Morningstar | Dunkin's Espresso Rollout Creates Short-Term Disruption, but Expect Top-Line Acceleration in 2019
On the heels of recent menu and operational improvements, narrow-moat Dunkin's fourth-quarter results were a disappointment as Dunkin U.S. comps slid to flat growth from the 1.3% third-quarter increase. We buy management's explanation that the fourth-quarter weakness was not the result of competition but instead a deliberate decision to pull back on marketing to minimize operational complexity while installing espresso machines at 9,000 locations. We see several benefits of the espresso platform, including higher average checks, increased afternoon daypart penetration, and connecting with younger consumers. Between espresso momentum, the return of Go2 breakfast sandwich promotion in January, mobile app enhancements, and easier comparisons, we expect comps to accelerate from here and come in close to 2% for 2019 (consistent with guidance of low-single-digit growth).The other noteworthy development was updated targets calling for 200-250 net new Dunkin U.S. units annually the next three years, with 2019 coming in toward the lower end of this target. This is deceleration from the target of 1,000 net new units from 2018-20 introduced last year. However, we see management's explanation of "quality over quantity" while emphasizing higher-volume next-generation locations and being more selective with nontraditional locations as valid. In our view, the more important takeaway is that Dunkin's longer-term revenue growth (low- to mid-single-digit growth) and operating profit growth (mid- to high-single-digit growth) targets remain intact, with higher-volume locations and CPG sales making up the difference for fewer unit openings.
We're not planning material changes to our $70 fair value estimate outside of time value of money adjustments. While we'd prefer a wider margin of safety even after today's pullback, we believe the top-line momentum from menu innovations/new restaurant formats and increasing cash returned to shareholders make Dunkin a solid long-term play.
Dunkin's full 2019 guidance strikes us as realistic, including low-single-digit Dunkin U.S. and Baskin-Robbins U.S. 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%), a full-year effective tax rate of 28%, reported EPS of $2.74-$2.83, and adjusted EPS of $2.94-$2.99.
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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