Dunkin' Earnings Preview: Same-Store Sales, Margins Under Spotlight

Feb 5 2014, 12:59pm CST | by

Dunkin' Earnings Preview: Same-Store Sales, Margins Under Spotlight

Dunkin’ Brands 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 earnings.

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 earnings:

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 currency fluctuation.

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 years.

See full analysis for Dunkin’ Brands

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Source: Forbes Business


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