Investors have kept Dunkin' Brands' (DNKN) stock returns below the market in 2019 as they waited for concrete signs that the growth rebound strategy is working. Sales gains were weak in the fiscal second quarter and even declined slightly in the Baskin-Robbins franchise.
This week, Dunkin' announced steady overall sales gains and a return to robust growth for the ice cream brand, thanks in part to its branding partnership around Netflix's show Stranger Things.
Let's dive right into the results.
Checking in on sales
Global sales gains improved to 4.7% from 3.8% in the prior quarter. The acceleration was partly due to the 122 new locations Dunkin' opened. But it was also supported by growth at existing restaurants.
The core Dunkin' coffee franchise improved comparable-store sales by 1.5%, which was steady compared with the prior quarter and well below the 5% boost Starbucks reported. Unlike its larger rival, which is growing customer traffic at a robust clip, Dunkin' saw guest counts slip this quarter. That decrease was offset by higher average spending on things like its new espresso-based drink platform.
The Baskin-Robbins brand fared better, with comps jumping 3.6% to mark its best quarterly result in almost two years. The marketing partnership with Stranger Things played a big role in that boost, executives said.
Management was also happy with the wider growth picture.
"We believe these results demonstrate that our [growth strategy] is working," CEO David Hoffmann said in a press release, "and the strategic investments made into the Dunkin' business last year are enabling us to drive top-line results and deliver a better guest experience."
Profits and cash flow
The news was more consistently positive on the financial side of the business. Operating income jumped 10% to $121 million. As a result, Dunkin's profitability improved to 34% of sales from 32% a year ago. Higher prices, increased sales, and the shift toward high-margin products like espresso-based drinks, all contributed in pushing adjusted net income up 8% to $76 million. Dunkin's stock repurchase spending resulting in per-share earnings improving a bit faster, to the tune of 9%.
Updates to the restaurant stock's many financial targets were almost uniformly positive. The company does project landing at the low end of its planned store launches in the U.S., but that trend might just push more openings into fiscal 2020. The shift isn't impacting expected sales growth, anyway, and Hoffmann and his team still see comps rising in the low-single digits this year. Dunkin' Brands raised its earnings outlook and now sees adjusted profits coming in between $3.10 per share and $3.12 per share, up from the prior range of $3.02 to $3.05.
Those numbers don't translate into expected market share gains in the U.S. against rivals like McDonald's and Starbucks. But they do support management's wider rebound strategy that involves building the snack and coffee menu as the chain expands into a more a national, rather than regional, footing. Dunkin' would prefer to see a better balance between customer traffic growth and increased spending, as Starbucks is enjoying today. But it is in good company by leaning on higher average spending, similar to McDonald's. That success should give management confidence to keep following its growth strategy into 2020.