Being a good corporate citizen and sticking to your values and not being the shark either so we're going to walk that tight rope, but that's where that green team is focused on and I think what's you're going to see.
Our fleet today, 70% of our portfolio has a dry through we've added a thousand curbside as many of those non drive through location. So we think we are really well positioned to be in on the go brand in the new reality.
Thanks, Dennis Great and kudos on crude is doing the right thing by your franchisees in place. Thanks appreciate that Dennis Thanks.
They will you.
This does conclude the question and answer session for today's program I'd like to hand, the program back to Dave Huffman for any further remarks.
No I just want to thank everyone for being on the call and we appreciate all the well wishes. We got from you and the support you've given us and again I know these are trying times and.
From the Dunkin' brands family and all of our franchisees, we just with wish all of you.
Stay safe and stay secure and and we'll get through this together, but we appreciate your interest in your than your commitments Dunkin' brands. Thanks, everyone be good.
Thank you ladies and gentlemen, if your participation in today's conference. This does conclude the program you may now disconnect good day.
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