THE HEDGEYE EDGE
Slowing Top Line:
Since peaking in 4Q12, Dunkin Brands' 2-year same-store sales trends have slowed by over 350 basis points to 1.7% in 1Q16. Adjusting for the weather benefit in 1Q16, 2-year sales trends are likely flat. The self-inflicted issues (more on that below) coupled with the increasingly competitive environment, suggest that it’s unlikely that DNKN can regain momentum anytime soon. We believe that major internal changes are needed to fix the brand beyond the ones already announced.
Slowing top line is also indicated by our proprietary Donut Tracker model. It continues to trend downward, making DNKN’s positive performance in 1Q16 look like a one quarter phenomenon supported by price, and is not indicative of stability or strength.
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INTERMEDIATE TERM (TREND)
Overcomplicating The Menu Is Bad For Operations:
DNKN currently faces an issue many operators have faced => menu overload. Over the last four years, the company has shifted away from its core competency and significantly increased the number of menu items. In addition, Dunkin’s barbell menu strategy (value versus premium products) is adding complexity to the menu, slowing down service times and increasing costs in the supply chain. The number of Dunkin’ menu items is up over 43% since 2010 and up 19% YoY in 2015.
LONG TERM (TAIL)
Slowing Unit Growth And Uses of Cash:
The slowing sales trends poses a longer-term risk to the company => slowing unit growth. In addition, the further the brand gets from the core markets in New England, the more expensive it is to build stores. The combination of slowing sales trends and lower new unit volume increases the likelihood that the company slows unit expansion. Finally, the company’s ability to pay out significant amounts of cash to shareholders is also at risk.
ONE-YEAR TRAILING CHART
