Dunkin’ Brand Earnings Preview : Sales and Margins To Grow

-1.84%
Downside
106
Market
105
Trefis
DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

Dunkin’ Brands (NASDAQ: DNKN) is scheduled to announce its Q1 earnings on April 24. The company runs both the Dunkin Donuts and Baskin-Robbins chains. 2013 was a successful year for the company, which saw an 8.5% increase in annual revenues. Comparable sales also grew 3.4% last year.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. For 2014, Dunkin’ is targeting a comparable sales growth of 3%-4% for Dunkin’ Donuts and 1%-2% for Baskin-Robbins, with a 6%-8% growth in revenues. We expect increasing sales and rising margins this quarter, in line with the company’s guidance for the year.

We have a $49 price estimate for Dunkin’ Brands, which is in line with the current market price. According to our analysis, Dunkin’ Donuts stores operating in the U.S. contribute about 80% to the company’s valuation.

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See full analysis for Dunkin’ Brands

Comparable Sales Ascending

The comparable sales of Dunkin’ Donuts stores in the U.S. rose by 3.5% in Q4 2013. The growth was primarily driven by increased average ticket and increased customer traffic. The introduction of new items in the menu such as breakfast sandwiches and wraps has been able to draw in more customers, especially during the afternoon segment. The company had shifted their focus on the afternoon segment after it grossed only 40% of its total sales after 11 am in 2013.

Dunkin’ Donuts is also working on reaching out to customers through social media and connecting with them on an individual level. Apart from building its fan community on Facebook, it is also developing its loyalty program through Dunkin’ Donuts cards and a mobile app to enhance customer experience . Although the loyalty program is not expected  to immediately boost sales in the short run, the company expects the program to help strengthen its customer base by offering custom-designed offers to them in the future. Digital marketing and one-to-one connectivity with the millenials is working well for major food chains, and can prove to be a game-changer for Dunkin’ too.

Baskin-Robbins International stores, the second major segment of the company, recorded 1.6% rise in comparable sales in Q4 last year. Strong sales were mainly reported from Korea, Middle East, Australia and Columbia. The company had introduced cakes, low-fat ice-creams and new flavors of ice-creams in order to attract more traffic. Such introductions in the menu are expected to continue pulling up sales this year as well.

Operating Margins To Swell

As Dunkin’ Donuts and Baskin-Robbins are both 100% franchised brands, Dunkin’ Brand accrues high margins. In Q4 2013, Dunkin’ Donuts stores in U.S.  reported 76.1% operating margins. Since all the stores are owned by franchisees, the company does not have to incur running costs such as labor, occupancy or raw material costs. If the sales continue to swell, Dunkin’ would be able to record healthier operating margins.

An issue of concern for the company is food price inflation. Although it does not affect Dunkin’ directly, but the price rise may force the franchisees to hike the menu prices which in turn could affect the net sales. As Dunkin’ charges a percentage of sales revenue from franchisees as royalty and franchise fee, it could see a dip in its margins due to a decline in sales.

Expansion Drive To Continue

Dunkin’ Brands added 790 new restaurants worldwide in 2013, including 371 outlets of Dunkin’ Donuts in the U.S. This year, it plans on opening 685-800 new outlets , including 380-410 new restaurants of the Dunkin’ Donuts chain in the U.S.