It's not just the espresso that has some investors hyped up and waving the buy flag for Dunkin' Brands (DNKN). The beginnings of a successful shift in product focus, encouraging domestic metrics, and strong international growth are three reasons that shouldn't be ignored by those looking to invest in this specialty restaurant chain.
Grab a donut, and let's get you up to speed.
1. A shift in product focus opens up a new group of customers
If you ask most people whether Dunkin' is a threat to beverage giant Starbucks (SBUX 1.93%), they would probably tell you no. While both companies serve coffee, Dunkin' has historically catered to drip-coffee customers looking for a quick and cheap cup of joe, and Starbucks is known for its premium coffee offerings.
However, one year ago, Dunkin' launched a strategic initiative to offer espresso drinks and other handcrafted beverages to customers, effectively stepping up to the plate to battle the green giant. Throughout the past year, this has included a $65 million outlay to install espresso machines in all locations, new signature latte releases, and the largest specialty holiday menu in the company's history, announced earlier this month.
Does Dunkin' really believe it can take over the espresso market? Here's what CEO Dave Hoffmann had to say earlier this year in the company's Q1 earnings call: "High-quality espresso beverages sold at a fair price and served at the speed of Dunkin' is something only we can do. It's why we believe we are the brand that could democratize espresso, and why we're committed to the category for the long term."
It sounds great, but is it working?
Yes. In Q2 of this year, the company reported a 30% growth in espresso sales year over year. In its Q3 report released this month, that growth number jumped to 40% year over year. Additionally, Hoffmann credits U.S. growth and performance to premium beverages. "Dunkin' U.S. performance was led by strength in premium beverages such as espresso and cold brew."
If Dunkin' can continue penetrating the specialty coffee beverage market and deliver on its promise of faster and more affordable options while maintaining comparable quality, Starbucks could be in a latte trouble.
2. U.S. sales growth signals a healthy brand
Driven by the espresso shift, Dunkin' U.S. is on the rise. Here are the highlights from this month's earnings release:
- Comparable-store sales growth is up 1.5% this quarter, year over year.
- Total revenue is up by $9.1 million, a 5.8% increase year over year.
Additionally, systemwide sales (total sales to customers from both franchise and company-owned stores and a good metric for the overall health of the brand) are up 4.4% from last year. Keep in mind this is only on the Dunkin' side of the house. Baskin-Robbins U.S., also under the umbrella of Dunkin' Brands, saw total revenues increase by 4.7%, comparable-store sales growth increase by 3.6%, and systemwide sales increase by 3.1%, all year over year.
3. International growth can't be ignored
While it's a smaller piece of the total pie, international growth should not be ignored, especially as the company continues to open locations abroad. Here are the facts from Q3:
- Dunkin' International comparable-store sales growth is up 7.3%.
- Total revenue is up $493,000, a 7.9% increase year over year.
- Systemwide sales are up 8.2%. When adjusted on a constant-currency basis, this figure jumps to 11%.
As mentioned, this segment is much smaller compared to the U.S. brands, but it still represents important opportunities for growth and for building on positive momentum. Buying stocks is not about purchasing after the success has come to fruition; it's about identifying companies with opportunities to grow. During the third quarter, Dunkin' opened 23 new international locations.
Putting it all together
With proven success entering a new area of the market, strong U.S. growth, and opportunities to build on momentum internationally, Dunkin' Brands is a buy.