Dunkin’ Donuts U.S. Growth Justifies The Run In Its Stock

Dunkin’ Brands (NASDAQ:DNKN) stock has soared more than 30% in the last six months and outperformed the broader indices. In addition to Dunkin’ Donuts, the company also operates the Baskin-Robbins brand, and although the company has a significant presence internationally, Dunkin’ Donuts’ U.S. operations contribute the most to the bottom line. The company has a pretty clear cut strategy for its Dunkin’ Donuts’s brand i.e. to keep expanding nationally while maintaining a steady same-store sales growth. Here’s how it plans to achieve its goals.

See full analysis for Dunkin’ Brands

1) Same-Store Sales Growth~4%

In 2012, Dunkin’ Donuts – U.S. reported a 4.2% rise in same store sales and the company seems to be on track at the moment. For the long term, it hopes to achieve sales growth through higher traffic, a shift towards premium products and menu price increases. The figure looks feasible given the chain’s ability to add new menu items regularly. For example, in 2012, it added 30 items to the menu including Breakfast Burritos, the Oreo Coolatta, the Roast Beef Bakery Sandwich, Red Velvet Donuts, etc.

Similarly, some of the new additions expected in 2013 are Turkey Sausage Breakfast Sandwich, Angus Steak and Egg Breakfast Sandwich, Dark Chocolate Mocha beverage lineup, among others. ^[1] Another thing that works in favor of Dunkin’ is that most of the new additions will be in California or Texas where the company currently has little or no presence. Therefore, the new stores aren’t likely to cannibalize the sales of the existing ones.

2) Expansion Across The Country

The company had 7,306 Dunkin’ Donuts stores in the U.S. at the end of 2012 and plans to double the number in the next 20 years. In 2013, it will add another 330-360 restaurants across the country. ^[2] As already mentioned, the expansion will involve setting up restaurants in relatively new markets, and so the explosion of new stores shouldn’t really compromise sales growth.

In order to accelerate store openings, Dunkin’ is offering incentives to franchisees such as reduced royalty payments during the initial phase. Trefis expects the company to add around 300 new Dunkin’ Donuts stores in the U.S. on average for the next several years. Since most of Dunkin’ Brands restaurants are franchised, the capital requirements to open new restaurants are lower which ensure that the expansion plans do not cause a strain on the company’s fiscal situation. To emphasize the point, the company incurred capital expenditure of only $23.4 million in 2012.

Back in 2011, when Dunkin’ Brands decided to go public, its high P/E ratio (66-68) made investors jittery and limited its upside. However, its profitability was obfuscated by one-time events such as loss on debt extinguishment, costs related to secondary offerings, impairment charges related to South Korea joint venture, and sponsor termination fee. With the true earning potential of the company now clearer and the company maintaining its sales growth, investors have become more comfortable giving the company a higher valuation. It currently has a forward P/E ratio of ~22; certainly not low, but justifiable for a company with aggressive expansion plans. ^[3]

We have a $38 price estimate for Dunkin Brands, which is in line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. DNKN Earnings Transcript [↩]
2. DNKN 10-k [↩]
3. Dunkin’ Brands Forward P/E [↩]