Dunkin' Brands (DNKN) Long-term Prospects Bright, Woes Stay

We issued an updated research report on Dunkin' Brands Group, Inc. (NASDAQ:DNKN) on Jun 6. Headquartered in Canton, MA, the company is a franchisor of quick service restaurants under the Dunkin' Donuts and Baskin-Robbins brands.

Opportunities

Banking on its already established namesake, the company has undertaken the implementation of a six-part plan to fuel Dunkin' Donuts’ strategic growth in the US and better position itself as a beverage-led On-the-Go brand. The plan includes building its coffee culture; faster and improved product innovation; targeted values and smart pricing; being a leader in digital; improving the restaurant-like experience; and driving consumer packaged goods and new channels.

Furthermore, the company’s licensing deals with Keurig Green Mountain and J.M. Smucker to sell Dunkin' K-Cup pods to retailers as well as online customers continue to expand Dunkin’ Brands’ reach. Recently, it also announced a partnership with Amtrak Corporation per which Dunkin’ hot coffee will be available to the 3.4 million annual customers on board Amtrak’s high speed trains.

Moreover, given its growing popularity, the company is expanding its footprint in the emerging markets of Asia and the Middle East. The company also considers the untapped market of South Africa to be of great potential and opened its first store in Cape Town in 2016.

Also, the company is prioritizing stabilization of its international business in some key markets. Dunkin' Brands continues to undertake initiatives to improve customer experience, expand convenience, and increase transactions. In fact, Baskin-Robbins has expanded its delivery program in Saudi Arabia to include more than 30 delivery hubs. Dunkin’ Donuts debuted in the Netherlands in the first quarter of 2017.

Meanwhile, the company is emphasizing on the improvement of its core menu, introduction of more customization options and promotional offers as well as adding further variations to the value and premium segments, which should boost comps.

We believe that increased focus on establishing itself as a beverage leader should further drive sales going forward, as beverages offer Dunkin’ Donuts the greatest growth opportunity. In-keeping with this strategy, the brand launched ready-to-drink bottled iced coffee, Fruited Iced Teas, Dunkin' Energy Punch powered by Monster Energy and frozen coffee in the first quarter of 2017.

Meanwhile, DD Perks Loyalty Program continues to be a major sales driver, primarily on the back of the company’s brand recognition. The loyalty program currently has over 6.5 million members and accounted for more than 10% of the total transactions in the first quarter.

Further, the company is growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivering. In fact, these initiatives make Dunkin' Donuts more convenient and accessible to customers. On-the-Go gives the company the power to drive customer loyalty and the power to drive efficiency as well as speed of service at its restaurants.

It should be noted that Dunkin' Brands operates mainly on a full-fledged franchise model like some of its peers including McDonald’s Corporation (NYSE:MCD) and Domino’s Pizza, Inc. (NYSE:DPZ) . We believe re-franchising a large chunk of the company’s system reduces its capital requirements, and facilitates earnings per share growth as well as return on equity expansion.

Headwinds

Dunkin' Brands’ international comps growth has mostly suffered over the last few years at both its Dunkin’ Donuts and Baskin Robbins divisions. Discretionary spending is under pressure due to a number of factors including sluggish local economies, currency devaluation and oil prices. Even in the most recent quarter, both its brands posted negative international comp sales.

Further, over the past few quarters, the U.S. restaurant space has not been too enticing. Same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the first quarter of 2017 marked the fifth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. As a result, the company’s sales have come under pressure.

In addition, Dunkin’ Donuts faces competition from fast casual giants like Panera Bread Company (NASDAQ:PNRA) , which offer healthier menu options and are gaining popularity among consumers. Competition also arises from other well-established coffee makers and breakfast serving restaurant chains, both of which are Dunkin’ Brands’ huge revenue-generating segments.

Bottom Line

We note that shares of the company have rallied nearly 30% over the last one year, comparing favorably with the Zacks categorized Retail-Restaurants industry’s gain of 14%. Meanwhile, although current quarter estimates have moved slightly downwards, current year estimates have moved up over 2% in the last month, signifying bright long-term prospects. Currently, Dunkin’ Brands carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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