Dunkin’ Brands (NASDAQ:DNKN) stock has surged more than 25% in the last six months and outperformed the broader indices. In addition to Dunkin’ Donuts, the company also operates the Baskin-Robbins brand, and although the company has a significant presence internationally, Dunkin’ Donuts’ U.S. operations contribute the most to the bottom line.
For a restaurant chain, top-line growth typically occurs through two ways: generating more sales at its existing restaurants and adding new restaurants. In this article, we’ll investigate what the company is doing to address the two.
America Runs On Dunkin
- Dunkin’s Top Line Suffers In Q3 As It Witnesses A Decline In Comps Due To Refranchising
- Dunkin’ Brands’ Q3 FY’16 Earnings Preview: Weakness In Comps To Continue
- Ready To Drink Coffee : The Next Growth Driver For Dunkin’ Brands?
- Dunkin’ Vs. Starbucks: Who Is More Leveraged?
- Dunkin’ Brand’s Five-Pronged Strategy Paves The Way For Future Growth
- Breakfast Sandwiches, Coffee Sales Lead Dunkin’ To Profitability In Q2’16, Even As The International Segments Suffer
Dunkin’ Donuts expansion strategy is pretty clear – double the number of stores in the U.S. to 15,000 in the next 20 years. The Western part of the country and states such as Texas represent huge untapped markets so the potential to expand is certainly there. Moreover, the last couple of years has seen the number of stores rising within the U.S. (243 and 291 new stores were opened in the U.S. in 2011 and 2012 respectively). This year Dunkin’ will add 330 to 360 new stores in the country. With its expansion plans on track, there is a certain amount of assurance that its store count will keep on rising.
Dunkin’ believes it be able to post comparable sales growth of ~3.5% in the long run. The big question is whether the chain can achieve this figure. This is one aspect of growth which has a higher degree of uncertainty. This is the breakdown of the 350 basis points that the company is targeting:
Pricing: 50 basis points
Customer traffic ~150 basis points
Move towards a more premium mix ~ 150 basis points
The annual pricing gains of 50 basis points shouldn’t be too much of a problem.  This is lower than the long term U.S. historical inflation. Moreover, menu price increases are implemented by all restaurant chains so Dunkin’ will not be alone in doing this.
Now, coming to the remaining two. There is an opportunity for the restaurant chain to attract more footfalls during afternoon since Dunkin’ Donuts is typically associated with the breakfast segment. Adding new sandwich and bakery products should boost their post-noon sales. At the same time, it will also help change its image of a restaurant chain serving just doughnuts and coffee.
It added 30 items to its menu including Breakfast Burritos, the Roast Beef Bakery Sandwich, Red Velvet Donuts, etc. Similarly, some of the new items to watch out for this year are Turkey Sausage Breakfast Sandwich, Angus Steak and Egg Breakfast Sandwich, among others. Extending its timings is also another way to generate incremental sales. Right now, about 2,000 Dunkin’ stores in the U.S. remain open for 24 hours. 
Maybe the split between the number of footfalls and the mix could vary but overall, annual comps of 3.5% don’t look unreasonable. If this were to rise to about 4.5%, we could have 10% upside to the current valuation, assuming all other things remain the same. Similarly, if the comps fall to about 2.5%, we could see a 10% lower valuation.
We have a $38 price estimate for Dunkin Brands, which is in line with the current market price.