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Dunkin' Brands Up 15% in 3 Months: What's Behind the Rally?

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Dunkin' Brands Group, Inc. (DNKN - Free Report) continues to gain from various sales-building initiatives including product launches, focus on beverage portfolio and aggressive expansion, and enhanced digital offerings. Notably, the company’s shares have gained 15.1% in the past three months, compared with the industry’s growth of 11.7%. However, high debt and the coronavirus pandemic continue to hurt the company. Let’s delve deeper.

Key Catalysts

The company is growing in terms of its use of digital technology through DD card, DD mobile app, DD Perks rewards program, On-the-Go ordering and delivery. During third-quarter 2019, the company added guest ordering for mobile on-the-go app. These initiatives make Dunkin’ convenient and accessible to customers. It also introduced multi-tender payment flexibility for the DD Perks program, which will provide more choice and convenience to Dunkin's on-the-go guests.

Additionally, the company anticipates a large percentage of Dunkin’ restaurants to open with drive-thrus. This increased emphasis on drive-thrus is huge part of the company’s strategy to be an On-the-Go brand and offer frictionless experience to guests. Furthering its delivery program, Dunkin’ has expanded its delivery service to Miami in partnership with DoorDash, covering over 70% of Baskin-Robbins stores across the United States.

Meanwhile, the company also partnered with Grubhub to create a Dunkin’ delivery system with POS integration. During second-quarter 2020, the company doubled its delivery footprint from 4,000 to 5,000 stores. In May 2020, the company also partnered with Uber Eats. During second-quarter 2020, delivery sales improved more than 250% online sales of cakes, quarts and novelties were up more than 150% versus the prior period. Delivery is now available in 93% of Baskin-Robbins U.S. shops.

The Zacks Rank #3 (Hold) company ranks among the well-established global quick-service restaurant brands. As a result, it enjoys enormous customer trust and brand loyalty making it easier for the company to launch new product lines. The company’s increased focus on menu innovation, especially on premium products to offer great beverages, is likely to drive growth.

 

Concerns

The coronavirus pandemic had an unfavorable impact on the company’s business, financial condition and operational results in second-quarter fiscal 2020. Although the company’s domestic footprint and high drive-thru mix positioned it favorably to weather the crisis, sales were impeded by temporary closures of restaurants and decline in traffic.

From the beginning of the fiscal third quarter to Jul 26, comparable store sales for Dunkin' U.S. and Baskin-Robbins U.S. locations were declining in low-single digits for open stores. Going forward, the company intends to shutdown 800 Dunkin' U.S. locations (or 8% of the Dunkin' U.S. restaurant footprint) in 2020 to sustain strong profitable future growth. Notably, this initiative will be implemented in conjunction with its franchisees as part of its real estate portfolio rationalization. Internationally, the company anticipates to close 350 restaurants permanently on a gross basis during the second half of 2020. Majority of the closures are expected to be from low-volume sales locations.

Moreover, high debt remains a concern for the company. At the end of Jun 27, 2020, the company’s long-term debt stood at $3 billion, almost flat with the Mar 28 level. Moreover, the company ended second-quarter fiscal 2020 with cash and cash equivalent of $611 million, which may not be enough to manage the high debt level.

Key Picks

Some better-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Papa John's International, Inc. (PZZA - Free Report) and El Pollo Loco Holdings, Inc. (LOCO - Free Report) . Jack in the Box and Papa John's sport a Zacks Rank #1 (Strong Buy), while El Pollo Loco carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Jack in the Box 2021 earnings are expected to surge 17.7%.

Papa John's has a three-five year earnings per share growth rate of 8%.

El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.

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