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Dunkin' Brands' Shares Gain Nearly 30% YTD: More Room to Run?

Zacks Equity Research

Dunkin' Brands Group, Inc. DNKN is poised to grow, given its focus on enhancing the beverage portfolio, strong digital initiatives and aggressive expansion strategies. The company also continues to rely on refranchising to boost earnings. Resultantly, with an impressive share price appreciation, the stock is a profitable investment choice at the moment.

Shares of Dunkin’ Brands have slightly outperformed its industry so far this year. The stock has returned 28.7% compared with the industry’s rally of 28.5%. Moreover, an upward revision in earnings estimates for 2019 reflects analysts’ confidence in the company’s potential. Over the past 30 days, the Zacks Consensus Estimate for its earnings in 2019 has moved up 1.7%. Further, the company delivered positive earnings surprise in each of the trailing four quarters, the average being 9.1%.

 

 

Dunkin’ Brands currently carries a Zacks Rank #2 (Buy) and has a Momentum Score of B. Back-tested results show that stocks, which have the combination of Momentum Scores of A or B and a Zacks Rank #1 (Strong Buy) or 2, can handily outperform peers.

Let’s delve deeper into other factors that make this stock a solid pick.

Top Line to Gain

Dunkin’ Brands continues to boost sales through regular product launches. With the demand for coffee expected to grow going forward, Dunkin 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’ U.S. restaurants.

After the successful addition of cold brew in the beverage portfolio, launch of handcrafted espresso beverage drove incremental sales and traffic, and boosted sales mix by 200 basis points. In fact, in the second quarter of 2019, espresso sales grew more than 40% and contributed to the company’s total performances.

Moving forward, espresso and other frozen beverages are expected to continue the momentum across the beverage portfolio. The company already introduced ready-to-drink bottled iced coffee and Fruited Iced Teas, Dunkin' Energy Punch powered by Monster Energy, and frozen coffee last year. Recently, it launched Donut Fries and a Dunkin' Run platform, a $2 snacking menu, which helped drive sales.

Meanwhile, in January, the company added the Power Platform, which has been driving incremental sales. In April, Dunkin’ Brands launched the Dunkin’ Bowls, which comprises an egg white bowl containing 14 grams of protein and only 250 calories. Power breakfast sandwiches have also been driving the company’s sales.

Dunkin’ Brands highly focuses on building new restaurant designs. It designed a next-generation restaurant involving technology that aims to provide a rich and faster restaurant experience, and deliver quality food and beverages. Of late, there are more than 60 new and remodeled NextGen restaurants across the country. Dunkin’ U.S. franchisees expect to open between 200 and 250 net new units of next-gen restaurants annually over the next 3 years.

Dunkin’ Brands is growing in terms of its use of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivery. These initiatives make it more convenient and accessible to customers.

All these strategies are indicative of the company’s expected top-line growth in 2019. The Zacks Consensus Estimate for its sales in 2019 is pegged at $1.4 billion, suggesting 3.8% growth from the year-ago reported figure.

Refranchising Strategy Safeguards Earnings

Dunkin' Brands operates on a full-fledged franchise model. We believe that refranchising a large chunk of its system reduces the company’s capital requirements and facilitates earnings per share growth. Arguably, earnings growth is of the utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock-price gains). Dunkin’ Brands’ earnings per share are expected to grow 4.8% in 2019.

Strong Brand Recognition & Expansion

The company ranks among well-established global quick-service restaurant brands. As a result, it enjoys enormous customer trust and brand loyalty, making it easier for Dunkin' Brands to launch new product lines. Its increased focus on menu innovation, especially on premium products to offer great beverages, is likely to drive growth. Banking on its already established namesake, the company undertook the implementation of a six-part plan to fuel growth in the United States and better position itself as a beverage-led On-the-Go brand.

Moreover, given its growing popularity, it is expanding footprint in the emerging markets of Asia and the Middle East. The company also considers the untapped market of South Africa a great potential, and has inked a franchise agreement to develop more than 250 Dunkin' restaurants and more than 70 Baskin-Robbins shops in here over the coming years. Such expansion strategies should boost its top line.

The company sees Chile, Philippines, Thailand and Germany on the top of its priority list as these are driving positive results. Meanwhile, Dunkin’ Brands is working on the design of its restaurant image and plans to have beta locations in the market later this year. The new design is believed to be transformational from a design, equipment and technology perspective.

Zacks Rank & Other Key Picks

Dunkin’ Brands currently carries a Zacks Rank #2 (Buy). Some other top-ranked stocks in the industry are Denny’s Corporation DENN, Dave & Buster’s PLAY and McDonald’s MCD, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dave & Buster’s and McDonald’s earnings for the current year are expected to increase 1% each. Denny’s earnings for the next year are expected to grow 8.3%.

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