Dunkin' Brands Group, Inc. (DNKN - Free Report) is currently one of the best-performing stocks in the U.S. restaurant space. With an impressive share price appreciation, the stock is a profitable investment choice at the moment.
Shares of Dunkin’ Brands have outperformed its industry in the past year. The stock has returned 25.8% compared with the industry’s growth of 0.8%. Moreover, an upward revision in earnings estimates for 2018 reflects analysts’ confidence in the company’s future potential. Over the past 30 days, the Zacks Consensus Estimate for 2018 earnings has edged up 0.4%. Further, the company delivered positive earnings surprise in three of the trailing four quarters, recording an average beat of 5.22%.
Dunkin’ Brands carries a Zacks Rank #2 (Buy) and has a Momentum Score of A. Back-tested results show that stocks with Momentum Scores of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 handily outperform others.
Let’s delve deeper into the other factors that make this stock a solid pick.
Leveraging Strength of Solid Brand Presence
Dunkin' Brands ranks among the well-established global quick service restaurant brands and hence enjoys enormous customer trust and brand loyalty. 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. The plan includes building its coffee culture; faster and improved product innovation; targeted values and smart pricing; being a leader in digital innovation; improving restaurant dining experience; and driving consumer packaged goods and new channels.
Moreover, given its growing popularity, the company is expanding footprint in the emerging markets of Asia and the Middle East. The company considers the untapped market of South Africa having a great potential and thus inked a franchise agreement to develop more than 250 Dunkin' Donuts restaurants and in excess of 70 Baskin-Robbins shops there, over the coming years. Such expansion strategies should boost the company’s top line.
Sales-Building Efforts Reflect on Top-Line Growth
Dunkin' Brands continues to boost sales through regular product launches. With the demand for coffee expected to further accelerate, Dunkin Donuts’ is continuously adding new coffee beverages to the menu, both in the value and premium offering segments, like the Macchiato's line of products and 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. In 2017, the company launched ready-to-drink bottled iced coffee and Fruited Iced Teas, Dunkin' Energy Punch powered by Monster Energy and its newest innovation, frozen coffee.
Apart from innovation across menu chains, the company is growing in terms of its usage of digital technology through DD card, DD mobile app, DD Perks rewards program, and On-the-Go ordering and delivery. Additionally, the company expects to see a larger percentage of Dunkin’ restaurants with drive-thrus (85% in 2017, compared to only 70% five years ago). This increased emphasis on drive-thrus is huge part of the company’s strategy to be an On-the-Go brand and offers frictionless guest experience. Furthering its delivery program, Dunkin’ Donuts expanded its delivery service to Miami, in partnership with DoorDash. All these strategies are indicative of the company’s expected top-line growth in 2018. The Zacks Consensus Estimate for 2018 sales is pegged at $1.3 billion, reflecting 53.1% year-over-year growth.
Refranchising Strategy Safeguards Earnings
Dunkin' Brands operates on a full-fledged franchise model. We believe refranchising a large chunk of its system reduces the company’s capital requirements and facilitates earnings per share growth. Meanwhile, free cash flow continues to grow, facilitating reinvestment to increase brand recognition and shareholders’ return. Moreover, since a major portion of its business is refranchised, Dunkin’ Brands is less affected by food-cost inflation compared to peers. The company’s asset-light business model thus works well and allows it to distribute cash to its shareholders in the form of dividends or share buybacks.
Arguably, earnings growth is of the utmost importance for determining a stock’s potential, as surging profit levels often indicate solid prospects (and stock-price gains). In 2018, Dunkin’ Brands’ earnings per share are expected to grow 12.8%.
Other Stocks to Consider
Other top-ranked stocks from the restaurant space include Wingstop (WING - Free Report) , Dine Brands (DIN - Free Report) and Domino’s (DPZ - Free Report) . While Wingstop and Dine Brands sport a Zacks Rank #1, Domino’s carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Wingstop, Dine Brands and Domino’s earnings for 2018 are expected to grow 13.5%, 23.1% and 55.2%, respectively.
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