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What to Expect from Dunkin’ Brands’s Q1 Earnings

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The global sell-off amid COVID-19 dragged Dunkin’ Brands (NASDAQ:DNKN) stock to a low of $38.51 on March 19. Since then, the stock has made a significant recovery. As of April 27, the company was trading at $60.82, which represents a rise of 57.9% from the lows on March 19. The company’s stock price rose due to investors’ optimism about the clearance of various stimulus packages, new COVID-19 cases peaking, and talks about reopening the economy. Despite the increase, the company is still trading 28.2% lower than its 52-week high of $84.74. So, should you buy Dunkin’ Brands before its first-quarter earnings? The company will likely report its first-quarter earnings before the market opens on Thursday. First, let’s look at analysts’ expectations for the quarter.

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Analysts expect Dunkin’ Brands’ revenue to fall

Analysts expect Dunkin’ Brands to report revenue of $311.8 million—a fall of 2.3% from $319.1 million in the same quarter of the previous year. The company has adopted an asset-light model by operating all of its restaurants as a franchise. I think that temporarily closing restaurants amid COVID-19 could lower the sales this quarter. During the fourth-quarter earnings, Dunkin’ Brands entered into a termination agreement with Speedway to close all 450 limited-menu Dunkin’ Speedway restaurants this year. The closures could also drag the company’s revenue down.

Meanwhile, Dunkin’ Brands continues to focus on beverage items, food innovation, and consistent value to drive its SSSG. In 2019, the company’s Espresso sales grew 40% YoY and accounted for 10% of its sales. So, Dunkin’ Brands continues to add new menu items to drive its beverage sales. Earlier, the company restricted Mobile On-The-Go ordering to its loyal customers (or DD Perks members). In the fourth quarter, the company expanded the facility to other customers. To enhance the customer experience, speed of the service, and customer satisfaction, the company has been remodeling its restaurants to next-gen restaurants.

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By the end of 2019, the company had remodeled 525 restaurants. Dunkin’ Brands plans to have 1,400 next-gen restaurants by the end of this year. Last year, the company had an agreement with Beyond Meat (NASDAQ:BYND) to introduce the Beyond Sausage Breakfast Sandwich. The breakfast menu item featured a sausage patty made of 100% plant-based ingredients. These initiatives could offset some of the sales declines caused by COVID-19.

Will Dunkin’ Brands’ EPS fall?

Analysts expect Dunkin’ Brands’ EPS to decline by 7.6% to $0.62 in the first quarter. Lower revenue and a decline in the EBIT margin could impact the company’s EPS during the quarter. For the quarter, analysts expect the company’s EBIT margin to fall from 33.3% to 32.7%. The sales deleverage from negative SSSG and higher SG&A (selling, general, and administrative) expenses could lower the company’s EBIT margin. Meanwhile, some of the declines could be offset by the lower number of shares outstanding due to share repurchases in the trailing four quarters.

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Outlook

For 2020, Dunkin’ Brands management expects its revenue to rise by low-to-mid single-digits. Adding new restaurants and the positive SSSG could drive the company’s revenue. Management plans to open 200–250 net new Dunkin’ restaurants in the US, which excludes closing 450 Dunkin’ Speedway restaurants. Meanwhile, the company plans to open 25 franchised Baskin-Robbins restaurants this year. Also, management expects the SSSG for both Dunkin’ and Baskin-Robbins restaurants in the US to be in the low-single-digits. Dunkin’ Brands’ management has set the adjusted EPS guidance at $3.16–$3.21 with weighted-average shares outstanding of approximately 84 million for the year. Meanwhile, the guidance was provided before the COVID-19 outbreak. So, the company might update its guidance during the announcement of its first-quarter earnings.

Valuation multiple

Since the beginning of this year, Dunkin’ Brands has lost 19.5% of its stock value. The decline appears to have caused the company’s valuation multiple to fall. As of April 27, Dunkin’ Brands was trading at a forward PE (price-to-earnings) multiple of 21.4x compared to 22.9x at the beginning of this year. Meanwhile, the company trades at a discount compared to McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX). On the same day, McDonald’s and Starbucks were trading at 27.3x and 32.2x, respectively.

As of Monday, the company was trading at 23.1x analysts’ 2020 EPS expectation and at 19.2x analysts’ 2021 EPS expectations. These expectations represent a fall of 17% in 2020 and a growth of 20.6% in 2021.

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Analysts’ recommendation for Dunkin’ Brands

On April 13, Credit Suisse double-upgraded Dunkin’ Brands to “outperform” from “underperform.” The firm cut its target price from $73 to $67. Meanwhile, Wedbush downgraded the stock to “neutral” and lowered its target price to $60 on April 24. Since the beginning of this month, Wells Fargo, BMO, Piper Sandler, and JPMorgan Chase have all lowered their target prices. Overall, Wall Street favors a “hold” rating for Dunkin’ Brands. Among the 27 analysts, 25.9% recommend a “buy,” while 74.1% recommend a “hold.” None of the analysts recommend a “sell.” As of Monday, analysts’ consensus target price was $62.47 with a 12-month return potential of 2.7%.

I’m optimistic about the company’s initiatives like beverage innovations, remodeling its restaurants, implementing digital advancements, focusing on growing its loyalty members. However, like McDonald’s and Starbucks, the company hasn’t provided an update on the impact of COVID-19. So, I think that investors should wait until the company reports its first-quarter results before making any investment decisions. I’ll be interested in the commentary provided by the company’s management.

Meanwhile, Starbucks and McDonald’s will likely report their performance in the comparable quarter today and tomorrow, respectively. For analysts’ expectations, read Why Starbucks Is a ‘Hold’ before Its Q2 Earnings and Why McDonald’s Is a ‘Buy’ before Its Q1 Earnings.

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