Why Dunkin’ Brands Closing 450 Stores is Good News for Investors
It's hard to ignore when a restaurant announces the closing of hundreds of stores. With Dunkin' Brands Group (NASDAQ: DNKN) closing 450 stores inside of Speedway locations, investors might be tempted to view this as though Dunkin' can't afford all of its locations. The fact that Dunkin' Brands suspended its dividend to save cash would seem to reinforce this theory.
However, the long-term story for Dunkin' has never been stronger. Investors would be wise to use the recent downdraft as an opportunity to buy the shares.
Sometimes less leads to more
Both Dunkin' and Starbucks (NASDAQ: SBUX) are planning on closing hundreds of stores this year, but for different reasons. According to Dunkin', the locations being closed are "lower volume units" that represent less than 0.5% of its U.S. annual systemwide sales. By comparison, Starbucks plans to close around 400 company-owned locations over the next year and a half.
Source: Dunkin' Brands.
The good news for investors in both companies is that they plan on opening new stores as well. On Starbucks' side, it is focused primarily on new locations in China. The company originally planned to open 600 total locations for 2020. Though Starbucks has cut this goal to 300 locations, 100 of those stores have been pushed to 2021.
Dunkin' plans on opening about 250 new locations and focusing on its NextGen restaurants. This store concept has multiple advantages. First, the restaurants are reportedly 25% more energy efficient. Second, they offer an on-tap beverage bar. Third, the stores have a double drive-thru with order confirmation screens.
The company believes new locations with a broader menu will lead to superior sales over the long term. In addition to potentially better sales, investors in Dunkin' have a hidden reason to buy the shares: the invisible dividend.
Buying a dividend that doesn't currently exist
Part of the reason Dunkin' shares have taken a hit is management's choice to suspend the regular dividend. The company said its focus is to preserve its balance sheet by reducing expenses and suspending both the dividend and share repurchases. In the last quarter, Dunkin's core free cash flow (net income plus depreciation minus capital expenditures) was a negative $43.4 million. Paying a dividend of about $33 million per quarter when you are burning cash isn't a great idea.
Starbucks seems to be in a slightly better situation. The company suspended its share repurchase program, yet left the dividend intact. In the last six months, the company's core free cash flow amounted to about $1.2 billion compared to dividends of $965 million. With an 80%-plus core payout ratio this quarter, compared to last quarter's ratio of 56%, there isn't a lot of wiggle room. That being said, Starbucks believes it has seen the worst of its cash burn so longer-term, its dividend should be safe.
Where Dunkin' is concerned, the company's dividend is in hiding right now. Prior to the suspension, Dunkin's average dividend increase over the last five years was just under 9% annually.
In addition, the company said during its conference call that "we do not have any maturities coming due on our debt until February of 2024." For a bit of perspective, in the last two years, Dunkin' reported full-year core free cash flow of $223 million and $247 million, respectively. It seems clear that the pandemic is causing a short-term issue and that Dunkin' will bring the dividend back. The implied dividend for 2020 works out to about $1.61 per share, which at today's prices means a potential yield of better than 2.3%. Aside from the invisible dividend, there are some quiet facts that suggest Dunkin's business has challenges, but it will recover.
The quiet facts
One of my favorite sayings from Peter Lynch is, "It's senseless to invest in a downtrodden enterprise unless the quiet facts tell you that conditions will improve." Unless you believe the pandemic will cause customers to abandon their Dunkin' run, the company's long-term growth prospects remain unchanged.
Dunkin's CEO Dave Hoffman reassured investors about the return of the dividend, saying that "The Board of Directors remains committed to paying dividends over the long-term and expects to reinstitute the program when it is appropriate to do so." When it comes to sales, Dunkin's U.S. comps were up 3.5% over the first 10 weeks of the quarter. In fact, Dunkin' U.S. was on pace for the highest quarterly comparable-store sales growth in nearly seven years.
In a similar way, Baskin-Robbins U.S. comps were up 11% in the first 10 weeks, then fell apart as COVID-19 lockdowns took hold. Further, the company said, "Average weekly sales have leveled off during the first four weeks of the second quarter and we are starting to see slight increases week-over-week."
The bottom line is Dunkin' is closing 450 lower-performing stores hoping to ultimately replace them with better-designed locations. While investors aren't being paid a dividend today, it looks likely to be returned in the future.
Dunkin' was on pace for significant sales increases prior to the pandemic, and a recovery seems to be on the horizon. Long-term investors should look beyond the current issues, and take this opportunity to scoop up Dunkin' shares while they are still down for the year.
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Chad Henage has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.