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Dunkin' Brands' Expansion Plans Bode Well, Competition Tough

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Dunkin' Brands Group, Inc.’s (DNKN - Free Report) aggressive expansion strategies and re-franchising strategy coupled with sales-building initiatives continue to drive the company’s performance. The stock has witnessed a gain of 27.4% in a year’s time, outperforming the industry’s rise of 13.2%. However, stiff competition and decline in ice cream sales remain concerns.

Solid Brand Presence to Drive Growth

Dunkin' Brands has been leveraging on its solid brand presence and expansion strategies. Banking on its established position, the company has undertaken the implementation of a six-part plan to fuel growth in the United States and gain traction as a beverage-led On-the-Go brand. Thus, the company’s continued focus on enhancing its beverage portfolio lends it a competitive edge.

Moreover, the company is expanding its footprint in the untapped market of South Africa. It has inked a franchise agreement to develop more than 250 Dunkin' Donuts restaurants and in excess of 70 Baskin-Robbins shops over the coming years. Such expansion strategies are likely to boost the top line.

Product Innovation to Drive Sales

The company continues to boost sales through regular product launches. Dunkin Donuts is continuously adding beverages to the menu in the value and premium offering segments, like the Macchiato's line of products and Cold Brew coffee. In 2017, the company launched ready-to-drink bottled iced coffee and Fruited iced tea, 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 its mobile app and rewards program. All these strategies are expected to boost the top line.  

Re-franchising Strategy Safeguards Earnings

The company’s major focus on re-franchising minimizes its capital requirements and facilitates earnings per share growth and ROE expansion. That said, since a major portion of its business is refranchised, Dunkin’ Brands is less affected by food-cost inflation compared to peers.






Headwinds

Consumers’ shift toward healthy frozen yogurt and fruit and vegetable-based flavors instead of ice cream could affect the company. In fact, Baskin-Robbins U.S. revenues were down 1.1% from the prior-year quarter to $14.1 million in second-quarter 2018 due to a decrease in royalty income and sale of ice cream. Thus, declining sales at ice cream parlors will hurt Dunkin' Brands' revenues in the near term.

Further, intense competition in the industry could eat into the company’s market share. Large casual companies offering healthier menu options are gaining popularity among consumers. Moreover, coffee giants like Starbucks intensify the competition due to its economies of scale.

If we look at the valuation metric, the company is expensive. Considering the price-to-earnings (P/E) ratio, Dunkin' Brands looks overvalued when compared with the industry. The stock has a trailing 12-month P/E ratio of 27.29, which is above the median level of 25.97 but below the high level of 28.99 scaled in the past year. Meanwhile, the trailing 12-month P/E ratio for the industry is 24.99.

Zacks Rank & Stocks to Consider

Dunkin' Brands carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Good Times Restaurants Inc. (GTIM - Free Report) , BJ's Restaurants, Inc. (BJRI - Free Report) and Dine Brands Global, Inc. (DIN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) .You can see the complete list of today’s Zacks #1 Rank stocks here.

Good Times Restaurants has an expected earnings growth rate of 38.9% for the current year.

BJ's Restaurants has an estimated earnings growth rate of 50.4% for the current year.

Dine Brands Global has an expected earnings growth rate of 69.23 % for the current quarter.

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