Dunkin’ Brands Expects Solid Sales Growth As Expansion Continues

by Trefis Team
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Dunkin Brands
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Dunkin’ Brands (NASDAQ:DNKN) is scheduled to announce its earnings on July 25. The stock has gained more than 10% in the last three months, buoyed by strong first quarter earnings and a general optimism about the overall economy. In addition to Dunkin’ Donuts, the company also operates the Baskin-Robbins brand.

Dunkin’ Donuts’ American operations contribute more than 75% to the stock price as per our estimates. The restaurant chain continues to expand with plans to open another 330-360 restaurants across the country in 2013. In the first quarter, it added 78 new stores. Overall, the bigger picture for the brand is to double the number of stores in the U.S. to 15,000 within the next twenty years.

The company has a target of generating 3.5-4% comparable sales growth in the long term. Sales were negatively affected in the first quarter due to harsh weather conditions in the Northeast, one of Dunkin’s core markets. As a result, comparable sales grew by a meager 1.7%. Under more normalized conditions, the result should be better this time around. [1]

Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

See full analysis for Dunkin’ Brands

One area where the company can grow its sales is during the afternoon segment. Since the restaurant chain generates only about 40% of its sales after 11am, the management is naturally keen to grow its sales in the afternoon. [2] Besides expanding its sandwich selections, some of the newer openings will feature sofas and televisions so that diners can relax and enjoy their meal at a slower pace. Dunkin’ Donuts is usually seen as a breakfast place, but the company hopes to change that notion with the help of these new additions.

Coming to profitability, Dunkin Donuts’ margins should remain in a narrow range given the nature of its business. The company-reported operating margins widened 60 basis points to 72.6% in the first quarter. Almost all of the restaurants operating under the Dunkin’ brand are franchised and is the reason why the margins are that high.

Baskin-Robbins: International Markets Hold Potential

Baskin-Robbins’ international locations contribute about 15% to the stock price, as per our estimates. As of March 30, 2013, there were 4,551 stores of Baskin-Robbins outside the United States. The ice cream chain has struggled domestically in the last few years, but is performing well internationally. The company opened 299 new stores in 2012, and posted same-store sales growth of 2.8%. [3]

We reckon the company could easily add 250-300 new stores annually over the next few years, due to its low penetration levels. The company is targeting expansion in countries like China, the Middle East, the U.K. and Vietnam.

As of now, we have a $40 price estimate for Dunkin Brands, which is about 10% lower than the current market price. We’ll revise our estimates after the earnings release.

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Notes:
  1. DNKN 10-Q []
  2. Dunkin’ Donuts Upgrades Stores to Be More Like Starbucks, June 13, 2013, bloomberg.com []
  3. DNKN 10-k []
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