Dunkin' Brands (NASDAQ:DNKN) -- the parent company behind Dunkin' Donuts and Baskin Robbins -- is recognized as one of the world's leading franchises of quick service restaurants, or QSRs, with more than 18,000 points of distribution in 60 countries.
Its stores sell over 1.7 billion cups of coffee on an annual basis, and the company is recognized as a QSR leader in said category. From fiscal 2004 through 2014, U.S. systemwide sales have grown at a compounded annual growth rate of 7.5%. In 2014, the domestic franchise system generated U.S. sales of over $7.7 billion with Dunkin' Brands logging $749 million in franchise fees and royalty income.
Despite these notable successes, when investors think of coffee, the main company that probably comes to mind for most is Starbucks. We often forget that Dunkin' Brands does in fact have its own competitive advantages and strong brand power in both domestic and international markets. Here are three factors that investors may be overlooking and that can speak to the company's growing potential.
Focus on social responsibility and healthier alternatives
Dunkin' Brands has been working behind the scenes to transform company operations to coincide with a strong mission of social responsibility and sustainability across the board.
Earlier this year, Dunkin' announced a new animal welfare commitment in partnership with the Humane Society in the United States. By the end of 2016, 10% of all eggs sourced for its breakfast sandwiches in the U.S will be cage-free. This project will be an ongoing development as Dunkin' will also be mapping out its international supply chain to understand the feasibility of transitioning to 100% cage-free eggs at a global level. The company also plans to source only gestation crate-free pork in the U.S by 2022.
By the end of this year, Dunkin' Brands is scheduled to roll out new guidelines for their DDSmart menu which is composed of "better-for-you" choices including thresholds in calorie, sugar, sodium, and saturated fat content. Plans also include reducing the sodium content across its U.S. menu at a consistent pace. By December, the plan is to have reduced sodium by 10% and to cut the sugar content of the beverage portfolio by the end of 2017. Starting this year, Baskin Robbins has also been testing out new smoothies with reduced sugar and calories.
International expansion in highly populated markets
Dunkin' Brands also recently announced the largest development agreement in the company's history with the goal of expanding Dunkin' Donuts in China. The joint venture with Chinese franchisees and subsidiaries aims to open and operate more than 1,400 Dunkin' Donuts restaurants across the region over the next 20 years. Currently, there are only 16 restaurants in China.
As per their most recent annual report for fiscal 2014, Dunkin stated they are migrating in to a model with multiple franchisees in one country including markets in the UK, Germany, and China. Although no exact financial forecasts have yet been provided in terms of what Dunkin' Brands expects from these expansion efforts, franchisee-reported sales grossed $2 billion in 2014, representing about 21% of the worldwide total. That translated to about $142 million of revenue for Dunkin' Brands, but segment operating profit fell over 10% for the year due largely to underperformance from Baskin-Robbins.
The company also announced an agreement with the Mexican Subsidiary of Sizzling Platter, LLC to begin developing Dunkin' Donuts restaurants throughout Mexico, where it currently operates no locations. The franchise agreement calls for the development of more than 100 Dunkin' Donuts restaurants in "Distrito Federal" (Mexico City) as well as other strategically chosen cities within Mexico including Hidalgo, Morelos, Jalisco, and Queretaro over the coming years.
Keeping up with technology
For quite some time now, the restaurant industry has adapted to a connected world with a special focus on mobile. It is a must for successful businesses to implement technology across the board.
In 2012, Dunkin' Brands launched the Dunkin' Mobile App, which allows customers to make purchases with their phones at stores. There are currently over 11 million downloads of the app and counting. In November of 2014, the company also reached a digital milestone of two million DD Perks rewards loyalty members less than a year after its launch.
This past April, Dunkin' also announced they would be adding Google Wallet as a new mobile payment plan for Android users -- making it quicker and easier for consumers to "run on Dunkin'." The digital payment option allows customers to purchase and reload virtual DD cards. As per John Costello, president of Global marketing and innovation at Dunkin' Brands, "Providing our guests with new levels of speed and convenience so that they can run on Dunkin'' more quickly than ever is an important part of our growth strategy."
Some areas of concern -- watch these numbers closely
Taking a closer look at the valuation, the stock is trading higher than I would prefer as a prospective investor. Forward price-to-earnings is currently at 24.4 times. However, the valuation is in line with its main competitors, including Panera Bread at 25.8 times forward earnings and Starbucks at 29.9 times.
Also, comparable store sales have been inconsistent for the company. For the U.S. segment, comps have fallen from 4.2% growth in 2012 to just 1.6% for 2014. The international segment has seen its comps go negative for both brands. Though an increased focus on overseas markets should boost these numbers, it is critical to see the international business grow systemwide sales organically, not just from new store openings.
And the new initiatives, although a work in progress, do seem to be working. During the last quarter the company did raise guidance partly due to improving same store sales. For full year 2015, Dunkin' Brands is expecting revenue growth of 6% to 8%, an increase from prior guidance of 5% to 7%. The outlook for adjusted earnings also received a small boost to $1.87 to $1.91 per share from $1.83 to $1.87.
There is no doubt that Dunkin' Brands and Starbucks have their respective "cult" and loyal following of customers. It may not be the place for coffee in many investors' minds, but Dunkin' Brands is pushing hard to bridge that gap.