Please ensure Javascript is enabled for purposes of website accessibility

3 Takeaways From the Dunkin' Brands Earnings Report

By Demitri Kalogeropoulos - May 8, 2018 at 3:54PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out why the coffee and snack chain believes sales growth will speed up over the next few quarters.

Dunkin' Brands (DNKN) is shrinking. The on-the-go coffee-and-doughnut chain announced quarterly results this past week that included a rare drop in sales at its existing locations.

That decline wasn't as bad it might seem at first glance, though. And it was offset by healthy gains in the company's store base that keep the company right on track with its long-term expansion plans.

Let's take a closer look at the results.

A pack of six donuts in a box.

Image source: Getty Images.

Slow growth should improve

Revenue growth dipped into negative territory, with comparable-store sales falling 0.5% versus a 1% increase last quarter. The business saw a slight uptick in average spending thanks to Dunkin's popular breakfast sandwich lineup. But that boost was offset by declining traffic .

By comparison, Starbucks' comps rose 2% on flat customer traffic in the U.S. McDonald's, meanwhile, led the industry with its 5.5% comps gain even as customer traffic declined slightly.

Dunkin' Brands was pinched by the same industry slowdown that has pushed Starbucks' comps lower in the past year. It also had to deal with unusually harsh winter storm conditions that, because of its geographic concentration in the northeast, had a major impact on its business. In fact, executives estimate that without the weather issues, comps would have been slightly positive for the quarter.

The chain also lost business due to its menu simplification rollout that, while projected to increase sales and reduce costs in the long run, hurt this quarter's results. Based on test-market trends, the company found that the new menu yielded a 1% sales decline early on that turned into a 1% increase later. Thus, Dunkin's growth trends likely held close to recent trends after accounting for temporary factors like weather and menu changes.

Store expansion is on track

CEO Nigel Travis and his team believe they can double their U.S. store footprint from its current 9,000-unit mark. They made progress on that score this quarter by adding 56 locations to keep the chain among the fastest-growing retailers in the casual dining sector. Domino's Pizza, which has a similarly small average store footprint, added 31 locations to its base in the same period. Dunkin' Brands has a much larger long-run opportunity ahead given that it has little presence in the western two-thirds of the country.

A chart showing Dunkin' Brands' store footprint.

Source: Dunkin' Brands' investor presentation.

Steady outlook

Dunkin' Brands affirmed its full-year outlook that calls for comps to rise by about 1%, or roughly the same pace as in 2017. An extra 275 stores launched in 2018, meanwhile, should push that sales growth figure into the low to mid-single digits overall.

That forecast doesn't imply robust market share gains, given that national rivals like Starbucks and McDonald's are growing at a faster rate today. Yet it would translate into accelerating sales gains for Dunkin' Brands over the next few quarters as the weather warms up and its menu simplification starts paying dividends.

That speed-up, including a continued uptick in afternoon traffic, should allow the chain to post healthy earnings this year despite aggressive competition in the coffee, breakfast, and afternoon snack space. Investor returns will be further bolstered by a growing dividend and an aggressive stock repurchase plan.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.