Morningstar | Dunkin' Adapting to an Evolving Industry, With Several Catalysts in Place to Drive Comps Into 2019
Narrow-moat Dunkin' Brands posted one of the more encouraging third-quarter updates among quick-service operators, as Dunkin' U.S. comps of 1.3% directly benefited from recent menu and operational improvements with additional levers in place to reach its 2020 comp target of 3%. While transaction growth remains elusive--as it does across much of the industry--we believe Dunkin' is ahead of the group when it comes to balancing value ("Go2" breakfast sandwich platform), menu and operational simplification, innovation (particularly in the afternoon daypart, where new Dunkin Run snack products drove the strongest afternoon comps in two years), and technology (12% transactions paid by mobile device, 3% order-ahead). More important, we expect these and other contributors such as new beverage equipment allowing for espresso drink innovation (partly the result of the company's previously announced $100 million investment in Dunkin' U.S. stores) and the rollout of next-generation store locations (60 currently, with plans to introduce a more scalable model next year) will push the company in to positive traffic territory into 2019 and total Dunkin' U.S. comps to the 2% range.2018 guidance remains largely unchanged save for timing adjustments for certain CPG product launches, including Dunkin U.S. comps of 1%, low-single-digit comps at Baskin Robbins U.S., low-to-mid single-digit revenue growth, mid-single digit adjusted operating profit growth (implying adjusted operating margins around 33%), and adjusted EPS of $2.80-$2.82 (which was raised from $2.68-$2.72 because of share-based tax benefits). As such, we're not planning changes to our $68 fair value estimate outside of time value of money adjustments, and see shares as fairly valued at current levels. While we'd prefer a wider margin of safety, we believe the combination of top-line momentum from menu innovations/new restaurant formats and increasing cash returned to shareholders limits near-term downside risk.
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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