Dunkin' Brands Group (NASDAQ:DNKN) is set to announce its fiscal second-quarter results on July 26. And, unlike the case with industry peers like Starbucks (NASDAQ:SBUX), investors are optimistic that they'll hear news of accelerating sales growth for the coffee and doughnut specialist.
Let's take a closer look at the main trends that will determine whether Dunkin' Brands stock continues its market-beating performance.
The sales rebound
Dunkin' Brands posted a rare comparable-store sales decline in the most recent quarter, with comps falling by 0.5%, to put the company behind Starbucks and its 2% gain. Yet investors are looking for that number to improve significantly for the second quarter.
Management blamed two temporary issues for depressing sales growth last quarter. First, intense winter weather harmed the business, and that impact was amplified by Dunkin' Brands' intense geographic focus in the northeastern U.S.
Second, the chain recently rolled out a complete revamp of its menu that cut out dozens of offerings and simplified the ordering process. Management said that the move predictably pushed sales lower over the short term but should boost comps in future quarters, including the one that just closed.
Food and beverage initiatives
There were also a few indications in late April that suggested Dunkin' Brands' latest innovations might be resonating with customers. The chain logged customer-traffic growth during the important afternoon hours as a result of its new coffee flavorings, for example.
It also set a record for sales of breakfast sandwiches and conducted a test of a new value menu that management called a hit. These wins were offset by the weather and menu challenges outlined above, but they might show a more obvious impact in this quarter's results. CEO Nigel Travis (who announced his retirement earlier this month) and his team, in fact, believe overall comp sales will improve by around 1% for the full year, which implies significantly faster gains over the next few quarters.
Store growth and cash returns
Dunkin' Brands' long-term plan calls for its store footprint to roughly double from the current 9,000 units in the U.S. That's possible because the chain hasn't established much of a presence outside the eastern third of the country. Starbucks, on the other hand, has already blanketed the country and is now focused on closing underperforming locations in its most densely populated markets. Dunkin' Brands also benefits from a smaller individual store footprint that, by skimping in areas like seating, makes it easier to ramp up its store count.
The company is planning to add over 275 locations in 2018, and it got off to a strong start with 56 openings in the fiscal first quarter. Investors should see that aggressive store-launch pace continue into the second quarter, and those gains should keep Dunkin' Brands on track to expand overall sales in the low to mid single digits for the full year.
That growth, combined with falling tax rates and reduced expenses, should allow adjusted earnings to rise to between $2.69 and $2.74 per share, according to management's most recent forecast, compared to $2.43 in 2017. Those returns will be supplemented by a dividend that most recently rose 8% and has room to keep climbing, thanks to Dunkin' Brands' asset-light operating model.