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Dunkin' Brands Group (DNKN) owns two of the most recognizable brands in the world, Dunkin' Donuts and Baskin-Robbins. It operates over 17,000 locations worldwide, making it one of the industry giants. This company went public on July 26, 2011, and has surged nearly 100% since. It is set to report first quarter earnings, so let's take a deeper look.

The brand overview

Dunkin' Donuts is the world's leading baked goods and coffee chain. There are over 10,000 Dunkin' Donuts locations worldwide, with more than 7,000 in North America alone. The brand is determined to continue expanding with an incredible growth model.

Baskin-Robbins is the largest ice cream chain in the world that sells ice cream, specialty desserts, and various beverages. It operates nearly 7,000 locations worldwide, with just 2,400 being in the United States. Baskin-Robbins is not going to grow nearly as much as Dunkin' Donuts, but it has consistently performed in its market.

Wild wild West: Here comes Dunkin'

Dunkin' Donuts opened 291 new locations in 2012, making it one of the fastest growing quick-service restaurants. This will be surpassed in 2013, with 330 to 360 new locations planned for opening. The most notable aspect of this expansion is that there are hardly any locations in the western United States. Chief Executive Officer Nigel Travis made the most anticipated announcement of his career by saying that Dunkin' Donuts would be expanding to Southern California in 2015. It will start by adding locations in Los Angeles and San Diego, two of the most populated areas of the state. This expansion could end up adding over 1,000 stores in California due to its immense size. Needless to say, this will have a huge impact on earnings.

Same Store Growth

Dunkin' Brands announced full-year earnings for 2012 on January 31. In the report, it showed a 4.2% increase in same-store sales for Dunkin' Donuts locations in the U.S. Management projects a same store growth of between 3% to 4% in 2013. Internationally, Dunkin' Donuts reported a 2.0% same store growth.

Baskin-Robbins had a 3.8% increase in U.S. comparable same-store. This was up from just 0.5% growth in 2011. Management projects same-store growth of 1% to 3% in 2013. Same-store sales are crucial for restaurants and retailers. Dunkin' Brands has been very consistent in this category, leading me to believe it will continue the trend.

Fiscal Year 2012 Highlights

Dunkin' Brands reported annual earnings that impressed analysts and left management patting each other on their backs. Here are the highlights from the report:

  • Earnings per share rose 38% to $1.28
  • Revenues increase 6.1% to $658.2 million
  • Operating income rose 15.3%
  • The dividend was increased 27% to $0.76 annually
  • Adjusted operating margin rose to an impressive 46.3%.

Breakdown of 2012's Revenue:

  • 75% of revenue came from Dunkin' Donuts locations in the U.S.
  • 7% of revenue came from Baskin-Robbins locations in the U.S.
  • 18% of revenue came from international locations

The United States is the core of Dunkin' Brands revenue stream. This is important to note because it means the company is not going to feel a hit from the non-stop woes in Europe or other problem areas. As the American economy continues to recover, revenues will rise too.

Growth buffer: K-cups

K-cups have become very popular in America and have become a nice addition to Dunkin's earnings. The k-cups are single serve pods and are used to brew coffee in Keurig machines. Keurigs are made by Green Mountain Coffee Roasters (GMCR) and are expected to gain an incredible 30% market share of coffee brewed in American homes. These machines can "make coffee shop quality cups in your own home." When the Keurig was first released, it seemed as if it would have a negative effect on Dunkin's earnings. However, management moved quickly and signed a deal to create Dunkin' Donuts K-cups. Now it is estimated that k-cup sales will add $0.01 to 2013's total earnings per share. Barron's currently estimates that these sales will also boost comparable same-store sales by 50 basis points from the fourth quarter of 2012 to the second quarter of 2013. Overall, this was a great move and will help Dunkin' take a larger share of coffee brewed in homes, while continuing to dominate in the public scene.

Corporate guidance

Here is the 2013 guidance provided by management in the annual report:

  • 6-8% revenue growth
  • 10-12% adjusted operating income growth
  • $1.48 - $1.51 earnings per share
  • $125 - $135 million in free cash flow

I think all of these numbers are attainable. It is very similar to the growth experienced in 2012, showing it is consistent. I believe 2014 and 2015 will have a much higher growth-rate when the California stores are being built and the franchise fees start rolling in.

Earnings Preview

Dunkin' Brands is set to release first quarter earnings on April 25. Currently, analysts expect earnings per share to come in at $0.29. This would represent a 16% growth year-over-year. I think it will meet expectations or surpass them by a penny or two. This is because Dunkin' has been signing contracts left and right to add franchisees in the West and I expect sales to reach all-time highs for the first quarter.

The bottom line

The rapid expansion Dunkin' Donuts plans to have from 2013 to 2015 makes it one of the top growth companies to invest in. The guidance management has given shows it could likely rise to or surpass $45 per share by the close of 2013. The $45 target is based on Dunkin' trading at a multiple of 30 on earnings of $1.50 for the year. It is set to report on April 25, so if you do not start a position before then, wait and see what management has to say. I have owned a position in this company for almost a year and do not plan on selling it any time soon. Dunkin' Brands is doing everything right.

Source: Dunkin' Brands: Earnings Preview, 2012 Review, And 2013 Guidance