Investors are cautiously optimistic heading into the third-quarter earnings report by Dunkin' Brands Group (NASDAQ:DNKN). The restaurant chain is expected to post much better sales trends than shareholders saw in Q2, which felt the biggest impact of coronavirus closures.
Dunkin' might also reveal modest market-share gains against Starbucks (NASDAQ:SBUX) during the last few months. But that good news will likely be tempered by evidence of sluggish growth in the international business, and financial pressures across its selling footprint.
Let's take a closer look at the report, set for Thursday, Oct. 29.
Racing back to growth
It won't be hard for Dunkin' to achieve improved results compared with the second quarter, which saw comparable-store sales dive 19% year over year in the U.S. as revenue dropped 20% overall. The Q3 period began in late July when nearly all of its store base had reopened following temporary COVID-19 shutdowns. That relaunch has investors predicting sales will drop by just 3% from the prior year through late September.
We'll find out on Thursday whether Dunkin' outgrew rival Starbucks, which is set to report its results on the same day. Both companies have traditionally catered to morning commuters, and that niche has been severely disrupted by consumer mobility changes brought on by the pandemic. Dunkin' Brands back in July suggested that comps declines were trending in the low single digits at the start of the quarter. Starbucks, on the other hand, forecast drops of between 12% and 17% for the U.S. geography.
Areas of concern
Despite the expected growth rebound, investors saw some worrying signs in last quarter's report that are worth following for updates on Thursday. The biggest is Dunkin's international business, which might not bounce back as quickly as the U.S. market.
Management said in July that it would keep 350 of its restaurants permanently closed following coronavirus shutdowns. Weak economic trends in key markets like India might convince CEO Dave Hoffmann and his team to rein in their global expansion plans at least through 2021.
In addition, keep an eye on profitability. While Dunkin' should report sharply improved trends around rental income, franchise fees, and royalty payments, the company might be in a tough market-share fight with Starbucks, McDonald's, and other peers. A competitive selling environment would send advertising and promotion costs higher even as sales continue to hover around flat.
Management's comments about the latest demand trends will capture most investor attention on Thursday since they'll offer the best clue about the health of the business into 2021. Dunkin might show a return to modest growth in the U.S. and a few other markets as of the start of Q4. But the chain likely won't be as optimistic about its global prospects for an expanding store base over the next year or so.
It's still unclear how long it might take before Dunkin' can return to its pre-COVID trends of strong sales growth and improving profitability, especially if the restaurant industry is stuck in a recession. But Thursday's report will likely represent an important step on that recovery path.