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Will Cost Inflation Hurt Dunkin' Brands (DNKN) This Earnings Season?

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Dunkin' Brands Group, Inc. (DNKN - Free Report) is slated to report its second-quarter 2014 results on Jul 24, before the opening bell. Last quarter, it posted a negative surprise of 5.71%. Let’s see what is in store for us this season.

Factors to Consider This Quarter

We are concerned that Dunkin' Brands might be particularly hurt this quarter by the food price inflation. As Dunkin’ Donuts and Baskin-Robbins are almost entirely franchised brands, cost inflation may force the franchisees to hike menu prices. This in turn can result in lower comps, which could lead to a contraction in its margins.

Also, Dunkin' Brands first quarter results were particularly weak due to inclement weather in the U.S. as comps increased only 1.2% at Dunkin' Donuts’ U.S. locations. To add to the woes, comps decreased 2.4% internationally.

Although we believe that the company will be able to turnaround its comps in this quarter, through menu innovation, a drastic change is not expected yet, particularly in a sluggishly recovering economy. Additionally, the intense competition in the U.S. in the doughnut as well as coffee categories also keeps us on the sidelines.

However, we are encouraged by the introduction of more drive-through locations, coupled with breakfast-menu optimization. The company’s newly launched digital initiatives and its global expansion, especially in the in emerging markets, are expected to drive comps growth internationally.

Earnings Whispers?

Our proven model does not conclusively show that Dunkin' Brands is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  Dunkin' Brands’ Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 0.00%.

Zacks Rank: Dunkin' Brands’ Zacks Rank #4 (Sell) when combined with a 0.00% ESP further lowers the predictive power of ESP.

Other Stocks to Consider

Here are some other companies that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

MGM Resorts International (MGM - Free Report) , with an Earnings ESP of +45.46% and a Zacks Rank #3(Hold).

Buffalo Wild Wings Inc. , with an Earnings ESP of +5.04% and a Zacks Rank #3.

Zoe's Kitchen, Inc. with an Earnings ESP of +50.00% and a Zacks Rank #2 (Buy).


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