Something's changing at Dunkin' Brands (NASDAQ: DNKN), and I'm not just talking about the chain's name, which will soon officially switch over to "Dunkin'."
More importantly, the coffee and snack specialist recently announced accelerating growth at its existing footprint of more than 9,000 locations. Paired with an aggressive pace of new store openings, that success has investors feeling optimistic about Dunkin's long-run outlook.
Shareholders will get an opportunity to adjust those expectations when the coffee and snack specialist announces its third-quarter earnings results on Oct. 25.
Image source: Getty Images.
Starting a new trend
It hasn't been easy for fast food chains to achieve even modest growth lately. Both Starbucks and McDonald's have reported reduced customer traffic in recent quarterly announcements, in fact. Dunkin' Brands noted similar trends, including in the second quarter.
Yet investors have been more focused on relative trends, and that's where Dunkin' Brands comes out ahead right now. Its comparable-store sales growth accelerated to a 1.4% increase last quarter from minor declines in each of the last two quarters. McDonald's and Starbucks, on the other hand, each reported growth slowdowns in their most recent outings.
The performance gap adds weight to management's claim that its new strategic initiatives are driving increased market share. Dunkin' Brands dramatically reshaped its menu, for example, and has added lots of new food options. The company has also made improvements to the customer shopping experience that executives say are driving higher satisfaction.
The best confirmation of those claims will show up in the company's comps metric next week, which will need to at least hold steady at about 1% to demonstrate that last quarter's increase wasn't just a temporary boost.
Extending the reach
Dunkin' Brands is underrepresented in key parts of the country. Its 9,000-store footprint is almost entirely focused on the eastern one-third of the United States, in fact. The potential runway for growth is significant, and that's why CEO David Hoffmann and his team believe they can eventually double their store count in the U.S.
The next step toward that goal is the 275 new locations the chain aims to open in fiscal 2018. Increasingly, these additions will be happening in areas where the brand is less well known and faces entrenched competition. Thus, investors will be closely watching updates on the economics supporting Dunkin' Brands' newest crop of stores.
Its heavily franchised business model, coupled with the strong efficiency of its stores, means the company can expand into new areas without incurring significant costs to the business. But investors should still brace for higher spending at least over the next few quarters.
The company is directing an expected $100 million toward its growth investment plan this year, including on menu offering shifts that support its move toward becoming a more comprehensive takeaway beverage specialist. Dunkin' Brands is adding equipment to stores as part of that change and is also shelling out for training on the new food and beverage options.
Early results from these changes have suggested that they are starting to deliver the almost 2-percentage-point sales growth increase that management had hoped they would. As a result, the company promised in late July to roll out the initiatives even more quickly than they had originally projected. Investors will find out this week whether that stepped-up investment pace went off without a hitch and whether Dunkin' Brands is still optimistic that it has the right strategy to offset the sluggish growth trends affecting the wider fast food industry.
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Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.