Dunkin’ Brands To Accelerate Expansion In Western & Emerging Markets

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

Dunkin’ Brands (NASDAQ: DNKN), the parent company of the two most recognized brands in the world: Dunkin’ Donuts and Baskin- Robbins, recently hosted its 2014 Investor and Analyst day on September 17. ((Dunkin’ Brands: Events and Presentations)) The company’s chief executives discussed about its financial growth plans, expansion plans, new restaurant growth plans and developments in its business strategies. This is an annual event, where the company’s investors and stakeholders get an in-depth idea about the current financial performance and future financial plans of the company.

Dunkin’ Brands delivered below average results in the last two quarters. In the latest Q2 earnings report, Dunkin’ Donuts U.S. segment reported a mere 1.8% increase in the comparable store sales, which was expected to be in the range 3% to 4%. Moreover, the net revenues rose just 4.6% to $191 million, driven by increased royalty income due to system wide sales growth. [1]

We have a $48 estimate for Dunkin’ Brands, which is approximately 9% above the current market price.

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See full analysis for Dunkin’ Brands

Financial and Operational Growth Plans

Dunkin’ Brands has a nearly 100% franchised model, with approximately 18,000 points of distribution in nearly 60 countries. The company believes that its model offers strategic and financial benefits, as the company does not own and operate many of its stores, and therefore, can focus on menu innovation, marketing and other initiatives to drive future growth. The company also mentioned that the current model enables leveraged capital structure, thereby providing financial flexibility.

The company’s quarterly cash dividends rose from $0.15 in 2012 to $0.23 in Q2 2014. In its latest ‘Investor and Analyst’ day event, the company reaffirmed its guidance for the year 2014. The company expects a 5-7% system-wide growth in net revenues and 7-9% growth in the net operating income in the fiscal 2014. This might translate to operating margin expansion of about 50 to 100 bps. Moreover, EPS is expected to be in the range $1.73 to $1.77. [2] In terms of segment updates, Dunkin’ Donuts U.S. is expected to open 380-410 net new units and to remodel 500 units; same store sale is expected to grow 2-3% in 2014. Baskin-Robbins U.S. has given a guidance of 1-3% same store sales growth and a total of 5-10 net new stores by the end of 2014. The international segments of both Dunkin’ Donuts and Baskin-Robbins are expected to open net 300-400 units.

The company also gave a brief overview of its 2015 guidance, in which Dunkin’ Donuts U.S. net restaurant growth is expected to be more than 5%, and same store sales growth is expected to be in the range 2-4%. Dunkin’ Brands has long term targets of 6-8% revenue growth and above 15% growth in adjusted EPS. For strong development outlook, the company has to strengthen its free cash flow to facilitate earnings growth through either deleveraging or shareholder payout.

Expansion Plans: Western Markets In Focus

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. The company has explained its presence in the U.S. through four different categories: core market, established market, emerging market and western market. The chart below explains the geographical presence of the company’s stores in the country with the number of restaurants in each market.

The company’s 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. In the long term plan, the company plans to add around 5, 000 Dunkin’ Donuts units in the western market, around 3,000 in the emerging markets and only 400 in its core eastern market, to take the total Dunkin’ Donuts U.S. units to 17,000.

However, due to strong franchisee demand in the core and established markets, the company has changed its net new openings guidance. The net openings growth in the core market is expected to be in the range 15-20%, revised from the previous guidance of 10-15%. The guidance remains unchanged for net new store development in western market; a growth of 15-20% in fiscal 2014.

  • Accelerating Growth In Western Market

The company has doubled its footprint from 32 restaurants in 2010 to 64 in 2013 in Texas, a lucrative western market. In the state, the average weekly sales of the restaurants grew by 57% in the last 3 years. On the other hand, the comparable same store sales rose from 1% in 2010 to 9% in 2013. Looking at the potential growth opportunity, Dunkin’ Donuts plans to open 800 to 1,000 net new restaurants in the region in the long term.

This is just one of the regions where the company is focusing its expansion. Other major focus area for the company is California. 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. [3]

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Notes:
  1. Dunkin’ Brands: Q2 2014 earnings call transcript []
  2. Dunkin’ Brands: Financial update []
  3. Dunkin’ Donuts announces locations of its restaurants in California []