Investors had modest expectations for the fourth-quarter earnings report from Dunkin' Brands (DNKN +0.00%). The fast-food specialist's stock trailed the market in 2019 as the chain put up growth numbers that trailed peers like McDonald's (MCD +0.25%) and Starbucks (SBUX 0.11%).
Yet on Thursday the coffee and snack food giant joined its larger rivals in posting multiyear records in key metrics like comparable-store sales gains. Dunkin' also issued an optimistic 2020 outlook that calls for the good times to continue well into the new year.
Let's take a closer look.
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Ending with a bang
Dunkin' managed a 2.8% increase in comps, and while that's well below the 6% gains that both Starbucks and McDonald's achieved in the past quarter, it was a positive result for two reasons. First, it marked a significant acceleration over the 1.5% increase investors saw over the previous six months. And second, it was the fastest expansion pace Dunkin' has seen in six years. "We had a strong finish to the year," CEO Dave Hoffmann said in a press release.
The chain credited its new espresso-based beverage platform and popular menu additions like cold brew drinks for convincing shoppers to spend more at its restaurants. Its aggressive store remodeling initiative helped push average transaction values higher, too. On the other hand, Dunkin' continues to see modest customer traffic declines. It joins McDonald's in that struggle, but not Starbucks, which has been growing guest counts at a robust 3% clip for several quarters.
The faster growth had a positive impact on earnings even after one accounts for Dunkin' Brands' spending on store upgrades and higher-quality food like the Beyond sausage breakfast sandwich. Operating margin increased for the quarter and for the full year, and that success combined with a shrinking outstanding share count to push adjusted earnings per share up 9% in 2019 -- roughly double the pace of revenue growth. The company's expansion strategy steamed ahead, with 211 new U.S. locations serving as part of nearly 400 restaurant launches around the world in 2019.
Changes coming in 2020
Hoffman and his team predicted another record year ahead, with between 200 and 250 U.S. store launches helping to push revenue higher by about the same 4% rate investors saw in 2019. Customer traffic will be key to watch going forward, although the company demonstrated last year that it can still achieve significant comps growth by simply raising the bar on its food and drink offerings.
To that end, Dunkin' is planning to pour $60 million into upgrading its beverage brewing this year. That initiative will pressure profitability in 2020, executives said. Yet it represents the surest path toward faster global growth over the long term. "Better-quality food and beverage enabled by better equipment is a cornerstone of the Dunkin' blueprint for growth," Hoffmann said. Investors should see that strategy play out across its store base this year as the restaurant chain remodels a further 500 locations and doubles down on high-margin drink and food service platforms.
