Dunkin’ Brands Results Could Send Stock Past $35

Dunkin’ Brands (NASDAQ:DNKN) is scheduled to announce its Q2 earnings on July 26. The stock has had a fantastic year so far, climbing close to 30% and outperforming the broader indices. Its Q1 earnings beat estimates as they were buoyed by strong comparable sales growth in its most important segment: Dunkin’ Donuts US. Here are some of the trends to watch for in the upcoming quarterly earnings.

(a) Comparable Sales Benefiting from New Menu Additions

For 2011, the comparable sales growth of Dunkin’ Donuts outlets in the U.S. grew 2.8%. But, with the focus on breakfast paying off, the comps growth increased to 7.2% for the first quarter of 2012. Items added to the menu include Hillshire sausage sandwiches in the last quarter of 2011 and Angus steak & egg sandwich in the first quarter of 2012. In the second quarter, the restaurant chain added breakfast burritos to expand its overall breakfast offerings. ^[1] For the long term, we estimate that the previous quarter figure of 7.2% might not be sustainable, especially given how it plans to expand its presence within the U.S. in the next few years. We forecast the average revenue per outlet to increase moderately at an annual rate of 4%.

For its Baskin-Robbins segment, the comparable sales growth jumped to 9.4% in the first quarter. The company has closed the under performing outlets in the U.S. and stepped up advertising spend as part of its brand-building initiatives. Comparable sales growth for 2011 was 0.5%, which was the first time in five years that the figure was positive. Sales have also been helped by the launch of cake bites, new holiday cards and the introduction of Baskin-Robbin gift cards. So, clearly the company’s efforts to revive the Baskin-Robbins brand in the U.S. are paying off.

(b) New Restaurant Additions to Boost Top-Line Growth

Dunkin’ Brands has massive plans to double the number of Dunkin’ Donuts outlets in the U.S. to 15,000 in the next 20 years. And it is on track to add 260 to 280 new Dunkin’ Donuts outlet in 2012. Similarly, the company expects to add more than 350 outlets internationally in 2012. We expect the new restaurant additions to have a significant impact on the overall revenue growth.

Dunkin’ Brands has also been in news recently because of its store openings in India. However, international outlets of Dunkin’ Donuts suffer from low average revenue per outlet (ARO), which is less than one-fourth of what it is for the U.S. outlets. Thus, the percentage contribution of Dunkin’ Donuts’ international outlets to the company’s overall valuation is quite low to make any significant impact on the stock price. If the company is able to boost its ARO levels and keeps on adding new restaurants internationally, then we could see Dunkin’ Donuts’ international operations having a greater impact on the company’s overall valuation.

We have a $35 price estimate for Dunkin’ Brands, which is about 5% higher than the current market price.

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1. Dunkin’ Donuts Breakfast Burritos: Fast Food Review, 5 June, 2012, huffingtonpost.com [↩]