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Why Dunkin Brands Group Inc (DNKN) Stock Shouldn’t Disappoint

Luce Emerson

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Corporate America may run on leverage, but there’s no doubt that individual Americans run on coffee. Enter Dunkin Brands Group Inc (NASDAQ:DNKN) to serve that need. Overall, DNKN stock had good news to report last quarter, including a dividend increase of 7.5% from $0.30 in 2016 to $0.3225, and I expect Dunkin’ to have more good news this coming quarter. Second-quarter earnings come out on Thursday.

Why Dunkin Brands Group Inc (DNKN) Stock Shouldn't Disappoint

Source: Chris Waits Via Flickr

DNKN’s unique asset light model — and by asset light, I really mean light at 100% franchised — continues to work very well for them.

It allows for financial flexibility (no big capital expenditures for company-owned stores) and encourages the HQ to focus attention on enhancing brand value and customer loyalty. As such, margins are high and risk to the company is low.

It’s a fantastic business model.

Dunkin’ has done right by its franchisees by strategically investing in its digital assets. The company now has 10 million email subscribers, 6.5 million DD Perk Members and 16 million social connections. While not as tech savvy as say, Starbucks Corporation (NASDAQ:SBUX), DNKN is headed in the same direction to foster a closer 1:1 connection with the consumer.

DNKN’s Domestic Growth Still in Early Stages

People who haven’t spent much time outside of the east coast, may not realize that Dunkin’ hasn’t really made it west of Missouri yet.

This presents a huge opportunity to cover uncharted territory. DNKN is concentrated in New England, which has been its bread and butter. It has methodically expanded outwards from there. So its largest geographic opportunities are in the south and western parts of the U.S. now. In the west, penetration is at a ratio of 1:286,400 compared to 1:8,700 in the core northeast markets.

DNKN estimates the market opportunity in the central and western part of the U.S. at 5,000 stores, which would mean a penetration rate of 1:23,800 — well below that of its core markets. There’s still fill in room in the northeast as well for another 300 stores or so.

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All in all, 17,000 stores is the long-term goal for Dunkin in the U.S. As of Q1, there were 8,884. So, the company will effectively double its current footprint.

While DNKN builds out, I should say their franchisees build out, each incremental unit will be accretive. Returns based on the average store in the emerging and western parts of the U.S. are excellent.

For a standalone traditional Dunkin Donuts Restaurant as opposed to other store formats, cash-on-cash returns are reported at 20%. Estimated unit volumes (presumably run-rate) are $900,000 on $485,000 of initial capex. This remains a compelling proposition for franchisees, and DNKN should not have an issue attracting partners as it expands westward.

I Scream for Ice Cream

Baskin Robbins is still in turnaround mode. Q1 comps earlier this year showed a 2.4% decline, but management has guided to positive comp store sales for the full year. Pure Baskin Robbins stores represented just 6% of 2016 fiscal revenues, leaving much room to grow the brand and business.

The combined store format (half DD/half BR) has raised BR’s profile, and these stores have come to represent 16% of total sales, so not insignificant, but there is still a lot of room for improvement.

They’ll open just ten new stores domestically this year. However, BR seems to have decent success abroad. That is the silver lining here. In all non-U.S. regions the number of BR stores outnumber DNKN, so brand equity does exist.

Even without the BR turnaround and international growth, DNKN stock is a strong brand and franchise with lots of room to run. Management has its eye on the prize, and as the company continues to execute on its 17,000 store plan, shareholders will not be disappointed.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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