Investors are looking forward to Dunkin' Brands Group's (NASDAQ:DNKN) earnings announcement on Thursday, Feb. 7. Among their reasons for optimism is the fact that Starbucks (NASDAQ:SBUX) had mostly positive things to say about the industry in its recent report.
Dunkin' Brands came into the period with solid momentum, too, thanks to a revamped snack and drink menu that resonated with customers in the third quarter. The chain sought to press that advantage this past quarter by elbowing into Starbucks' territory and seeking modest wins against McDonald's.
We'll find out later this week whether these initiatives worked in an ultra-competitive industry.
Snatching market share
The big question will be around market share and sales growth, given that Dunkin' Brands upgraded its stores to provide premium, espresso-based beverages during the quarter. That move puts it into more direct competition with Starbucks, which has dominated the niche for decades.
The coffee titan said in its most recent report that sales growth held steady at 4% in the U.S. market and was powered by healthy demand for its beverages. Starbucks also reported that customer traffic trends improved for the third straight quarter and were flat compared to a minor decline in the prior period.
Expectations aren't quite as high for Dunkin' Brands, but investors are looking for it to post modestly positive sales following last quarter's 1.3% uptick. Ideally, customer traffic trends improved as well.
Finally, the company should see better economic returns if sales tilted toward higher-margin beverage sales, as management hoped they would.
Expanding the store base
Many of the company's recent changes, including bulking up its snack menu and pushing into premium drinks, are targeted at boosting its appeal so that the chain can dramatically expand its sales base. Management aims to more than double the U.S. store count, in fact, to almost 20,000 locations, by pushing westward over the next several years.
That optimistic outlook means investors will be scrutinizing the economic returns from Dunkin' Brands' latest crop of new stores that are predominantly launching outside of the company's geographic base in the northeastern part of the U.S. It should wrap fiscal 2018 up having added about 275 restaurants to its footprint for a small slowdown from last year's 313 launches. CEO David Hoffmann said last quarter's 52 new locations were off to a good start, and the chain hopes to keep that momentum going into early 2019.
A robust outlook?
Starbucks set a positive industry tone by increasing its growth outlook after having lowered its guidance in each of the last two fiscal years. Dunkin' Brands might have similarly optimistic things to say as it looks forward to fiscal 2019. Forecasting a sales growth acceleration from the roughly 1% rate it has achieved lately would be a good start. Investors might also find plenty to cheer if the company projects a more aggressive store growth plan for the new year.
On the other hand, if Hoffmann and his team predict flat or declining sales at existing locations, or take the foot off the gas pedal in their geographic expansion plans, then it's likely Dunkin' Brands' latest growth initiatives failed to achieve management's targets. If that's the case, shareholders will be in for a rough ride next week.
Demitrios Kalogeropoulos owns shares of 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.