Dunkin' Brands (NASDAQ: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.
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.
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.
Demitrios Kalogeropoulos owns shares of Dunkin' Brands Group, McDonald's, and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.