Negative U.S. Comps Result In A Mixed Quarter For Dunkin’ Brands

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

Dunkin’ Brands (NASDAQ:DNKN) delivered a hit and a miss in its first quarter. While the earnings came in above consensus estimates, helped by improved margins, reduced share count, and changes in the corporate tax law, the revenue fell short of expectations, which was blamed on a challenging retail and restaurant environment, unfavorable weather, and its menu simplification strategy. This resulted in a decline in the Dunkin’ comparable store sales for the U.S.  CEO Nigel Travis stated that while the results were “choppy,” he expects improvements in the coming quarters.

We have a $62 price estimate for Dunkin’ Brands, which is slightly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard to modify different drivers, and see their impact on the net income and price estimate for the company.

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Key Factors That May Impact Results Going Forward

1. Simplified Menu: In the first quarter, DNKN completed the national rollout of its menu simplification, which resulted in a 10% reduction of required menu items, as well as the elimination of another 23 optional products, “most of which were slow moving, complex, and off strategy.” This is expected to have a 100 basis points negative impact on the revenue in the short term, but should help in the long run by reducing the complexity, which should, in turn, deliver a better guest experience, improve order accuracy, drive franchisee profitability, and ultimately, increase restaurant level margins.

2. Expanding Its Footprint: Dunkin’ Brands is looking to expand the footprint of Dunkin’ Donuts U.S. at a 3% annual rate, adding around 1,000 new restaurants by 2020. It is also looking to convert its existing restaurants into NextGen stores to offer better customer service.  In the quarter, 71 net new locations globally were added, of which 56 were domestic Dunkin’ locations. New restaurants add to revenue growth, and should positively impact the company’s valuation.

3. Share Repurchase: DNKN entered into a $650 million accelerated share repurchase program during the first quarter. The company now expects full-year weighted average shares outstanding of approximately 85 million, down from roughly 92 million in Q4 2017. Consequently, DNKN revised its GAAP diluted earnings per share guidance to $2.49 to $2.58 (from $2.20 to $2.29) and diluted adjusted earnings per share range to $2.69 to $2.74 (previously it was $2.40 to $2.45), due to the new share count and changes in the corporate tax law.

4. Branded CPG Products: Retail sales of branded CPG (Consumer Product Goods) products saw growth exceeding 10% in the first quarter. DNKN’s total portfolio of CPG products across both brands delivered $220 million in retail sales in Q1, including $34 million in ready-to-drink sales. The company noted that Dunkin’ K-Cups continued to outpace the category, while sales of their line of ready-to-drink bottled iced coffees remained strong. New and innovative product launches, such as the new ready-to-drink flavor, Cookies & Cream, should help to ensure continued growth from this avenue.

5. Convenience To Customers: Dunkin’ Brands is looking to increase the conveniences it offers to its guests with several initiatives such as a focus on its loyalty program, testing a digital catering platform, and tying up with third-party delivery options with a goal of creating a strong delivery and catering platform by the end of next year. The company is also working on building a dedicated mobile order drive-thru lane to ensure speed of service to its digital customers.

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