) is scheduled to announce its Q4 and full-year earnings on
February 6. In addition to the Dunkin' Donuts brand, the company
also runs the Baskin-Robbins chain. Through the three quarters,
Dunkin' generated an income of 97 cents a share. For the full year,
the company's management expects the earnings to be at the lower
end of its guidance of $1.50-$1.53 per share. Shares of the company
gained almost 50% in 2013 on the back of two solid quarterly
We have a $48 price estimate for Dunkin Brands
, which is in line with the current market price. Stores operating
under the Dunkin' Donuts brand in the U.S. contribute more than 75%
to the company's valuation, as per our estimates.
Here are some of the things to watch out for in the upcoming
a) Comparable Sales Growth
The same-store sales figure for the first three quarters for
Dunkin' Donuts stores in the U.S. stood at 1.7%, 4% and 4.2%
respectively. Harsh weather in the first quarter impacted its sales
during the first quarter, but the company has done well otherwise.
In the long term, we estimate that Dunkin' Donuts will be able to
grow its comparable sales by 3.5-4% annually. This is primarily
because there is a scope to increase sales during the afternoon
segments. Till last year, Dunkin' Donuts generated only 40% of
the sales after 11am.
The company has upped its focus on sandwiches and pretzels -
items that the diners are likely to consume during the daytime and
in the evening. Dunkin' is also refurbishing its existing
restaurants to incorporate cushion seating and TVs in order to
attract more customers during the daytime.
Comparable sales, or same-store sales, is an important measure
to gauge a restaurant's performance since it only includes the
restaurants open for more than a year and excludes the effect of
b) Operating Margins
Since Dunkin' Donuts is a near 100% franchised brand, it has
very high margins. During the third quarter, Dunkin' Donuts U.S.'
reported margins stayed relatively stable at 74.7%, up 100 basis
points compared to the margins in Q3 2012.
Back in 2012, the company announced it was ready to offer
incentives such as reduced fee and royalty to its franchisees in
order to fulfill its expansion drive. As a result, there could
be some deterioration in the long term margins of the company.
Margins will also depend on the magnitude of the comparable
sales growth. The majority of the expenses involved in franchising
a restaurant brand are fixed (since Dunkin' doesn't have to incur
labor, occupancy or raw material costs). Therefore, higher
franchisee sales spread out the expenses over a bigger revenue base
and widen the overall margins.
c) Store Expansion
In 2013, the company added 790 new stores globally, out of which
371 were Dunkin' Donuts stores in the U.S. In 2014, the
company plans to add another 380-410 stores. The Western part of
the U.S. is a major focus area for the company since it has little
presence in the region. At the start of 2013, there were only 191
Dunkin' Donuts stores in the Western half of the country.
The company eventually plans to raise that figure to 5,000
stores, including 1,000 in California. Dunkin' entered into Denver
last year and also signed agreements with franchisees to open
nearly 90 stores across states such as California, Utah and
Colorado by 2014-2015. Overall, Dunkin' plans to almost double the
number of stores in the U.S. to 15,000 within the next 18-20
See full analysis for Dunkin' Brands
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