Is Dunkin’ Brands’ Value Stored In the Expansion Of Its Stores?

Dunkin’ Brands (NASDAQ:DNKN) is expected to announce its 4^th quarter and full year results on February 7, 2019. Dunkin’ Brands has reported a good year so far with Dunkin’ US driving from the front. In the third quarter the company reported a positive comparable sales growth at all of its brands, as well as the ambitious store count growth the company  has set for itself –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. The market expects the company to post around $1.3 billion in revenue and earnings are estimated to be around $2.83 for the Fiscal Year 2018.

We have a $76 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 Our Outlook for Dunkin’ Brands in FY 2018 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. It had a less than 100 basis points negative impact on the revenue in the Q3, and should pressure the revenues in the last quarter as well, albeit by a slower rate. Conversely, this step will help in the long run by reducing the complexity, which should help 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. The company is also on track 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. Branded CPG Products: DNKN’s total portfolio of CPG products across both brands in retail sales was up 11% year on year (YOY) for quarter 3. New and innovative product launches, such as the new ready-to-drink flavor, Cookies & Cream, should help to ensure continued growth from this avenue.

4. 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.

5. 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 toward new espresso equipment and consequently, revitalizing a critical, high-growth category for its business.

6. Launch Of Value Platforms: In April 2018 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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