The American global doughnut and coffee chain, Dunkin’ Brands (NASDAQ: DNKN), reported mixed results in its first fiscal quarter report, with a significant growth of 6.2% in total revenues in contrast to a 50 basis points drop in the comparable store sales year-over-year. The company’s moderate performance was an outcome of two contradicting factors: increase in royalty income and low sales of ice-cream products against the severely harsh weather conditions in North-eastern region of the U.S., where most of the Dunkin’ Donuts’ restaurants are located. 
In the second quarter, the company expects to generate a net income of $1.79 to $1.83 per share, an increase of around 18% over the previous year figure. In the first quarter, Dunkin’ Brands added 69 net new Dunkin’ Donuts U.S. locations with an estimated target of 380-410 stores for the fiscal year 2014. Furthermore, Dunkin’ Donuts U.S. franchises remodeled 94 restaurants during the first quarter. The food and beverage industry usually witnesses a moderate pace in store expansions in the U.S. during the first half of the calendar year. As evident from the seasonality trend, the company gains momentum in the latter half of the year. A total of 150 Dunkin’ Donuts U.S restaurants are expected to be set up by the end of Q2. 
We have a $48 estimate for Dunkin’ Brands, which is approximately 6 % above the current market price. In addition to the Dunkin’ Donuts brand, the company also runs the Baskin-Robbins brand.
Expansion On The Cards
Most of the Dunkin’ Donuts U.S stores are concentrated in the eastern part of the U.S and don’t have a big presence in western U.S. However, plans to expand in the western markets are on the charts. Adding new assets to the company will help them generate more revenues for the upcoming quarters. According to Nigel Travis, company’s Chairman and CEO, Dunkin’ Donuts is slated to open 4-5 restaurants in California by the end of fourth fiscal quarter, much earlier than its original expected date. The company announced the locations of its stores in California on June 10 and also mentioned its plans to open 54 more stores in Southern California in the coming years. With nearly 11,000 Dunkin’ Donuts stores in 33 countries around the world, the company is keen to expand, owing to the fact that new store openings delivered 25% unlevered cash and cash returns to its franchises, and this is the fourth year in a row new stores achieved this target. In the long term, the company’s plan is to double the count of U.S. stores to 15,000 in the next 18-20 years.
Western Markets: Competition Vs Growth Opportunities
The company’s plan to expand its footprints outside its traditional base in North-east has gained the interest of coffee lovers in the western region of the U.S. In its latest quarter earnings call transcript, the company announced that about 15-20% of the new stores planned for this year will be set up in western markets. The doughnut & coffee chain is less known in these markets which might create difficulties for the company in its distribution and in maintaining margins, but on the other hand it has great potential to expand. The company’s competitors such as Starbucks (NASDAQ: SBUX) and McDonald’s Corporation (NYSE: MCD), leading brands in terms of coffee sales, are dominant forces in the western markets. Burger King Worldwide (NYSE: BKW) along with its Seattle Best coffee line and Peet’s Coffee also enjoy a great share of coffee consuming customers in the west. This might hinder the company’s growth rate in the initial period but with a strong brand appeal and even stronger marketing strength, the company expects an exponential growth once it picks up pace. Dunkin’ Donuts’ stores report more sales of coffee than its food and might even steal some market share of these coffee giants, as people might prefer the brand’s trademark donuts along with their coffee.
On the other hand, significant expansion plans in the unfamiliar territory reflects that the company sees limited opportunities for growth in its existing core regions. In 2013, Dunkin’ Donuts opened 371 net new stores in the U.S., out of which 64% of the total 7,677 stores at the end of the year were in 10 states in the North-eastern region. With few stores in the western region, the company has a huge scope for aggressive expansion in the coming years along with tremendous growth opportunities. Krispy Kreme Doughnuts (NYSE: KKD), another popular doughnut chain, has had stores in California for a long time now, unlike Dunkin’ Donuts. Krispy Kreme has reported some of the best growth across its chains in California, when it changed its business model to ‘small factory design’, a model similar to that of Dunkin’ Donuts stores. Krispy Kreme’s success does not indicate that Dunkin’ Donuts will be a huge success as well, but it sure favors the latter’s approach. Moreover, it indicates that customers are willing to shift their preferences from leading brands to try out products of newer brands.
With assurance of better quality doughnuts and coffee, the company has high hopes from its western expansion and believes that these stores might provide incremental revenues for the initial few years.