Quick-service restaurant chain Dunkin' Brands (NASDAQ:DNKN) will post its fourth-quarter earnings numbers before the opening bell on Tuesday, Feb 6. Its peers have announced generally weak results in recent weeks, and so investors will be watching closely to see if the coffee, doughnut, and breakfast sandwich specialist can continue its impressive streak of 45 consecutive quarters of positive sales growth.
With that bigger picture in mind, let's look at what investors can expect from the report.
Tough growth conditions
Comparable-store sales have been growing at a slightly positive rate for most of 2017, including a below-1% uptick in the most recent quarter. CEO Nigel Travis and his executive team have been working hard to push that figure higher, mainly by targeting the early morning hours that are responsible for most of Dunkin' Brands' sales. Popular breakfast sandwich launches lifted average spending last quarter, for example, which completely offset a slight decline in customer traffic.
Starbucks just revealed sluggish comps growth of 2% in its core U.S. segment during the quarter, which leaves the door open for Dunkin' Brands to announce having stolen a chunk of market share on Tuesday. However, the coffee titan's stumbles were confined to its afternoon business, particularly with respect to its seasonal drinks and holiday merchandise. Starbucks' morning beverage business, in contrast, hummed along at close to peak performance. That means Dunkin' Brands' revenue might not have been boosted by increased market share.
Investors will be keeping a close eye on customer traffic to see which breakfast giant's menu is resonating with those busy, hungry buyers. McDonald's recently announced a 1% traffic uptick in the U.S. and Starbucks' traffic was flat. Dunkin' Brands' metric has been slightly negative over the past nine months, meanwhile, so even a small step toward its peers would qualify as a win for the business.
Strong profitability is a major perk of Dunkin' Brands' 100% franchised model, and investors should see that approach deliver solid financial results. Operating income grew at a double-digit rate in the most recent quarter, which allowed profit margin to climb to 57% of sales from 55% in the year-ago period.
That's significantly better than McDonald's 42% rate, though the fast-food titan has room to boost that rate as it brings its portion of corporate-owned restaurants down to 5% from the 15% it managed at the start of 2017. Dunkin' Brands is already fully franchised, and so its ability to expand margins comes down to notching operating wins such as increasing throughput.
A weak outlook?
McDonald's doesn't issue growth forecasts, but it has now posted a slowing expansion pace for two consecutive quarters. Meanwhile, Starbucks told investors last week that its expansion pace this fiscal year should be close to the lower end of the 3% to 5% range it had issued back in November. Even that modest prediction looks aggressive given that growth was just 2% in its fiscal first quarter.
That's why it will be interesting to see whether Dunkin' Brands sounds a similarly downbeat tone with its updated forecast on Tuesday. Management is currently targeting minor comps growth for the full year, coupled with aggressive store expansion as the company moves toward its goal of doubling the restaurant base to 18,000 locations over the long term.
That long-term growth strategy will be easier to implement if Dunkin' Brands can protect the positive sales growth pace it has enjoyed since 2007.