Expansion In The Western U.S. To Remain Key Factor For Dunkin’ Brands’ Top-Line Growth

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

Dunkin’ Brands (NASDAQ: DNKN) is scheduled to announce its third fiscal quarter earnings report on October 23. [1] The company delivered unimpressive results in its second quarter results, as the comparable store sales of the Dunkin’ Donuts U.S. segment increased just 1.8%, much lower than the company’s expectation of 3 -4% growth. As a result, the second quarter revenues grew just 4.6% to $191 million. [2]

Due to the increased competitive activity in the restaurant industry, all the top fast food chains, such as McDonald’s Corporation (NYSE: MCD), Starbucks (NASDAQ: SBUX) and Burger King (NYSE: BKW), are planning to expand their customer base in domestic, as well as international markets. Most of the Dunkin’ brands’ stores in the U.S. are concentrated in the eastern part of the country, and the company has accelerated its expansion process in the western markets. Moreover, at the beginning of the second quarter, the company launched its online cake ordering business for Baskin Robbins U.S., which has been delivering impressive results. Dunkin’ Brands is planning to take this to a global scale in the coming years.

We have a $48.59 estimate for Dunkin’ Brands, which is approximately 4.3% above the current market price.

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See full analysis for Dunkin’ Brands

In September, Dunkin’ Brands recently hosted its 2014 Investor and Analyst day. [3] The company officials provided the financial and expansion guidance for the year 2014, as well as for 2015. 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. ((Dunkin’ Brands: Financial update)) In terms of segment updates, same store sales figure for Dunkin’ Donuts is expected to grow 2-3% in 2014. Baskin-Robbins U.S. has given a guidance of 1-3% same store sales growth.

Has Dunkin’ Brands Taken Enough Measures To Tackle Tough Industry-Wide Competition?

Dunkin’ Brands is one of the well renowned and highly successful quick service restaurant (QSR) chains in the world. This has been a tough year for the QSR industry as all the major restaurant chains are facing rising commodity prices and changing dining preferences of people. Dunkin’ Brands is not only facing tough competition within the QSR industry for a larger pie of breakfast market share, but is also fighting a tough battle against the fast-casual segment, which is stealing the customer traffic from the top QSRs.

  • Breakfast Daypart: Menu Additions And Low Menu Prices Might Attract Customers

Breakfast is currently the most competitive and popular segment daypart in the industry. Other competitors such as McDonald’s, Starbucks and Burger King are far ahead in this category in term of innovative menu items and loyal customer base.  The company has around 9% share in the breakfast market, much behind McDonald’s. Although over the last couple of years, Dunkin’ Brands has gained reputation, due to its operational quality and consistent effort towards customer satisfaction.

Off lately, new brands are trying to enter the industry and are directly targeting the breakfast market. Even though new entrants do not directly impact Dunkin’s business, their entry increases the overall competition in the industry, reducing price manipulation in the market.  In the second quarter, the company introduced new limited offer products such as the Chicken Apple Sausage Breakfast Sandwich, differentiating it from other competitors. Furthermore, the low price of its breakfast menu led to an increase in customer traffic. In the second quarter, the company witnessed the highest afternoon guest count. Even though it was a positive sign for the company, the increased competition slowed down the comparable sales growth, due to lower prices.

  • Stiff Competition From Fast-Casual Segment

Fast casual restaurants such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread have started eating into the market share of these leading QSR chains for the last couple of years. According to the recent NPD’s food-service market research, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. [4] People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. A decreasing customer count might hinder the company’s sales growth.

The next few quarters would be very crucial for QSRs such as McDonald’s, Dunkin’ Donuts and Subway, where the industry would be reacting to increasing commodity prices on one hand and changing consumer preferences on the other. However, Dunkin’ Brands is yet to prove its menu strength, so that it can boost its customer count.

Expansion Remains Main Focus For Dunkin’ Brands

In its Investor and Analyst Day report, the company 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.

Dunkin’ Brands plans on focusing more on the emerging and western markets, where the company has higher growth potential.  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.

In California, Dunkin’ Donuts is slated to open 4-5 restaurants by the end of fourth fiscal quarter, much ahead of the schedule. 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. [5] However, in emerging markets like Atlanta, the company is planning to increase its store count to approximately 120 by the end of 2014. In the emerging markets, the average weekly sales have grown 25% over the last 3 years, whereas the comparable store sales have increased to 7% in 2013 from 1% in 2010. Dunkin’ Donuts U.S. is expected to open 380-410 net new units and Baskin-Robbins U.S. is expected to open 5-10 net new units in 2014. The company expects the net restaurant growth in 2015 to be more than 5%.

Dunkin’ Brands is also accelerating its expansion process in Europe, where the company is keen on targeting high GDP countries. Currently, there are 144 Dunkin’ Donut stores across Europe and expects to open atleast 45 new stores in the region in the next fiscal year. Despite the stronger customer base and huge brand appeal of other top fast food brands in these regions, the company is confident of its top-line growth from new store openings.

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Notes:
  1. Dunkin’ Brands: Q3 2014 earnings conference call []
  2. Dunkin’ Brands: Q2 2014 earnings call transcript []
  3. Dunkin’ Brands: Events and Presentations []
  4. Income gap and shrinking middle class take a toll on restaurant industry []
  5. Dunkin’ Donuts announces locations of its restaurants in California []