Dunkin' Brands Earnings Preview: Expect A Stable Quarter

Dunkin' Brands ( DNKN ) is set to announce its Q3 earnings on October 24. Shares of the company have gained close to 40% this year on the back of a strong second quarter earnings and on the announcement of expansion plans in the Western part of the country, especially in California.

Dunkin' Donuts' American operations contribute almost 80% to the stock price as per our estimates. Dunkin' Donuts international stores enjoy nowhere the same royalty rate as those in the U.S. and is the reason why the segment's contribution to the stock price is not that significant.

In addition to Dunkin' Donuts, the company also operates the Baskin-Robbins brand.

We have a $43 price estimate for Dunkin' Brands , which is slightly lower than the current market price.

Expect Stable Same-Store Sales

The management expects Dunkin' Donuts' same-store sales to average about 3.5-4% in the long run. This figure looks an achievable target for Dunkin' Donuts. Most of the expansion will occur in the Western half of the country where the store has a low presence. So, the new stores won't cannibalize the sales of the existing ones. Moreover, there is a scope for the chain to grow its sales in the afternoon segment. Dunkin' Donuts is seen as a breakfast place and only 40% of its sales are generated post 11am.

The restaurant chain has added new sandwiches such as Turkey Sausage Breakfast Sandwich, Angus Steak and Egg Breakfast Sandwich among others this year, in order to lure customers post breakfast hours. The newer stores will also contain more sofas and TVs in order to encourage customers to dine in and order food. Hence, the company is moving in the right direction in terms of generating sales during the daytime.

Dunkin' Donuts' same-store sales in the U.S. accelerated to 4% in the second quarter from 1.7% in the first quarter. Sales were negatively impacted by harsh weather conditions in the Northeast, one of Dunkin's core markets, in the first quarter, but rebounded in the second quarter under more normalized conditions.

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 currency fluctuation.

Restaurant Addition To Continue

During the second quarter earnings release, the company stuck to its previous forecast of adding 330-360 new Dunkin' stores in the U.S.Through the first half of the year, Dunkin' has added 141 new stores in the U.S. In the long term, Dunkin' expects to double the number of stores in the U.S. to about 15,000 within the next twenty years.

Dunkin Donuts Margins Should Decline This Year

Since almost all of the Dunkin' Donuts stores in the U.S. are franchised, the company boasts of extremely high margins. In the second quarter earnings, the segment's reported operating margins declined to 67.7% vs 73.3% in the previous year quarter, primarily due to a one-time expense of $7.5 million related to a volume guarantee with the franchisee-owned supply chain cooperative.

In the absence of one-time expenses, the margins should remain stable for the remainder of the year. For the full year, we expect the margins to fall by approximately 200 basis points mostly due to the one-time expenses incurred in the second quarter.

Scope For Baskin-Robbins To Add Stores In International Markets

Baskin-Robbins' international locations contribute about 15% to the stock price, as per our estimates. The ice cream chain has struggled domestically in the last few years, but is performing well internationally. The company added 299 new stores in 2012, and posted same-store sales growth of 2.8%.

As of June 30, 2013, Baskin-Robbins had 4,601 stores internationally. Considering the company's low penetration levels, we estimate it to easily add 250-300 new stores annually over the next few years. The markets high on the company's priority list are China, Vietnam, the Middle East and the U.K.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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