Dunkin’ Brands: Trefis Estimate Revised To $48, Still Bullish On The Stock

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Dunkin' Brands Group

Where is the DNKN stock heading to? Is it an attractive buying opportunity or will the stock witness further lower levels?

Dunkin’ Brands’ (DNKN) stock suffered another major blow as the investors panicked following a moderate full-year guidance presented by the company at its annual 2015 Investor & Analyst Day. The company hosted its annual Investor & Analyst Day on October 1 and presented its future plans, strategies, and guidance for the next few years. [1] Concerned about the possible threats from the hurricane Joaquin and the company’s unchanged guidance for fiscal 2015, the investors became wary of the company’s near-term prospects. As a result, the company’s stock went tumbling down from $49 to $43 within a day, and is currently trading close to roughly $42.

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Trefis has updated its price estimate for DNKN stock from $56 to $48, which is still roughly 13% above the current price estimate. Here are the reasons why Trefis is still bullish on the stock, even after the estimate revision.

See full analysis for Dunkin’ Brands

Guidance Isn’t That Bad

After a robust performance in Q1 2015, the company raised its guidance for the fiscal year 2015.

Before Q1 results After updating the guidance
Revenue Growth 5-7% 6-8%
Adjusted Operating Income Growth 6-8% 7-8%
Adjusted EPS $1.83-$1.87 $1.87-$1.91

 

However, much of the revision of this guidance was due to the company’s agreement with J.M. Smucker Company and Keurig Green Mountain to make Dunkin’ K-Cup Packs available at retail outlets nationwide. [2] Furthermore, despite the decline in comparable sales for Baskin-Robbins International, the second biggest segment, the company kept its guidance unchanged, as it believed that the temporary headwinds, which hampered the segment’s growth in Q2, would fade away in Q3. (Read: U.S. segments help drive Dunkin’ Brands top-line growth in Q2 2015)

That brings us to the Investors & Analyst Day event, prior to which the market was hoping the company would raise its EPS guidance to $1.92 for the fiscal 2015. However, keeping in mind the other probable future headwinds and the potential overlapping impact of previous headwinds of Q2 into Q3, the company again kept its full-year targets unchanged. Apparently, this did not go down well with the investors, who were critical about this move.

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Source: Dunkin’ Brands IR (Investors & Analysts Day)

However, this might be a panic move by the investors, as keeping the guidance unchanged despite all possible headwinds is a bold move by the company, if not a positive one.

  • Hurricane Joaquin To Play Spoilsport

Hurricane Joaquin is one of the threats lurking near the east coast area of the U.S.  Some of the states, including South Carolina, North Carolina, and Georgia, are under huge threats from the storm. [3] This has raised concerns among Dunkin’ Donuts’ restaurant operators in the area. Most of the Dunkin’ Donuts stores are concentrated in the Northeast region of the country and the company is worried that this hurricane might disrupt all the operations in that region, leading to a potential decline in comparable sales and thereby revenue growth.

As a result of this threat by the Hurricane Joaquin, Dunkin’ Brands expects its Dunkin’ Donuts U.S. segment to deliver only a 1.1% growth in comparable sales with a significant decline in customer traffic.

  • Restaurant Development To Remain Stable Despite Closings

Dunkin’ Brands also mentioned that it will be closing 100 of its Dunkin’ Donuts U.S. stores in the next 15 months. The decision is made on account of poor performance of those stores; the stores being closed represent merely 0.1% of Dunkin’ Donuts sales. Despite the huge cut down, the company promises to keep the net new openings unchanged.

Despite these factors, the company is firmly holding on its 2015 targets, which indicates a positive approach.

Restaurant Development Is Picking Up Pace

As of June 2015, there are currently 19,095 total restaurants, with 8,240 Dunkin’ Donuts U.S. restaurants, 2,490 Baskin-Robbins U.S. restaurants, and the remaining international stores. Dunkin’ Brands is one of the fastest growing companies by unit count among quick service restaurants. Moreover, Dunkin’ Brands plans on focusing more on 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. (See: Expansion in the Western U.S. to remain key factor for Dunkin’ Brands’ top-line growth)

On a broader perspective, the company aims on taking its total count above 30,000 in the future, with a majority of operations in the U.S. With a target of 6% growth rate for Dunkin’ Donuts U.S. stores development, the company has already picked up pace by opening its Dunkin’ Donuts stores in California. More importantly, the 6% growth rate is higher than what the company has achieved in the last 5 years.

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Trefis has revised its estimates for number of restaurants for each segment.

Number of restaurants by 2022 Previous Estimate New Estimate
Dunkin’ Donuts US 11,222 11,122
Dunkin’ Donuts International 4,293 4,293
Baskin-Robbins US 2,579 2,587
Baskin-Robbins International 6,918 6,848

 

However, the pace of expansion for both brands has picked up lately and incremental revenues from the new stores might contribute to revenue growth in the coming years.

Dunkin’ K-Cups: Going Strong

As already discussed in our prior article, Dunkin’ Brands’ market share in the single serve K-Cups segment grew 80 basis points over the 4 week period ended September 5, 2015, and it now has a 5.4% market share in this category owing to the solid momentum of its K-Cups. The market expects the company to further improve this number in the coming few months. (Read: Why DNKN stock has the potential to go 20% higher in the coming quarters)

With the winter season coming, the sales of K-Cups might further accelerate, providing a further boost to average revenue per outlet for the Dunkin’ Donuts U.S. segment.

The above mentioned factors might just overshadow the impacts of Hurricane Joaquin and other small headwinds. This compels us to believe that the recent drop in the company’s stock price might just be a temporary panic. As a matter of fact, this might be a better entry point for long-term investors.

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Notes:
  1. Dunkin’ Brands 2015 Investor & Analyst Day []
  2. Dunkin’ Brands, 8-K SEC Filing, Q1 2015 []
  3. East coast on alert for powerful hurricane Joaquin’s turn north []