Dunkin’ Donuts: 2013 Year In Review

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DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

Dunkin’ Brands (NASDAQ:DNKN) has had a fantastic year, with shares of the company surging nearly 50% since the start of the year. We believe the company’s success has been well deserved, built on a solid foundation of a sustained increase in sales and cost-effective expansion. In this article, we take a deeper look at the company’s strategy over the course of the year and how it has helped the stock unlock its potential. We also take a look at whether the company can sustain such high levels of growth over the coming months.

We have a $48 price estimate for Dunkin Brands, which is in line with the current market price. Stores operating under the Dunkin’ Donuts brand in the U.S. contribute more than 75% to the company’s valuation, as per our estimates.

Expanding To The West

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The headline for Dunkin’ investors over the past year has been the company’s aggressive search for new markets. Dunkin’ Donuts stores are very popular in the Northeastern parts of the U.S., but have been virtually absent in the western part of the country. The company now clearly sees this as a growth opportunity, and has signaled its intent by establishing its first stores in Denver this year. Furthermore, it has also signed agreements with franchisees to open nearly 90 stores across states such as California, Utah and Colorado by 2014-2015. Through the first three quarters of the year, the company had added 222 new Dunkin’ Donuts stores in the U.S.

See full analysis for Dunkin’ Brands

With the help of many such franchisee agreements, the company plans to increase its store count in the U.S. to 15,000 in the next 18-20 years – almost double the number it has today. Furthermore, the franchisee system allows Dunkin’ to set up new stores very quickly and more importantly – very economically. For example, even though the company added 650 stores globally in 2012, it incurred a capital expense of mere $22.4 million. [1] This means that rapid expansion won’t compromise with balance sheet stability and keep operating costs low. Given the numbers involved, the company does face the possibility of cannibalizing its own sales. But given that there are fresh markets to explore, we believe that the year’s stock surge stands well justified.

Targeting A Steady And A Sustainable Growth

Dunkin’ has also seen a consistent growth in same-store sales in the U.S. in during the year – proving it’s not just more stores but more sales per store that’s adding to the company’s top line as well. The same-store sales figure for the first three quarters for Dunkin’ Donuts stores in the U.S. stood at 1.7%, 4% and 4.2% respectively. [2] Harsh weather in the first quarter impacted its sales which raised doubts over whether the company would be able to return to 4% growth figures in the subsequent quarters. But Dunkin’ proved it is getting its strategy right by posting two consecutive quarters of better than expected sales.

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.

While a general improvement in the U.S. economy must have helped, credit must also be given to management’s attempts at expanding sales beyond the traditional 11 a.m. breakfast slot. The focus has largely been on making stores more welcoming for the afternoon (or evening) customer, with improved seating and TVs. [3]

The year has also seen major menu revamps, with an increased focus on pretzels and sandwiches to lure more customers in the latter hours. With nearly 60% of company sales coming in the breakfast hour, an attempt at diversifying past the 11 a.m. slot definitely makes a lot of sense. We believe there’s plenty of room for Dunkin to leverage its existing stores, and a long-term trend of 3-4% same-store sales expansion should be a realistic target.

All in all, we believe that there are plenty of opportunities open for the company at this point. However, it should also be noted that we believe that the stock’s spectacular run of 2013 has pushed it right up to its full potential. Going forward, there is less likelihood of the company outpacing investor expectations at current valuation levels. A further surge in the stock price runs the risk of a market correction.

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