Performance Of International Segments: Key For Dunkin’ Brands In Q4 2015 Results

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

Dunkin’ Brands (DNKN) is scheduled to report its fourth-quarter fiscal 2015 earnings report on February 4, 2016. [1] The company’s international segments of both the brands, Dunkin’ Donuts and Baskin-Robbins, have been the primary reason for the sluggish performance. On the other hand, the US segments are enjoying increasing customer traffic and strong comparable store sales growth for the last two  years.

Over the last 12 months, DNKN stock has witnessed a 20% upside move to $56 before falling nearly 33% to $37. The stock is currently trading close to $40. Trefis’ estimate for Dunkin’ Brands stock is $45, which is nearly 12% above the current market price.

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High Hopes From International Segments

For the last two years, the company’s international segments have been underperforming, as is evident from their comparable store sales growth figures. On the other hand, the US segments have been posting strong sales growth over the same period.

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In the US, Dunkin’ Donuts and Baskin-Robbins’ robust growth in revenues and margins, are primarily due to innovative menu additions and efficient marketing strategies. The increase in customer traffic has been a major factor that has boosted the average check for the company in peak hours. The domestic segments for both the brands, Dunkin’ Donuts and Baskin-Robbins, continued their strong momentum with 1.1% and 7.5% comparable store sales growth, respectively, in the third quarter. However, it was offset by flat comparable store sales growth of 0.8% by the Dunkin’ Donuts International segment, coupled with a 2.4% decline in the comparable store sales of the Baskin-Robbins International segment. (See: Dunkin’ Brands Struggles After Another Disappointing Performance By International Segments in Q3)

Even though the company’s international segments account for less than 20% of the total revenue, they still are vital drivers to boost the company’s current stagnant growth. According to Trefis estimates, the profit contribution of Dunkin’ Donuts International has declined from 3.8% in 2011 to 2.5% in 2014, whereas that of the Baskin-Robbins International segment has declined from 14% in 2011 to 8.8% in 2014.

Except for the Baskin-Robbins International segment, all the reporting segments of the company are performed fairly better in fiscal year 2015 as compared to that in the fiscal year 2014. Even a flat sales growth figure for Baskin-Robbins International segment and 1-2% growth for Dunkin’ Donuts International segment will provide a strong positive boost to the company’s overall top-line performance for the fourth quarter, and effectively for the entire fiscal year’s performance. No doubt, the investors will keep their eyes on the results for the international segments.

Store Expansion Plans & Guidance To Play Vital Role

In the third quarter, Dunkin’ Brands opened 90 net new restaurants worldwide, taking the total restaurant count to 19,185. The company opened net 68 new Dunkin’ Donuts stores, compared to 120 last year. This is due to the closings of some of the self-serve coffee stations located within the stores by Speedway. Dunkin’ Brands, in its Investors & Analyst Day presentation, mentioned that Speedway will be closing 100 self-serve coffee stations, which have been operated by third-party Dunkin’ Donuts franchisees. [2]

The company’s aim to bring the 2015’s net new openings to 410-440 seems achievable, as the fourth quarter usually witnesses more store openings compared to the rest of the year. In the first nine months of 2015, the company managed to open a net 323 new stores, despite the closing of stores.

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For Dunkin’ Donuts U.S., if we consider a similar number (140) of gross openings in the fourth quarter, and 30 of the rest of the 60 closings in Q4 2015, we will have approximately 110 net openings, taking the total Dunkin’ Donuts openings for fiscal 2015 to roughly 330. The company has opened net 32 Dunkin’ Donuts stores internationally in the first nine months of 2015, and with a similar year-over-year growth rate, this number might jump to 80. The impact of change in the number of Dunkin’ Donuts stores on the company’s valuation can be analyzed below:

Baskin-Robbins U.S. has witnessed a tremendous slowdown in the net openings over the past few years, and this year it has witnessed a net 4 openings in the first nine months. Trefis estimates this number to reach 6 by the end of this year. On the other hand, the company has opened only 61 net Baskin-Robbins stores internationally in the first nine months of 2015, probably due to 16 net closings in Q3. Trefis forecasts the number of Baskin-Robbins international stores to increase by 120 in the fiscal year 2015.

Moreover, the sales growth guidance and target for the net store openings for the next year will be another key highlight for investors. We have noticed earlier that a positive guidance plays a vital role in the initial stock movement after the results announcement.

We will soon see where guidance and actual results compare to the market EPS estimate of 50 cents for the fourth quarter. [3]

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Notes:
  1. Dunkin’ Brands, Q4 2015, Earnings conference call []
  2. Dunkin’ Brands, Investor and Analyst Day 2015 []
  3. Dunkin’ Brands, analyst estimates, Yahoo Finance []