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Dunkin' Brands Strategic Efforts to Aid Long-Term Growth

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Shares of Dunkin' Brands Group, Inc. (DNKN - Free Report) are riding high on robust earnings surprise history, sales building initiatives, enhanced digital offerings and franchised business model. In the past six months, the company’s shares have increased 11.6%, outperforming the industry’s gain of 0.5%. However, the U.S. ice cream industry is also shrinking gradually due to a shift to healthier substitutes, consequently impacting Baskin Robbins as well. Let’s delve deeper.

Key Catalysts

Dunkin' Brands has impressed investors with better-than-expected earnings. The company has delivered an earnings beat in six of the trailing seven quarters. Moreover, in the preceding four quarters earnings have surpassed the Zacks Consensus Estimate by an average of 5.2%. Following earnings beat in the first quarter of 2018, the company’s raised guidance. For 2018, Dunkin’ Brands expects adjusted earnings in the range of $2.69-$2.74 per share (up from the previously guided range of $2.40-$2.45 EPS).  Earnings estimates for 2018 have moved up 2.6% over the last 60 days. Given its progress on the fundamentals, the company is likely to perform well in the quarters ahead.

Dunkin' Brands is a well-established global quick service restaurant brand. As a result, it enjoys enormous customer trust and brand loyalty making it easier for the company to launch new product lines. Banking on its already established namesake, the company has undertaken the implementation of a six-part plan to fuel Dunkin’ Brands’ strategic growth in the United States and better position itself as a beverage-led On-the-Go brand. That plan includes building its coffee culture; faster and improved product innovation; targeted values and smart pricing; leadership position in digital innovation; improving the restaurant-like experience; and driving consumer packaged goods and new channels.

The Zacks Rank #3 (Hold) company continues to boost sales through regular product launches. With the demand for coffee expected to grow going forward, Dunkin’ Donuts’ is continuously adding new coffee beverages to the menu, both in the value and premium offering segment, like the Macchiato's line of products and the recent — Cold Brew coffee. On an incremental sales basis, cold brew has been the most successful product launch and is helping to drive the brand’s coffee credibility. Moreover, the company’s robust digital initiatives are driving traffic and guest experience.

Concerns

As Dunkin' Brands has outperformed the industry in the past six months, the stock’s valuation looks stretched. The stock has a trailing 12-month P/E ratio of 25.96, which is below the high level of 28.14 scaled in a year. On the contrary, the trailing 12-month P/E ratio for the industry and the S&P 500 is 24.68 and 19.94, respectively.

The company is facing competition from larger fast casual companies which offer healthier menu options and are gaining popularity among consumers. Further, the company’s coffee offerings face intense competition from one of the coffee giants — Starbucks — boasting a much larger scale of operations. Additionally, Dunkin' Donuts generates a chunk of revenues from the breakfast segment, which is gradually becoming more competitive.

The U.S. ice cream industry is shrinking gradually. In the recent times, the trend of ice cream consumption at home has increased as several key brands are now available at grocery stores. Further, consumers are shifting more toward healthy frozen yogurt and fruit and vegetable-based flavors. Consequently, declining sales at ice cream parlors would hurt Dunkin' Brand's revenues in the near term. Moreover, the company is experiencing lower than expected sale in ice cream products in its international segment too.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. (WING - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Denny's Corporation (DENN - Free Report) . While Wingstop sports a Zacks Rank #1 (Strong Buy), Dine Brands and Denny's carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has delivered better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

Denny's has reported better-than-expected earnings in the preceding two quarters.

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