Dunkin’ Brands Earnings Preview: Customer Count To Determine Sales Growth

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

Dunkin’ Brands (NASDAQ: DNKN) is scheduled to release its annual results for the fiscal 2014 on February 5. [1] The company 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%. [2] 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 check. As a result, the company was able to post more than a 50% adjusted operating income margin. [3]

Quick service restaurants (QSR) had a tough period last year, with commodity inflation and decline in customer traffic negatively impacting their top-line growth. However, the prices of meat products, coffee, and dairy products, have dropped in the last few months to the relief of these companies. On the other hand, high competitive activity in the U.S. restaurant industry over the breakfast market share has become a topic of concern for Dunkin’ Brands over the last couple of years.

We have a $43 estimate for Dunkin’ Brands, which is approximately 9% below the current market price.

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See full analysis for Dunkin’ Brands

Industry-wide Competition To Impact Sales Growth

Over the last three years, the breakfast market has become a top priority for all the top quick service restaurants in the U.S. Moreover, some of the fast casual restaurants, such as Chipotle Mexican Grill(NYSE:CMG), are stealing the already diminished customer traffic, as customers gradually drift away from fast food dining habits to healthier options. According to Technomic’s report, the fast casual segment witnessed an 8% increase in comparable store sales in the third quarter of fiscal 2014, compared to 1.9% and 1.2% for casual-dining and QSRs respectively. [4] The report also mentioned that the consumers, with increased jobs and more disposable incomes, are more likely to spend their extra cash by trading up from fast casual restaurants to casual dining outlets for higher quality food, rather than going to cheaper alternatives – such as fast food chains. Moreover, top fast food chain McDonald’s (NYSE:MCD) recently reported disappointing figures in its annual report on January 23, primarily driven by a decline in customer 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 targets in 2015. As a result, 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. (See: Dunkin’ Brand’s Stock Down 10% On Revised Guidance)

Expansion Plans Remain Priority For Dunkin’ Donuts

Dunkin’ Brands is one of the fastest growing companies by unit count among the quick service restaurants. 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. Out of the total net new developments, 24% were in the western markets and 28 % in the emerging markets. On January 12, the company released its domestic growth report for the year 2014, in which it mentioned that the company opened a total of 422 net new Dunkin’ Donuts and Baskin-Robbins, out of which 405 were Dunkin’ Donuts stores and the rest were Baskin-Robbins outlets. [5] For the fiscal 2015, the company expects to open between 410-440 Dunkin’ Donuts outlets and 5-10 Baskin-Robbins outlets in the U.S.

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. 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.

On January 8, Dunkin’ Brands announced its intent to expand Dunkin’ Donuts in China. The company has signed a long-term franchise agreement with Golden Cup Pte. Ltd, as wholly owned subsidiary of RRJ Capital Master Fund II, which will serve as the franchise partners to open and operate nearly 1,400 Dunkin’ Donuts stores in the country. [6]

Dunkin’s expansion activity has increased over the last few months, indicating the company’s intent to increase its customer base and test new markets.

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Notes:
  1. Dunkin’ Brands Q4 2014 earnings conference call []
  2. Dunkin’ Brands: Q3 2014 earnings conference call []
  3. Dunkin’ Brands report third quarter 2014 results []
  4. 5 foodservice stats to toast at the close of 2014 []
  5. Dunkin’ Brands announces 2014 domestic restaurant growth []
  6. Dunkin’ Donuts announces expansion plans in China with signing of largest development agreement in company history []