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Why Dunkin Stock Can Beat the S&P 500

Dunkin Brands Group Inc (NASDAQ:DNKN) has underperformed the S&P 500 in the past year. Its stock price gained 16% year-to-date versus a 25% rise for the wider index.

However, in my view, the fast food company's plans to upgrade its loyalty program and invest in improving the appearance of its restaurants could lead to it beating the S&P 500 in the upcoming years.

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Loyalty program

The company enhanced its loyalty program in the fiscal 2019 third quarter. Its loyalty program members can now earn reward points via payment method such as cash and credit card. This has increased its sales per customer and could boost take-up of its loyalty program across a larger range of consumers.

Dunkin also added the option for its customers who are not part of its loyalty program to place orders through its mobile app. This contributed to a 25% increase in the company's orders that were placed through its mobile app in the fiscal 2019 third quarter.

The changes made by the company to its loyalty program could encourage an increasing number of its customers to sign up. This will provide the business with a large amount of data on the buying habits of its customers that can be used to personalize its offers and recommendations. The end result could be higher sales, as well as a greater sense of customer loyalty that widens its economic moat.

Investing for growth

The company launched products that contain plant-based protein in the fiscal 2019 third quarter. For example, it now sells the Beyond Breakfast Sausage, as well as two vegan desserts. They could widen Dunkin's appeal to a broader range of consumers at a time when alternatives to meat products are becoming increasingly popular.

The business is also upgrading its restaurants to give them a more modern appearance. This has resonated with its customers according to the company's recent updates. It contributed to an increase in Dunkin's customer satisfaction scores in its refurbished restaurants compared to its existing locations. The company expects to continue to refurbish its restaurants in the 2020 fiscal year, which could catalyse its financial performance.

The business plans to open additional restaurants in the U.S. alongside its restaurant refurbishments. This follows its opening of 55 new restaurants in the U.S. in the fiscal 2019 third quarter.

Potential risks

The fast food industry faces an uncertain future. Rapid expansion by a number of nationwide operators means that the market is saturated. This could mean that Dunkin finds it increasingly difficult to deliver a high rate of sales growth.

Its margins may be negatively impacted by increases in the minimum wage across a variety of regions in which it operates. This effect could be compounded by a lack of available labor that makes the company's task of opening new restaurants more challenging.

In response, the business is expanding its international presence. For example, it has established agreements with third-party delivery companies in the majority of its international markets to cater to the rising popularity of fast-food delivery. This contributed to the company's double-digit increase in sales performance in many of its international markets in the fiscal 2019 third quarter.

Dunkin's investment in its international delivery services could eventually be successfully applied in the U.S. This could provide it with a competitive advantage compared to its sector peers, and may enable it to generate higher sales growth than many of its rivals.

Outlook

Market analysts forecast that the company will report a 5.1% rise in its earnings per share in fiscal year 2020. Its forward price-earnings ratio of 24.9 is not cheap, but its growth strategy could lead to a rising stock price in the long run.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.