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Dunkin' Brands' Sales Building Efforts on Track, Costs High

Zacks Equity Research

Dunkin' Brands Group, Inc. DNKN is gaining momentum on the back of various sales-building initiatives, loyalty program and digitalization. Evidently, shares of the company have gained 13.9% year to date compared with the industry’s 13.4% growth. However, dismal sales performance at Baskin-Robbins U.S. is concerning. Let’s delve deeper.

Hidden Catalysts

Dunkin' Brands has managed to impress investors with earnings beat for the sixth straight quarter, when the company posted first-quarter 2019 results. Moreover, it came up with an average trailing four-quarter positive earnings surprise of 8.9%. For 2019, adjusted earnings are expected in the $2.94-$2.99 per share range. For 2019, earnings estimates have moved 2 cents up over the past 30 days. Given its progress on the fundamentals, the company is likely to perform well in the quarters ahead.

These apart, this Zacks Rank #3 (Hold) company continues to boost sales through regular product launches. As the demand for coffee is expected to improve, Dunkin' Brands is continuously adding new coffee beverages to the menu, both in the value and premium offering segments like the Macchiato's line of products and the recent — Cold Brew coffee. In the fourth quarter of 2018, the company introduced an entirely new handcrafted espresso beverage in more than 9,000 Dunkin' Brands’ U.S. restaurants.

Being one of the well-established global quick-service restaurant brands, Dunkin' Brands enjoys immense customer trust and brand loyalty. This, in turn, makes it easier for the company to launch new product lines. Also, it is making solid efforts toward menu innovation, especially on premium products to offer great beverages, which are encouraging.

Banking on its already established namesake, Dunkin' Brands has undertaken the implementation of a six-part plan to fuel the company’s strategic growth in the United States 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 innovation; improving the restaurant-like experience; and driving consumer packaged goods and new channels.



Concerns

Dismal sales performance at Baskin-Robbins U.S. has been a major concern. In first-quarter 2019, Baskin-Robbins U.S. sales declined 2.2%, following a decrease of 9.2%, 1.1%, 1.1% and 0.6%, in the fourth, third, second and first quarter of 2018, respectively. Dunkin' Brands stated that Baskin-Robbins U.S. is in the initial stages of brand transformation.

Moreover, the restaurant industry is plagued with high costs of operations owing to increased labor costs and other administrative expenses. Dunkin’ Brands have also been facing margin pressure due to higher costs of operations. In 2018, total operating costs and expenses increased 2.5% year over year. Meanwhile, total operating costs and expenses increased to $220 million compared with $213.5 million in the prior-year quarter.

Key Picks

Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Yum China Holdings, Inc. YUMC and Denny's Corporation DENN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle Mexican Grill and Yum China’s long-term earnings are likely to witness 19.2% and 9.8% growth, respectively.

Denny's earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the average beat being 8%.

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