Here’s Why “Simplification” Is Key For Dunkin’ Brands’ Growth
Dunkin’ Brands’ (NASDAQ:DNKN) most valuable segment, Dunkin’ Donuts U.S., is struggling to grow comparable sales. For the first three quarters of 2017, comparable sales growth of this segment was less than 1% compared to the 2% figure for Q3 and Q4 2016. While average ticket size has been growing, declining guest traffic is the primary cause of slow comparable sales growth. As the retail environment undergoes a transition and consumers prefer online shopping as opposed to visiting malls, foot falls in coffee shops such as Dunkin’ Donuts is declining. Another challenge faced by the company is the lack of labor. In an interview in October this year, Dunkin’ Brands’ CEO mentioned that staffing its restaurants is a tough task and higher employee turnover impacts customer satisfaction. Dunkin’ Brands is working on menu simplification to tackle this challenge. A less complicated menu will ensure that employees can be trained faster and with simpler operations, employee turnover can be reduced. This initiative can also improve guest satisfaction and give the company a competitive edge.
The two key drivers of growth for Dunkin’ Donuts U.S. are the average revenue per restaurant and the total number of franchised restaurants. According to our estimates, the number of Dunkin’ Donuts U.S. outlets will grow from around 9,100 in 2017 to nearly 11,500 by the end of our forecast period. Aggressive expansion where this number reaches around 13,000 by the end of our forecast period can lead to a nearly 10% upside in our price estimate.
Click here to analyze the impact of the number of outlets on Dunkin’ Brands’ valuation.
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Aggressive expansion is likely to be the key driver of the growth for the company. Investors believe that if Dunkin’ Brands is acquired, infusion of funds into the business can aid faster expansion and improve its valuation. However, if the company is not acquired, a simplified menu can act as a key growth driver since this initiative will help resolve the labor challenge. A simplified menu can streamline the operations of Dunkin’ Brands aiding in faster expansion as employee training can be quicker, incentivizing franchisees. Further the company’s investment in technology which makes operations more efficient and the customer interface quicker, is likely to be another growth driver for the long term.
Our price estimate for Dunkin’ Brands is $55, slightly lower than its current market price of around $57.
Click here to see our complete analysis for Dunkin’ Brands.
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