Why Dunkin’ Brands’ 3Q14 operating margins improved

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Operating income and margins

Dunkin’ Brands Group, Inc. (DNKN) reported an operating income of $92.4 million in 3Q14. That’s a 12.4% increase from $82.2 million in the corresponding quarter a year ago. The company also had a $3.7 million write-down in connection with its Spanish joint venture. Operating margins also increased to 47.9% from 44.1% over the same period.

 Dunkin Expenses 2014-10-31

Costs of operation

Dunkin’ Brands reported $13.3 million in occupancy costs compared to $13.4 million in the corresponding quarter a year ago. This includes rental expenses related to the restaurant location, which do not fluctuate because the locations are leased for the long term at a fixed price.

Cost of ice cream products was $19.5 million compared to $20.9 million— a 6% decline year-over-year. These costs are related to the Baskin-Robbins’ ice-cream products that are sold to the franchise. Dean Food has manufactured these products for the company since 2013.

Food costs related to company-operated restaurants declined 7% year-over-year, to $5.5 million from $5.9 million in the same quarter a year ago. Dunkin’ Brands increased its overall menu prices by 1.10%, but management says this was offset by discounts related to trial product promotions.

General and administrative expenses (or G&A) for the quarter also declined to $56.3 million, compared to $57.7 million in the corresponding quarter a year ago.

G&A costs are important to track in the restaurant industry as they include a mixed bag of expenses. For example, Dunkin’ Brands’ and Domino’s Pizza, Inc.’s (DPZ) G&A expenses included technological infrastructure costs, executive compensation, advertising, and marketing, etcetera.

Both of these restaurant chains are held by the Vanguard Total Stock Market ETF (VTI), which also holds Jack in the Box Inc (JACK) and Darden Restaurants, Inc (DRI).

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The cost reductions we’ve covered here helped improve Dunkin’ Brands’ operating margins by 3.8% year-over-year. But to get at the company’s bottom line, we need to look at the impact of taxes and interest rates. In the next part of this series, we’ll look at the company’s net profits and net margins.

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