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Why Did Dunkin' Brands Group Inc Stock Rise 12% in November?

By Daniel B. Kline - Dec 11, 2016 at 10:38AM

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The company saw overall revenue drop, but there was a good reason for that.

Fueled by a decent, but not spectacular Q3 earnings report on Oct.20, Dunkin' Brands (DNKN) rose steadily throughout the month of November.

What happened?

In Q3, Dunkin' Donuts stores in the United States saw comparable sales grow by 2% and the company added 115 new restaurants worldwide, including 56 in its home country. That positive news was tempered by the fact that Baskin-Robbins' U.S. comparable-store sales dropped by 0.9% and overall revenues decreased by 1.3%.

Those results seem decidedly mixed on the surface, but the revenue drop happened because the company finished its long-stated goal of selling all its stores to franchisees. That lowered revenue, but it also cuts expenses.

That was likely not top of mind for many shareholders when the earnings report was released. However, as time passed, the results looked better under further examination and optimism over Q4 pushed the share price up. After opening on Nov. 1 at $48.51 the stock moved steadily upward through the month to close at $54.29, an 11.91% gain, according to data from S&P Global Market Intelligence.

Beverage sales were strong in Q3. Image source: Dunkin' Donuts.

So what

After achieving its long-stated goal of becoming fully franchised, the chain seems well-positioned for the future. CFO Paul Carbone made a strong case for future success in the earnings release.

In regards to restaurant-level economics, we are particularly encouraged by first-year cash-on-cash returns that franchisees are experiencing in our high-opportunity West and Emerging markets. We will continue to focus on driving franchisee profitability by better serving the customer, building high-margin beverage sales, lowering store construction costs and simplifying store operations.

Now what

Going forward Dunkin' has to drive revenue for its franchisees. CEO Nigel Travis seemed very optimistic about those possibilities in his comments in the earnings release.

Our Dunkin' Donuts U.S. business delivered solid comps for the quarter, fueled by record-breaking beverage sales, with double-digit growth in the espresso and iced coffee categories. Other noteworthy achievements in the quarter included: surpassing 5 million members in our DD Perks rewards program, which remains one of the fastest growing loyalty programs in the quick-service-restaurant industry.

Growing beverage sales, which are higher-margin than food sales, remains key in pushing revenue higher. The company should see a strong fourth quarter as it continues to develop and sell higher-end beverages (including its seasonal offerings) and its new, growing Cold Brew iced coffee.

Daniel Kline has no position in any stocks mentioned. He could use a coffee. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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