Dunkin’ Brands To See Growth In Q4’16, On The Back Of Sales Leverage And Operational Efficiencies

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

Dunkin’ Brands (NASDAQ: DNKN) is scheduled to announce its fourth quarter and full year earnings on 9th February, 2017. The company reported a slight fall in revenues in the September quarter, at -1% y-o-y, owing to the deceleration in traffic and decline in comparable sales seen in the restaurant industry. However, it was exacerbated by the conversion of the company’s stores to franchisees. In terms of bottom line, Dunkin’ saw a 15% y-o-y growth in its EPS, supported by the company’s share buyback program, fiscal discipline the company had been practicing to curtail its expenses, and the gains recognized from the sale of its company operated restaurants. In the upcoming quarterly results, we expect the trend in earnings growth to continue, while the revenues also show sequential improvement. In the following note, we discuss some of the key trends that can be expected to be seen in the upcoming quarterly results.

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Key Trends:

  • As mentioned above, Dunkin’s top line suffered a slight hit in the third quarter of 2016 due to its strategy to convert its operating model to that of a 100% franchised model. Consequently, the company expects its full year revenues to come in lower than earlier anticipated, worsened by the general softening in the industry. After revising the annual revenue growth guidance from 4% – 6% to  3% – 5% in Q2’16, it now forecasts revenues growth to be even lower at 2% y-o-y.
  • As the company converts remaining restaurants into franchises, its revenues may suffer a slight decline, more than offset by gaining traction of its new menu items and beverage sales. Moreover, the company’s margins are expected to increase significantly owing to this refranchising, slightly offset by increasing wages. However, the lower commodity prices in the past few months, along with operational efficiency are likely to help prop up the operating margins.
  • Dunkin’ expects to open approximately 430 new Dunkin’ outlets and 5-10 Baskin’ outlets in the U.S. by the end of 2016, while internationally the store openings will be limited to 200 for both the brands. Furthermore, the company recently announced a multi-unit store development agreements with four existing franchise groups to develop approximately 65 new restaurants in Dallas-Fort Worth and the surrounding area including Dallas, Collin, and Tarrant counties.
  • The doughnut chain recently revamped its tea lineup in an effort to compete with its biggest competitor and coffee mammoth, Starbucks. Dunkin’ has replaced its traditional original, green, and decaf teas with Bold Breakfast black tea, Harmony Leaf green tea, Chamomile Fields, Hibiscus Kiss, and Cool Mint.
  • The company is striking partnerships with various companies, to offer new and innovative flavors to its customers. It recently partnered with Pop-Tarts to offer two Dunkin’ Donuts inspired flavors, Chocolate Mocha and Vanilla Latte. The limited edition products combines the classic aspects of the beloved toaster pastries with never-before-seen fillings.
  • Dunkin’ has also signed a deal with Coca-Cola to launch ready to drink coffee in 2017. This is a step undertaken by Dunkin’ to compete with Starbucks in the segment, and to tap into the $1.5 billion ready-to-drink segment. As the bottled iced coffee will be made available at grocery, convenience stores, mass merchandisers, and Dunkin’ Donuts restaurants, the company can expect to see an improvement in brand visibility and incremental visits to its restaurants.
  • Another such partnership is with National Hockey League, making the chain the official U.S. coffee, doughnut, and breakfast sandwich partner of the NHL. The multiyear partnership will give Dunkin’ prominent branding at many NHL events. The chain has also entered a multiyear, multi-million dollar partnership with NBC Sports.
  • By partnering with customer relation management firm, Salesforce, Dunkin’ hopes to make its DD Loyalty Program more popular. The ability to offer personalized, one-to-one customer experiences across digital channels, by way of exclusive, personalized special offers to earn bonus points for food and beverage purchases, targeted to the individual customer’s purchasing profile, the company can expect to see growth in the number of users, and thus, revenues.
  • To attract traffic during the holiday season, Dunkin’ Donuts announced the giving away of 500 free medium cups of hot coffee for one day at select locations.
  • The company’s international segments have suffered from sales decline in all three quarters of the year. Although the decline was slightly lower in the third quarter, for both Dunkin’ and Baskin, the trend is expected to be sticky. Consequently, the segment is expected to showcase weakness in the upcoming results, mainly due to foreign currency headwinds and sales declines in Europe.
  • The industry-wide slowdown in the restaurant sector continued in the fourth quarter. Restaurants have now posted four consecutive quarters of declining year-over-year sales. This is due to a fewer number of people eating out, and most of the consumer spending going towards big ticket purchases rather than soft goods. The following table gives a summary of the declining comps and traffic in the three months of the fourth quarter.
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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dunkin’ Brands

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