Dunkin’ Brand’s Stock Down 10% On Revised Guidance

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

Dunkin’ Brands (NASDAQ: DNKN) had a challenging year in terms of delivering expected results. The restaurant industry is facing the rough consequences of commodity inflation. On top of that, quick service restaurants (QSRs) are witnessing a decline in customer traffic, due to tough competition from the fast-casual segment. With the ongoing intense breakfast battle in the industry, Dunkin’ Donuts has revamped its breakfast menu and expanded its coffee portfolio.

The company started the year with a decline in comparable store sales growth in the U.S. to 1.2%, due to adverse weather conditions in North America. [1] The company then reaffirmed its performance guidance for the 2014 fiscal year and was expecting to generate a net income of $1.79 to $1.83 per share. However, in the second quarter, the company again delivered disappointing results, as comparable store sales of the Dunkin’ Donuts U.S. segment increased just 1.8% due to strong competitive activity in the fast food segment, whereas the company was expecting the comparable sales to bounce back to the range of 3%-4%, as the weather improved in the second quarter. [2] The sluggish performance by the company continued in the third quarter, in which comparable store sales of the Dunkin’ Donuts U.S. segment increased just 2%, and that of Baskin-Robbins U.S. grew by 5.8%. [3] However, while the company managed to keep its comparable sales and transactions positive, the performance was well below the company’s expectations.

On December 18, Dunkin’ Brands announced new and updated performance guidance, where the company provided additional performance expectations for fiscal year 2015.  In the report, the company mentioned that its earnings growth expectation for 2015 is below its long-term targets. As a result of disappointing performance targets, the company’s stock declined nearly 10% from $46.22 to $42.

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We have a $48 estimate for Dunkin’ Brands, which is approximately 15% above the current market price.

See full analysis for Dunkin’ Brands

Losing Investor Confidence Due To Revised Lower Guidance

In Q3, the company hosted its Investor and Analyst day and discussed its financial growth plans, expansion plans, new restaurant growth plans, and developments in its business strategies. (See: Dunkin’ Brands To Accelerate Expansion In Western & Emerging Markets) In its brief overview of 2015 guidance, the company mentioned that 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%.  Moreover, Dunkin’ Brands mentioned long-term targets of 6-8% revenue growth and above 15% growth in adjusted EPS.

However, in its revised guidance, the company expects Dunkin’ Donuts U.S. comparable sales growth to be in the range 1-3%, down from the 2-4% expected guidance mentioned during the Investor and Analyst Day. Moreover, the company expects Dunkin’ Donuts U.S. to add 410-440 net new restaurants and Baskin-Robbins U.S. to add 5-10 new outlets in 2015. The long term revenue growth targets for the company were lowered from the 6-8% range to 5-7%. [4] On the other hand, for 2014, the company expects full year adjusted EPS to be $1.75 to $1.76, and full year Dunkin’ Donuts U.S. comparable sales to be approximately positive 1.4%, compared to the 1.8% consensus estimate. This indicates the fourth quarter comparable sales to be well below the +2.2% consensus estimate.

Dunkin’ Brands expects the poor performance and customer pressure in its joint ventures in Korea and Japan to negatively impact next year’s results for its international segments. Moreover, the company holds the declining sales of packaged coffee in its outlets as the major reason for its decreased guidance.

The investor reaction to this was visible in the company’s stock price, as the trading volume doubled and its stock price declined 10% to $42 the very next day. ((Dunkin’ Brands, www.nasdaq.com)) We are currently updating our model to incorporate the news.

Will Starbucks Follow The Same Path?

Since Dunkin’ Brands mentioned the declining sales of packaged coffee, it might be a possible reason of worry for other coffee companies as well, such as Starbucks (NASDAQ: SBUX). According to the International Coffee Organization, the production of Arabica coffee in Brazil is expected to be nearly 6 million bags lower in 2014-2015 compared to last year. Dunkin’s underperformance and less packaged coffee sales due to higher prices, might turn into a wider phenomenon and we might possibly see other companies revising their guidance or taking some other measures to counter the situation. While this may be only a temporary worry, it may lead to additional uncertainty, and investor confidence is the first thing that might be affected.

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Notes:
  1. “DNKN 8-K”, First quarter SEC filing, April 2014 []
  2. Dunkin’ Brands: Q2 2014 earnings call transcript []
  3. Dunkin’ Brands: Q3 2014 earnings conference call []
  4. Dunkin’ Brand announces fiscal year 2015 performance expectations []