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Here's Why You Should Hold on to Dunkin' Brands for Now

Zacks Equity Research

Dunkin' Brands Group, Inc. DNKN focuses on various sales-building initiatives, expansion plan and enhancement of digital offerings to drive growth. However, dismal sales performance at Baskin-Robbins international remains a concern. In the past year, the stock has gained 12.4%, compared with the industry’s rally of 19.7%. Let’s delve deeper.

Factors Likely to Drive Performance in 2020

Dunkin' Brands’ increased focus on menu innovation, especially on premium products to offer great beverages, is likely to drive growth. Being one of the foremost global quick-service restaurant brands, it enjoys enormous customer trust and brand loyalty making it easier for the company to launch new product lines.

Moreover, given its growing popularity, the company is expanding presence in the emerging markets of Asia and the Middle East. The company has identified South Africa as a great prospect and has inked a franchise agreement to develop more than 250 Dunkin' restaurants and more than 70 Baskin-Robbins shops in here, in the days ahead. Notably, , the company had more than 13,000 Dunkin' restaurants and 8,000 Baskin-Robbins restaurants at the end of the third quarter.

Dunkin' Brands continues to boost sales through regular product launches. With the demand for coffee expected to keep growing, the company is continuously adding new coffee beverages to the menu, both in the value and premium offering segment. For instance like the Macchiato's line of products and the recent — Cold Brew coffee.

After the successful addition of cold brew in the beverage portfolio, launch of handcrafted espresso beverage drove incremental sales and traffic, and bolstered 200-basis point sales mix. In third-quarter 2019, espresso sales improved more than 40% year over year. In fact, Dunkin Brands’ U.S. comps also grew 1.5% in third-quarter 2019, owing to increase in average ticket. This can be attributed to strong performance of premium beverages like espresso and cold brew, and sales of breakfast sandwiches backed by the success of national Go2s value platform.

The company is also focusing on digitalization to drive sales. 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. During the last reported quarter, the company added guest ordering for mobile on-the-go app. These initiatives make Dunkin’ Brands more convenient and accessible to customers.



 

Concerns

Dismal sales performance at Baskin-Robbins international has been a major concern. In third-quarter 2019, Baskin-Robbins International revenues decreased 0.5% thanks to a decline in sales of ice cream and other products, and low royalty income.

Moreover, the restaurant industry is grappling with high costs of operations, owing to increased labor costs and other administrative expenses. Dunkin’ Brands’ margins have also been under pressure, owing to higher costs of operations. In 2018, total operating costs and expenses increased 2.5% year over year. In the nine months ended Sep 28, 2019, total operating costs and expenses increased 0.8% from the comparable year-ago period.

Zacks Rank & Stocks to Consider

Dunkin' Brands has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Domino's Pizza, Inc. DPZ and Bloomin' Brands, Inc. BLMN. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle Mexican Grill has reported better-than-expected earnings in all of the trailing four quarters, with average being 16.1%.

Domino's Pizza and Bloomin' Brands have an impressive long-term earnings growth rate of 13.7% and 9.8%, respectively.

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