Strong Growth In Dunkin’ U.S. Drives Earnings Beat For Dunkin’ Brands

Dunkin’ Brands (NASDAQ:DNKN) announced its third quarter earnings on October 25, wherein a rise in both revenue and earnings was reported, with both metrics exceeding analysts’ expectations. This growth was driven by positive comparable sales growth at all of its brands, as well as the ambitious store count growth the company has set for itself – the company aims to add 1,000 new restaurants by 2020. In the third quarter, 3.3% store count growth and 1.3% comps growth at Dunkin’ U.S. helped the company report a 6% 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 69% growth in the adjusted diluted EPS. These trends are expected to continue through the year. For the full year, the company is aiming to deliver a  low-to-mid-single-digit revenue growth, 1% comps growth at Dunkin’ U.S., low-single digit comparable sales growth for Baskin-Robbins U.S., and a significant improvement in earnings.

We have a $73 price estimate for Dunkin’ Brands, which is roughly in-line with the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Dunkin’ Brands’ Performance In Q3 and Estimating Its Fair Price to modify different drivers, and see their impact on the net income and price estimate for the company.

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 less than 100 basis points negative impact on the revenue in the Q3, and should pressure the revenues in the next quarter as well, albeit by a slower rate. 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.

2. Expanding Its Footprint: Dunkin’ Brands is looking to expand the footprint of Dunkin’ 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 Q3, 52 net new locations were added in the country, and the company now has 60 new and remodeled NextGen restaurants. 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, which has been completed by the end of the third quarter. This has been one of the factors driving the earnings growth, with the company upping its GAAP diluted earnings per share and diluted adjusted earnings per share guidance to $2.60 to $2.64 (from $2.48 to $2.56) and $2.80 to $2.82 (from $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, on a 52-week basis (at the end of Q3) retail sales of its CPG products remained strong, up 11% versus last year. 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 has grown its partnership with DoorDash, who now covers over 70% of Baskin-Robbins stores across the U.S.  The consumer response to this remains positive, with delivery orders on average carrying a ticket that is 50% higher than that of the restaurant. The company is also working on building a dedicated mobile order drive-thru lane to ensure speed of service to its digital customers.

6. Investment Into Dunkin’ U.S.: Earlier this year, the company announced its intention to invest approximately $100 million into the Dunkin’ U.S. business, with about 65% of this investment allocated toward equipment that would accelerate its beverage-led strategy. In this regard, the company noted solid growth across its beverage portfolio, led by Cold Brew and Frozen categories. The management also stated that a significant portion of these funds will go towards new espresso equipment and consequently, revitalizing a critical, high-growth category for its business.

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 also started another value platform called Dunkin’ Run, which is a $2 snacking menu, which helped drive strong afternoon sales and reinvigorate the afternoon daypart.

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