High Competitive Activity Slows Down Dunkin’ Brands’ Comparable Sales Growth In Third Quarter

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

Dunkin’ Brands (NASDAQ: DNKN) delivered mixed results in its Q3 earnings report, as comparable store sales of the Dunkin’ Donuts U.S. segment increased just 2%, and that of Baskin-Robbins U.S. grew by 5.8%. [1] However, the revenue growth was below expectations, as it rose just 3.4% year-over-year (y-o-y), primarily driven by increased royalty income due to system-wide sales growth offset by declines in ice-cream product sales. The increase in comparable store was primarily due to higher customer traffic and increased average spend per visit. As a result, the company was able to post more than a 50% adjusted operating income margin. [2]

Dunkin’ Brands added more than 120 restaurants of both brands domestically, including 3 traditional Dunkin’ Donuts restaurants in California. The company’s comparable store sales have been pressured by a strong competitive breakfast and coffee environment in the restaurant industry. As a result, comparable sales growth slowed in the U.S., whereas comparable sales declined in the international markets.

We have a $48.59 estimate for Dunkin’ Brands, which is approximately 7.7% above the current market price.

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Stiff Competition In The QSR Breakfast Industry Drags Down Comparable Sales

The company’s comparable store sales in the U.S. witnessed a slight improvement over Q2’s figure. However, the ongoing sluggish economy and high competitive activity in the restaurant industry for the breakfast market share pressurized the company’s sales growth for the major part of the quarter. Dunkin’ Donuts U.S. reported comparable store sales growth of 2%, whereas Baskin-Robbins U.S. reported comparable sales growth of 5.8%. However, the international segment of both these brands witnessed a decline in comparable sales growth, as Dunkin’ Donuts international segment witnessed a sales decline of 2.9%, and Baskin-Robbins international reported a 1.5% decline in the sales. [3]

Breakfast is currently the most competitive and popular segment in the industry. Other competitors such as McDonald’s (NYSE:MCD), Starbucks (NASDAQ: SBUX) and Burger King Worldwide (NYSE:BKW) are far ahead in this category in term of innovative menu items and loyal customer base.  The company has around a 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. The company, through its new beverage product launches such as Dark Roast Coffee and strong breakfast sandwich results, has been trying to deliver excellent morning results. Although menu pricing of the company was up 110 basis points, comparable sales in the U.S. increased for both the morning and afternoon hours, with a slight improvement in traffic.

The company is aware of the fact that the tough competition in the industry, along with other industry economics, might create a hindrance in its path for achieving the lower end of its guidance for comparable sales for the fiscal year 2014. Nonetheless, the company has reaffirmed its long term targets of 2-4%U.S. comparable store sales growth and 6 – 8% revenue growth.

Focus On Mobile Platform & Perks Loyalty Program To Sustain Customer Traffic

According to the recent NPD’s food-service market research, 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. Fast casual restaurants, such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread, are stealing away the customer traffic from traditional QSRs.

To sustain its customer count, Dunkin’ Donuts is relying heavily on its mobile platform and perks loyalty program. Both the initiatives are quite successful, as the perks loyalty program now has more than 1.8 million members. The program, along with the mobile app, helps the company to track the complete customer journey of the perks member and as a result, the company uses this data to deliver targeted offers to these customers. Because of this the company witnessed a slight improvement in customer traffic in the later half of the quarter. On the other hand, the online ordering initiative by Baskin-Robbins U.S. is reaping huge profits for the brand while still being in the infant stage. The company believes that these initiatives, with more improvement and advancements, might attract more customers in 2015.

Expansion In The U.S. To Create Opportunities For Dunkin’ Brands

As of September end, Dunkin’ Brands has total 7,941 stores, with 261 stores in the western markets and 1,119 stores in emerging markets. 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 markets, 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.

During the third quarter, the company added 120 net new Dunkin’ Donuts U.S. stores and 6 net new Baskin-Robbins U.S. locations. Baskin-Robbins international added 61 net new stores compared to 73 last year. The decrease in new store locations internationally is primary due to closings in Japan and China. Out of the total net new developments, 24% were in the western markets and 28 % in the emerging markets. We have discussed the expansion plans of the company in our prior article. (See Dunkin’ Brands To Accelerate Expansion In Western & Emerging Markets)

One of the company’s main focus regions in the western markets is California. However, top traditional fast food chains, such as McDonald’s, Starbucks and Burger King already have great dominance in this region, making it tough for Dunkin’ Brands to create an early impact. Attracting more customers by introducing new innovative menu items and expanding its presence in the untested markets will remain a top priority for the company.

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Notes:
  1. Dunkin’ Brands: Q3 2014 earnings conference call []
  2. Dunkin’ Brands report third quarter 2014 results []
  3. Ref: 2 []
  4. Income gap and shrinking middle class take a toll on restaurant industry []