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2 Big Growth Opportunities for Dunkin' Brands Stock

By Joe Tenebruso – Updated Apr 14, 2019 at 8:09PM

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Here's how the coffee chain can reward investors in the coming years.

Dunkin' Brands (DNKN) is off to a fast start in 2019. Shares of the popular restaurant chain are already up more than 11% so far this year, following its solid fourth-quarter earnings report in February.

Yet plenty more gains could still lie ahead for shareholders. Here are two powerful growth drivers for the stock going forward.

Nationwide expansion 

Because it's a 100% franchised business, each new store that Dunkin' Brands opens quickly adds to its bottom line. Franchise fees and royalty income are high-margin revenue streams that allow Dunkin' Brands to generate bountiful free cash flow, which it passes on to investors via dividends and share repurchases. It's a powerful formula for shareholder wealth creation -- one that Dunkin' Brands has used to great effect for the better part of a decade. 

Management sees long runways for growth still ahead. The company intends to double its U.S. store count to nearly 20,000 locations over time. Much of this growth will take place in the western part of the country, far outside of Dunkin's core markets in the Northeast.

A compass pointing westward

Dunkin' Brands' western expansion is a key part of its growth strategy. Image source: Getty Images.

It's vital that these new restaurants achieve returns on par with those in the company's more developed markets, so as to entice franchisees to open more locations. Fortunately, Dunkin' Brands is making solid progress in this regard. Franchisees opened 278 net new Dunkin' restaurants in the U.S. during 2018. CEO David Hoffmann said during the company's fourth-quarter conference call that 90% of these new restaurant openings were outside Dunkin's core markets -- and that these new stores are generating strong returns on investment for franchisees.

"The 2017 cohort of new store openings in our top 10 developing markets continues to track comfortably between 20% [and] 25% cash-on-cash returns," Hoffmann said. "As a reminder, all of these top 10 markets are outside of the core Northeast, in states such as California, Florida, Georgia, and Tennessee."

The company plans to open 200 to 250 new Dunkin' U.S. restaurants annually over the next three years. This should help to drive its profits substantially higher in the coming years.

Check out the latest earnings call transcript for Dunkin' Brands.

Delivery

Building more stores -- and driving more traffic to them -- will remain management's key focus. Yet industrywide traffic remains under pressure from the relentless growth of e-commerce. The more people shop online, the less they need to travel to the retail centers in which many Dunkin' restaurants are located.

Dunkin' is working to meet this challenge by expanding its network of delivery partners. A recently announced test with Grubhub (GRUB) will make delivery available at more Dunkin' locations. Commenting on these initiatives, Hoffman said:

We are thrilled to announce that we're partnering with Grubhub for a delivery pilot that integrates directly with our POS [point of sale] or cash register system. Grubhub is No. 1 in the delivery space, and we're excited to add them to our list of high-quality partners. We're starting with a small alpha pilot and will look to expand to a larger-market test in the near future.

Delivery should help to boost sales and profits at Dunkin' Brands' restaurants. It could also lead to an expansion in the stock's price-to-earnings ratio, as investors gain more confidence in the restaurant chain's ability to compete successfully in an increasingly online world. Both of these things could help to drive Dunkin' Brands' stock price sharply higher in the years ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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