Morningstar | Blueprint for Growth Strategies Validated by Dunkin's Strong 2019 Start, Reinforce Long-Term Outlook
We had anticipated a bounceback in narrow-moat Dunkin's U.S. comps following last quarter's deliberate decision to reduce marketing as it rolled out new espresso equipment, but the stronger-than-expected start to 2019 give us greater conviction in our long-term assumptions. Dunkin U.S. comps of 2.4% (ahead of market expectations of 1.5%) was the clear highlight from the quarter, and validate "Blueprint for Growth" strategies such as menu simplification, espresso relaunch, the Go2 sandwich value platform, new premium additions (notably, the Power Breakfast sandwich), and mobile app enhancements (which helped to drive a 25% increase in mobile orders, which now represent 4% of transactions). While the QSR category remains highly promotional and it will face more difficult compares as the year progresses, we now expect Dunkin U.S. comps will come in slightly above 2% for 2019 (still consistent with guidance of low-single-digit growth) and set the stage for 2%-3% growth in 2020-21.As it continues to shift to a "quality over quantity" approach with new expansion--emphasizing higher-volume next-generation locations and being more selective with nontraditional locations--we're encouraged that the NextGen format stores are generating strong returns, which should become an increasing new unit productivity contributor, and by extension, system sales. Assuming our outlook calling for 2%-3% comps and 2%-3% annual restaurant openings are valid for the next five years, it will put Dunkin closer to 5% system sales growth (up from our previous estimate of 4%-5%) and position it for 7%-8% operating profit growth (via G&A expense reductions), implying high-30s operating margins.
We're planning to add a dollar or two to our $72 fair value estimate based on the strong start to 2019 and more optimistic near-term sales results. While we see shares as fairly valued, we believe the top-line momentum and increasing cash returned to shareholders make Dunkin a solid long-term play.
Dunkin's full 2019 guidance remains largely unchanged, including low-single-digit Dunkin U.S. and Baskin-Robbins comps, low- to mid-single-digit revenue growth (including low- to mid-single-digit growth from CPG products), mid- to high-single-digit adjusted operating profit growth (implying adjusted operating margins just above 33%), and a full-year effective tax rate of 28%. The company will incur $13 million in debt extinguishment expenses tied to an April securitized debt placement of $1.7 billion and result in a reduction in its GAAP EPS guidance range (now $2.63-$2.72, versus $2.74-$2.83), but management's adjusted EPS outlook remains in place at $2.94-$2.99 (and we expect the company to come in near the high end for the year).
Dunkin' Brands Group is a franchisor of quick service restaurants serving hot and cold coffee and baked goods, as well as ice cream. Through its Dunkin' Donuts brand, the company franchises restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. The company licenses Dunkin' Donuts brand products sold in certain retail outlets such as retail packaged coffee, Dunkin' K-Cup? pods, and ready-to-drink bottled iced coffee. Through its Baskin-Robbins brand, the company franchises restaurants featuring ice cream, frozen beverages, and related products. The company distributes Baskin-Robbins ice cream products to certain markets for sale in Baskin-Robbins restaurants and certain retail outlets.
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