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Dunkin' Brands Long-term View Bright, Headwinds Persist

Zacks Equity Research

We issued an updated research report on Dunkin' Brands Group, Inc. DNKN on Mar 14. Headquartered in Canton, MA, the company is a franchisor of quick service restaurants under the Dunkin' Donuts and Baskin-Robbins brands.

Dunkin’ Brands’ earnings beat the Zacks Consensus Estimate in all of the trailing eight quarters. However, estimates for the current quarter have been trending downward lately.

Banking on its already established namesake, the company has undertaken the implementation of a six-part plan to fuel Dunkin's strategic growth in the US and better position itself as a beverage-led On-the-Go brand. The plan includes building its coffee culture; faster and improved product innovation; targeted values and smart pricing; being a leader in digital; improving the restaurant-like experience; and driving consumer packaged goods and new channels.

Furthermore, the company’s licensing deals with Keurig Green Mountain and J.M. Smucker to sell Dunkin' K-Cup pods to retailers as well as online customers continue to expand Dunkin’s brand reach. Moreover, given its growing popularity, the company is expanding its footprint in the emerging markets of Asia and the Middle East. The company also considers the untapped market of South Africa to be of great potential and opened its first store in Cape Town in 2016.

Meanwhile, the company is emphasizing on the improvement of its core menu, introduction of more customization options and promotional offers as well as adding further variations to the value and premium segments, which should boost comps.

Increased focus on establishing itself as a beverage leader should further drive sales going forward, as beverages offer Dunkin’ the greatest growth opportunity. In-keeping with this strategy, the company also launched ready-to-drink bottled iced coffee in Feb 2017, which is manufactured, distributed, marketed and sold by The Coca-Cola Company KO nationwide.

Additionally, the company is growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivering. In fact, these initiatives make Dunkin' Donuts more convenient and accessible to customers. On-the-Go gives the company the power to drive customer loyalty and the power to drive efficiency as well as speed of service at its restaurants.

Notably, Dunkin' Brands operates mainly on a full-fledged franchise model like some of its peers including McDonald’s Corporation MCD and Domino’s Pizza, Inc. DPZ. We believe re-franchising a large chunk of the company’s system reduces its capital requirements, and facilitates earnings per share growth and return on equity expansion.

However, Dunkin' Brands’ international comps growth has mostly suffered over the past three years at both its Dunkin’ Donuts and Baskin Robbins divisions. Discretionary spending is under pressure due to a number of factors including sluggish local economies, currency devaluation and oil prices. Even in the most recent quarter, though Baskin Robbins posted positive comp sales led by Japan, Dunkin’ Donuts posted negative comps due to poor performance in South Korea, Europe and Middle East.

Further, intensifying competition and a soft consumer spending environment in the U.S. restaurant space add to the company’s concerns.

We note that, shares of the company have increased 17.4% over the last one year, comparing favorably with the Zacks categorized Retail-Restaurants industry’s loss of 6%.



Dunkin’ Brands currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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