Dunkin’ Brands (NASDAQ:DNKN) investors trailed the market last year as the coffee and snack specialist struggled against the competition on both the premium and value ends of the market. Customer traffic declined through most of 2019, even as it rose for rival Starbucks (NASDAQ:SBUX).
Yet, as they brace for the fourth-quarter earnings report on Thursday, Feb. 6, shareholders have several positive trends in mind that could jump-start sales and profit growth into the new year. These include a major store remodeling program in addition to Dunkin’s aggressive push into delivery.
Let’s look at how these and other factors might have impacted the fast-food chain’s results as it moves into fiscal 2020.
Growing the top line
A key reason why some restaurant stock investors prefer Dunkin’ brands to Starbucks today is its untapped market potential in the United States. While Starbucks is already established throughout the country, Dunkin’ still has room to expand into new metro areas. Shareholders see evidence of that in its expected 200 store launches for full-year 2019.
Dunkin’s modest sales growth lately has come from a balanced contribution between that growing base and higher sales at existing locations, or comps. Yet the comps have been a weak spot, landing at 1.5% over the past six months compared with 6% in Starbucks’ U.S. restaurants.
That gap was driven by weak customer traffic trends at a time when Dunkin’ faced competition in its high-end espresso beverage platform and in the drip coffee it has built a following around. We’ll find out on Thursday whether the chain’s latest menu and marketing moves helped improve its market position.
CEO David Hoffmann and his team highlighted two major initiatives back in early November that they think could boost sales trends over the next few years. The first is its remodeling plan, which modernizes its restaurants while stressing speed and capitalizing on the new espresso-based drink platform. That store layout pushes high-margin products and is lifting customer satisfaction, which explains why management is targeting 500 remodels in 2019 and an even faster upgrade pace in 2020.
The other big trend to follow this week is home delivery, which is a key growth pillar for Starbucks and other peers including McDonald’s (NYSE: MCD). Dunkin’ has a relatively small base of those digital orders right now, but the demand spike in recent months has been huge, especially in markets outside the U.S.
Dunkin’s challenge is to apply those wins in the much more competitive U.S. landscape, but management told investors a few months ago that it is “ready to capitalize on it and boomerang our learnings back” to the domestic market.
Assuming the company hits its fourth-quarter targets, it will have boosted sales by around 4% in 2019 while adding roughly 200 new locations in the U.S. market. Comps should land at around 2%.
Looking out to 2020, the company could easily project a faster expansion pace given its long-term goal of opening 200 to 250 new units each year. The bigger number to watch is the brand’s comps forecast, which might trend closer to flat if Dunkin’ doesn’t make progress toward returning to at least modest customer traffic growth in this competitive market.
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Demitrios Kalogeropoulos owns shares of McDonald’s and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin’ Brands Group. The Motley Fool has a disclosure policy.
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