Aggressive Expansion’s Impact On DNKN’s Stock

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

The last couple of years has witnessed stiff competition in the U.S. restaurant industry, primarily among the fast food segment for the breakfast market share. Some of the major fast food brands, such as McDonald’s, Restaurant Brands International (Burger King and Tim Hortons), Starbucks, and Dunkin’ Brands, have revamped their menu, especially their breakfast options. However, McDonald’s has more than 36,000 restaurants spread over 119 countries around the world, Starbucks has roughly 22,000 stores worldwide, and Restaurant brands International, with Burger King and Tim Hortons combined, have over 19,000 restaurants in approximately 100 countries. Compared to these widely spread brands, Dunkin’ Brands has nearly 18,800 points of distribution in nearly 60 countries, with most of the concentration in the eastern part of the U.S. Dunkin’ Brands has mentioned its intent to expand its Dunkin’ Donuts U.S. segment to the western part of the U.S., into the regions where people have higher spending power.

Moreover, Dunkin’ Brands delivered strong numbers in its fourth quarter of the fiscal 2014, as it reported positive comparable store sales in the U.S.  In Q4, comparable store sales for Dunkin’ Donuts U.S. increased 1.4%, whereas comparable store sales for Baskin-Robbins U.S. grew 9.3%. [1]

We have a $48 estimate for Dunkin’ Brands, which is roughly the same as the current market price.

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See full analysis for Dunkin’ Brands

While the Trefis estimate for the DNKN stock is in-line with the current market price, we estimate the net revenues for fiscal 2015 to be roughly $804 million, which is slightly above the general consensus of $794 million. [2] However, taking the company’s plans and guidance, as well as probable future scenarios in mind, there is a scenario that can impact the company’s stock price.

  • Aggressive Expansion By Dunkin’ Donuts (Domestically and Internationally)

Dunkin’ Brands is one of the fastest growing companies by unit count among the quick service restaurants. On January 12 2015, 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 in the U.S., out of which 405 were Dunkin’ Donuts stores and the rest were Baskin-Robbins outlets. [3] Internationally, the company opened 282 net new stores, taking the total count of new store openings for the company to 704.

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. We have discussed the details of this plan in our prior article. (See: Expansion in the Western U.S. to remain key factor for Dunkin’ Brands’ top-line growth) Opening of Dunkin’ Donuts locations in these regions will also provide the opportunity to open some of the Baskin-Robbins in those regions over the same period.

Apart from opening of new stores in the U.S., the company is also aggressively expanding in the other food loving nations. 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. [4] 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.

According to Trefis estimates, Dunkin’ Donuts U.S. currently has roughly 8,500 stores, and we assumed that the company’s plan to have a total of 17,000 Dunkin’ Donuts stores in the U.S. might take the next 18-20 years. Now, however, if we assume that the company’s long-term plan happens over the next 14-15 year period instead, this would increase yearly store openings to around 600, which would then assume that the company might open 3,500 more DD USA restaurants in the next six years.  Thus taking the total Dunkin’ Donuts U.S. store count to 12,000.  On the other hand, currently there are 2,484 Baskin-Robbins U.S. stores, and we estimate the Baskin-Robbins U.S. stores to increase to 2,554 stores by the end of 2021. In a case of aggressive expansion, this number might further reach roughly 2,600.

Now coming to international expansion, Dunkin’ Donuts International has currently 3,228 stores and Baskin-Robbins International has 5,068 stores. We estimate these figures to reach 4,450 and 6,700 respectively by the end of year 2021. In case of aggressive expansion in the Asian countries, these numbers might slightly increase to 4,600 DD international stores and 6,800 Baskin-Robbins international stores. In this scenario, the total store count for the company might reach roughly 26,000 stores by the end of 2021, giving a 13.5% upside to our price estimate for the company.

This scenario might not only improve the company’s market share in the industry, but might also provide a boost to the company’s revenue stream, as most of the expansion has been planned in high income regions.

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Notes:
  1. Dunkin’ Brands Q4 2014 earnings call transcript []
  2. Reuters: Dunkin’ Brands []
  3. Dunkin’ Brands announces 2014 domestic restaurant growth []
  4. Dunkin’ Donuts announces expansion plans in China with signing of largest development agreement in company history []