The coffee and quick-serve restaurant industry has been red-hot over the last few years and one of the largest players within it, Dunkin' Brands (NASDAQ:DNKN), has benefited greatly. It was a top performer in 2013 with an incredible 45.27% rise, and the rally could easily continue in 2014. Delivering on earnings will be key for whether the rise continues, and Dunkin's first report of 2014 is due out on Feb. 6. Let's take a look and see if now is the time to buy Dunkin' or if we should wait to see what the report holds.
The brand family
Dunkin' Brands owns, operates, and franchises quick-service restaurants under the Dunkin' Donuts and Baskin Robbins brands. Dunkin' Donuts is one of the world's largest coffee and baked-goods restaurants and Baskin Robbins is the world's largest specialty ice cream chain. The company is nearly 100% franchised, which gives it the advantage of being asset-light and allows it to generate significant free cash flow.
The last time out
Dunkin' released third-quarter results on Oct. 24, and the numbers were mixed in comparison with analyst estimates. Here's an overview of the report:
|Earnings Per Share||$0.41||$0.43|
|Revenue||$186.3 million||$182.95 million|
Over the last year or so, many companies who reported mixed earnings beat on EPS, but missed on revenue; Dunkin' did the opposite, which made the market indifferent, and the stock has moved very little since then. With this said, Dunkin's earnings per share increased by 10.8% and revenue rose by 8.5% year-over-year. U.S. comparable-store sales for Dunkin' Donuts and Baskin-Robbins grew by 4.2% and 3.2% year-over-year, respectively. Operating income increased 4.6% to $89.33 million, driven by the operating margin expanding 310 basis points to 44.1%. Overall, it was a great quarter and I believe the franchised business model will allow Dunkin' to continue expanding globally while growing its operating income and expanding its margin.
Dunkin's fourth-quarter earnings are due out before the market opens on Feb. 6. The current expectations call for growth on both the top and bottom lines:
|Earnings Per Share||$0.40||$0.34|
|Revenue||$178.52 million||$161.7 million|
These expectations call for Dunkin's earnings per share to increase 17.6% and revenue to rise 10.4% year-over-year. I believe the company will exceed these estimates due to better-than-expected comparable-store sales at Dunkin' Donuts. When it comes to Baskin-Robbins, I expect U.S. same-store sales to be flat due to the colder weather, but I see international same-store sales increasing 1%-3%; this brand has been much more successful in the international market and I do not see this changing in the fourth quarter. Key metrics aside, there is much more to watch for...
What else to watch for
Besides financial statistics, it will be important to watch for updates about Dunkin's expansion. Dunkin' Brands announced that it expects to open 685-800 new locations in 2014, which is right around the total of 790 locations that it opened in 2013. The main region I am interested in right now is the Western United States.
Dunkin' Donuts franchises will expand rapidly throughout the Western United States, which will make the 'America Runs on Dunkin' saying more truthful. In September, the company noted that there were 7,337 Dunkin' Donuts locations in the U.S., but only 191 were in the West; this is expected to change as the company plans to open 5,000 locations, including 1,000 in California alone. Dunkin's addition of 5,000 locations in the West, paired with its expansion in other regions, would just about double the total number of Dunkin' Donuts locations in the United States.
I would like to see specific dates given for when a large portion of these stores will be opened, so investors and analysts can know when exactly to expect the new, high-revenue region to come into play. All in all, if Dunkin' can meet or exceed earnings expectations and give a positive update on these expansion plans, the stock will likely see a large move to the upside.
An update on the competition
Starbucks (NASDAQ:SBUX) and McDonald's (NYSE:MCD) are two of Dunkin' Donuts' largest competitors in the coffee and quick-serve restaurant industry. Both have recently reported earnings, so let's take a look at the results:
|Earnings Per Share||$0.71||$0.69|
|Revenue||$4.24 billion||$4.29 billion|
Starbucks' earnings per share increased 24.6% and revenue increased 11.8% year-over-year, driven by global comparable-store sales growing by 5%. Operating income rose 29% to $813.5 million as Starbucks was able to expand its operating margin by an impressive 260 basis points to 19.2%. The most notable aspect of the report came within its expansion update; 417 stores were opened during the quarter, bringing Starbucks' total count to 20,184 worldwide. This was the best first quarter in its history and the guidance points toward three more record-setting quarters. Starbucks is arguably the best growth story in the market today and it should be strongly considered if you are not sold on Dunkin' Brands.
|Earnings Per Share||$1.40||$1.39|
|Revenue||$7.09 billion||$7.11 billion|
McDonald's earnings per share increased 1.5% and revenue increased 2% from the same period a year ago. Both operating income and net income were flat year-over-year, but the company was still able to maintain its dividend and share repurchase program as it returned $1.3 billion to shareholders during the quarter. All of this may seem dim, but the weakest aspect of the report was comparable-store sales:
|Asian Pacific/Middle East/Africa||(2.4%)||(1.3%)|
Even with the weak earnings report, McDonald's management remains optimistic on its future and the company plans to open 1,500-1,600 new restaurants in 2014. Best of all, CEO Don Thompson stated, "Consistent with our long-standing priorities for our use of cash, after investing in our business, we are committed to returning all free cash flow to shareholders over the long term, through dividends and share repurchases." McDonald's has paid and raised its dividend every year since 1976, and for this reason, I do not believe the stock will show much weakness in the coming weeks. If the stock drops, the yield will rise which will cause dividend-seeking investors to pile in. With this said, I still prefer Dunkin' Brands and Starbucks over McDonald's.
The Foolish bottom line
Dunkin' Brands is a growing force in the market with two global powerhouse brands. It is about to report fourth-quarter results and I believe it will surpass the expectations due to strong growth in the Dunkin' Donuts brand. Investors should look to pick up a position on any sharp decline going into the report or on any weakness following the release, and hold onto it as a long-term investment.