Dunkin’ U.S. Drives Growth In The Second Quarter

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

Dunkin’ Brands (NASDAQ:DNKN) announced its second quarter earnings on July 26, wherein a rise in both revenue and earnings was reported, with both metrics exceeding analysts’ expectations. This growth was driven by the ambitious store count growth the company has set for itself – the company aims to add 1,000 new restaurants by 2020. Consequently, store count growth and an impressive performance by Dunkin’ U.S., which reported comparable sales improvement of 1.4%, helped the company report a 4.9% increase in its revenues. Increased sales, improved margins, a reduced share count, and changes in the corporate tax law, aided in the company posting a 30.5% growth in the diluted adjusted EPS. These trends are expected to continue through the year, with the company aiming to deliver a  low-to-mid single digit revenue growth, and a significant improvement in earnings.

We have a $65 price estimate for Dunkin’ Brands, which is lower than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on DNKN’s second quarter earnings 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 had a 100 basis points negative impact on the revenue in the Q2, and should pressure the revenues in the next two quarters. On the other hand, this step will 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. Offsetting the negative revenue impact, franchisees also experienced a decrease of approximately 100 basis points in the cost of goods sold, and moderate labor savings.

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 Q2, 96 net new locations globally were added, of which 64 were domestic Dunkin’ locations. The company remains on track to deliver 90% of net restaurant growth outside of its core markets by the end of 2020. 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 during the Q1 earnings release 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. However, given the higher than expected G&A costs, the company revised its earnings guidance to $2.48 to $2.56 and $2.68 to $2.72, respectively.

4. Branded CPG Products: DNKN’s total portfolio of CPG products across both brands crossed $400 million in retail sales in the first half of the year, including $70 million in ready-to-drink bottled iced coffee. The company noted that Dunkin’ K-Cups continued to outpace the category, growing more than 20%, which is greater than four times the rate of the category. 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.

6. New CEO: After nearly a decade, CEO Nigel Travis retired from Dunkin’ Brands, and has been replaced by David Hoffmann, who had been the president of Dunkin’ Donuts’ businesses in the United States. The latter has been heavily involved in the changes seen in the company in recent times, such as the development of the three-year strategic plan, which focused on menu innovation, customer convenience driven by the digital segment, restaurant growth, and new channels for its branded packaged goods.

7. Partnership With CardFree: DNKN announced a multi-year deal with CardFree, a leading mobile wallet provider, which will give the company greater control over the operation of the technology enabling its mobile payments and orders placed through its app. The company also enables its customers to pay via integrations with Masterpass by Mastercard, Visa Pay, Apple Pay, Android Pay, and Samsung Pay, making it easier for its users.

8. Launch Of Value Platforms: In April, DNKN launched its national value platform, Go2s, and the company noted that more than 75% of these breakfast sandwich transactions contained a beverage, and the average check size was roughly $8-$9. The company intends to continue testing various constructs of this platform, to see what works. DNKN is starting another value platform called Dunkin’ Run, which is a $2 snacking menu, and is also aimed at re-energizing the afternoon daypart.

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