Will High Costs Affect Dunkin Brands' (DNKN) Q1 Earnings?

Dunkin' Brands Group, Inc. (NASDAQ:DNKN) is set to release first-quarter 2018 numbers on Apr 26, before market open.

The company’s sincere focus on menu innovation as part of sales building efforts, along with relentless expansion of its brands are expected to reflect in first-quarter revenues. However, despite having a fully franchised model, high labor costs and intense competition in the industry continue to be potent headwinds, which might have had dented earnings in the to-be-reported quarter.

However, a strong brand presence has led Dunkin’ Brands’ shares to rise 10.5% over the past year, outperforming the industry’s gain of 6.7%.

Let’s find out how the company’s top and bottom line will shape up in the first quarter.

Top Line to Grow on Sales Boosting Efforts

Dunkin' Brands operates through the Dunkin' Donuts and Baskin-Robbins brands. Various sales and digital initiatives undertaken by the company such as more drive-through locations, menu innovation, breakfast menu optimization, loyalty program and mobile ordering service should boost first-quarter top line.

The company’s focus on expanding its beverage portfolio provides it with a great growth opportunity. Dunkin’ Brands also launched ready-to-drink bottled iced coffee in February 2017, which is manufactured, distributed, marketed and sold by the Coca-Cola Company (NYSE:KO) nationwide. Simultaneously, the brand still continues to offer innovative breakfast sandwiches, baked goods and other classic food items. The company is gradually simplifying the number of food offerings on its menu, in order to streamline its restaurant operations and improve execution.

All such sales building efforts have led revenues to increase 3.8% year over year in 2017 and the upside trend is expected to continue in the to-be-reported quarter as well. Subsequently, the Zacks Consensus Estimate for first-quarter revenues is pegged at $301.26 million, reflecting an increase of 58.1% from the prior-year quarter.

Will High Costs Dent Earnings?

The consensus estimate for first-quarter earnings is pegged at 52 cents, projecting a 3.7% decline from the year-ago quarter. We believe that earnings might have been affected due to high costs that are ailing the restaurant industry of late.

Adjusted operating income margin was down 90 basis points to 54.4% in the fourth quarter and an increase in occupancy expenses related to franchised restaurants, along with high general and administrative expenses are further expected to affect the company’s margins in the first quarter.

However, Dunkin' Brands operates on a full-fledged franchise model. We believe, re-franchising a large chunk of its system will reduce the company’s capital requirements and facilitate earnings per share growth in the long run.

Our Quantitative Model Suggests a Beat

According to our quantitative model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP has a fair chance of beating estimates. Meanwhile, stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) are best avoided.

Dunkin’ Brands has a Zacks Rank #3 and an Earnings ESP of +0.57%, a combination that increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Dunkin' Brands Group, Inc. Price and EPS Surprise

Stocks to Consider

Here are some other companies in the restaurant space, which per our model have the right combination of elements to post an earnings beat this quarter.

Domino's (NYSE:DPZ) has an Earnings ESP of +0.20% and a Zacks Rank #3. The company is scheduled to report first-quarter results on Apr 26, before market open. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop (NASDAQ:WING) has an Earnings ESP of +3.80% and a Zacks Rank #3. The company is slated to release first-quarter results on May 3, after market close.

Wendy’s (NASDAQ:WEN) has an Earnings ESP of +2.72% and a Zacks Rank #3. The company is scheduled to report first-quarter results on May 8, after market close.

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