Morningstar | Dunkin's Blueprint for Growth Gaining Steam, Should Continue With Equipment/Technology Investments
We believe the key takeaway coming out of narrow-moat Dunkin Brands' second-quarter update is that its U.S. Blueprint for Growth is gaining steam, with plans to invest $100 million in new equipment and technology infrastructure and an expanded partnership with mobile wallet provider CardFree making its 2020 target of 3% comps more feasible. Dunkin' U.S. comps of 1.4%--an acceleration from 0.8% last quarter--were driven by average ticket increases stemming from the nationwide "Go2" breakfast sandwich promotion, as well as an impressive 75% beverage attachment rate. We expect transaction growth to improve gradually over the next several quarters as menu simplification efforts benefit peak hour throughput, new beverage equipment allowing for espresso drink innovation, next generation store locations continue to open, and one-to-one mobile marketing efforts. We also believe that these efforts, coupled with new in-store CPG products, can help reverse negative transaction trends during the afternoon daypart, making full-year comps in the 1%-2% range appear achievable (compared with unchanged guidance calling for 1% growth).Some may question the magnitude of the $100 million investment--65% of which will go toward new equipment, 30% for technology infrastructure, and 5% for the rollout costs, spread between the back half of 2018 and 2019--as it was the primary factor in the reduced operating income growth (now mid-single-digits versus mid- to high-single-digits previously) and adjusted EPS outlook for the year ($2.68-$2.72 versus $2.69-$2.74). However, we believe the longer-term top-line and operational efficiency benefits stemming from these efforts more than outweigh the near-term financial hit, resulting in a modest increase to our $64 fair value estimate. 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.
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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