Dunkin’ Brands (DNKN) is on the Hedgeye Restaurants Best Ideas list as a SHORT.
HEDGEYE OPINION
This has been a painful call for me in 3Q16. DNKN is the 5th best performing restaurant stock we follow. The delivery stocks (PZZA, DPZ and WING) are the top three followed by JACK (unfortunately another SHORT call).
I get that the DNKN business model is strong; I just can’t see the recovery in the sales trends. Ultimately, I believe that will lead to slowing unit growth in 2017. That being said, the company can manage earnings better than most companies. Despite missing the SSS estimates for the last four quarters, DNKN has managed to beat the EPS numbers every quarter.
After updating the quarterly sneak peek I’m struck at how bearish the street is on DNKN. Being part of consensus is a strange place for me, but for DNKN it feels like the right place to be.
STOCK PERFORMANCE
DNKN has shown strong performance over the past 12 months, increasing 18.5%. The company is going to need to post accelerating SSS performance to continue the stock price momentum.
- 1-Month – 5.2%
- 3-Month – 8.5%
- YTD – 18.7%
- 12-Month – 18.5%
BEAT/MISS RATIO
- Revenues – 5 for 6 (slight miss last quarter)
- Company-owned Same-Store Sales – 2 for 6 (DNKN has missed the last 4 quarters)
- EPS – 6 for 6 (The last time DNKN missed was 4Q14)
- Price Impact – negative 4 of the last 5 quarters (the biggest decline being in 2Q15, when the stock fell 4.9%)
SHORT INTEREST – At 12.4% short interest is very high relative to others in the group. Short interest for SBUX, MCD and DPZ are 1.1%, 1.3% and 5.2%, respectively.
BROKER OUTLOOK – 18% buy ratings down from 43% YoY. The average target price is $48.52, down 4.9% from current levels.
EARNINGS REVISION – DNKN’s EPS estimates have shown a steady increase in the out years:
- 3Q16E – currently $0.58, has ticked down $0.01 since March
- FY16E – currently $2.21, up from $2.19 in January 2016
- FY17E – currently $2.43, down from $2.47 in January 2016
VALUATION – Currently trading at 14.31x NTM EV/EBITDA - YTD the EV/EBITDA multiple has improved from 13.67x since the beginning of the year. Next to DPZ at 18.6x NTM EV/EBITDA, DNKN is the most expensive “asset light” business model stock.
OPERATIONAL PERFORMANCE
SAME-STORE SALES
- System-Wide SSS: CM is estimating +0.8% or +0.9% on a 2-year basis, versus +0.7% in 2Q16, which represents a 20bps slowing sequentially in the 2-year average
FRANCHISED DOMESTIC SSS
- DUNKIN DONUTS SSS: CM is looking for +1.2% or +1.2% on a 2-year basis, versus +1.7% in 2Q16, which represents a 50bps decrease sequentially in the 2-year average
- BASKIN-ROBBINS SSS: CM is looking for +0.5% or +4.0% on a 2-year basis, versus 2.0% in 2Q16, which represents a 200bps increase sequentially in the 2-year average
FRANCHISED INTERNATIONAL SSS
- DUNKIN DONUTS SSS: CM is looking for -1.6% or -0.4% on a 2-year basis, versus -1.6% in 2Q16, which represents a 120bps increase sequentially in the 2-year average
- BASKIN-ROBBINS SSS: CM is looking for -3.5% or -3.0% on a 2-year basis, versus -4.6% in 2Q16, which represents a 160bps increase sequentially in the 2-year average
NEW UNIT NET ADDITIONS – DNKN has marginally beat the # store opened at quarter end for the last two quarters. The system wide # stores estimate for 3Q16 is 19,810, up 3.3%.
- TOTAL DUNKIN DONUTS – 511 up 4.4% YoY
- DUNKIN DONUTS USA – 374 up 4.5% YoY
- DUNKIN DONUTS INTL – 133 up 4.1% YoY
- TOTAL BASKIN ROBBINS – 114 up 1.5% YoY
- BASKIN ROBBINS USA – 41 up 1.6% YoY
- BASKIN ROBBINS INTL – 73 up 1.4% YoY
MARGINS
- G&A: CM is projecting 29.2%, which represents a decline of 4bps YoY
- EBITDA MARGIN: CM is expecting 55.7%, which represents an increase of 276bps YoY
- OPERATING MARGIN: CM is expecting 52.7%, which represents a decrease of 218bps YoY
GUIDANCE
“Our comp store sales guidance remains unchanged. We continue to expect Dunkin' Donuts US comp store sales growth of between 0% and 2% and Baskin-Robbins US comp store sales growth of between 1% and 3%.”
“Our development targets also remain unchanged. We continue to expect between 430 and 460 net new Dunkin' Donuts US restaurants, excluding the closure of approximately 30 Speedway self-service coffee stations, between five and 10 net new Baskin-Robbins US restaurants, and approximately 200 net new restaurants across the two brands international.”
“From a revenue perspective, we now expect growth of between 3% and 5% as a result of the sale of Company-owned stores in the second quarter as well as the anticipated future sales of Company-owned stores in the balance of 2016.”
“We are reaffirming our targets for adjusted operating income growth of between 8% and 10%, and adjusted earnings per share of $2.20 to $2.22 on a 53-week basis. We are also updating our full-year share comp guidance to 93 million shares outstanding. Previously, it was 94 million. And we continue to expect a 38.5% tax rate.”
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
