Dunkin' earnings: Challenging times for coffee chain

The slogan goes, "America runs on Dunkin'." But these days, caffeine behemoth Starbucks and a resurgent McDonald's appear to be winning the coffee race.

Dunkin' Donuts
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Analysts say Dunkin continues to deal with self-inflicted wounds after the donut chain's franchisees raised prices last year to offset wage pressures. Adding to Dunkin's woes is McDonald's launching an all-day breakfast menu in October, a decision that drove traffic to the Golden Arches in the fourth quarter.

"It's hard for me to believe that Dunkin' is going to be able to capture more share in that environment where the two biggest behemoths in the sector that compete against them are growing very rapidly," said BTIG restaurant industry analyst Peter Saleh.

Dunkin' Brands Group's stock is down nearly 12 percent in the past 12 months, while in the same stretch Starbucks and McDonald's are each up more than 30 percent. Dunkin' has been underperforming the broad market and recently traded at its lowest forward price-to-earnings ratio since its 2011 IPO.

According to Morgan Stanley analyst John Glass, Dunkin' also is challenged by "possible restaurant-level bottlenecks" as well as "diminishing K-cup sales in retail shops." And he said in a note last week that the "overly aggressive pricing by franchisees" has included Dunkin' locations in the Boston area having a 10-ounce cup of joe higher than similar size cup at Starbucks, for instance.

There have also been new concerns about Dunkin's expansion westward into markets where Starbucks is already well established.

"It doesn't look like the returns of their western stores are as strong as when they first opened," said R.J. Hottovy, a stock analyst at Morningstar. Nonetheless, Hottovy added that he still thinks "there's an opportunity for them in the West."

The Canton, Massachusetts-based company plans eventually to have 1,000 donut stores in California but now has fewer than 50 locations in the Golden State out of about 11,500 restaurants total. Its largest current market is the East Coast. "They want to make sure it works before they open more and more stores," said BTIG's Saleh. "You have to go slow and you have to get the real estate right and you have to build the brand west of the Mississippi."

Investors are bracing for lackluster fourth-quarter results when Dunkin' reports on Thursday, before the market opens.

For the December quarter, earnings are forecast to rise 8 percent to 50 cents a share from 46 cents a year earlier, according to analysts polled by Thomson Reuters. Revenue is seen increasing by 5 percent.

The Street is looking for continued deceleration in Dunkin's domestic same-store sales for the fourth quarter. The closely watched metric is forecast to rise a scant 0.8 percent in the December quarter, based on 22 estimates tracked by Consensus Metrix.

Morningstar's Hottovy said Dunkin' had 3 percent to 4 percent comps prior to the slowdown. "Sales numbers will be pressured for at least in the fourth quarter and probably into the first and second quarters," he said.

Others believe the turnaround story could take much longer.

"We see no clear path to material improvement in one-year and two-year Dunkin' Donut U.S. same-store sales in 2016 as we believe any potential improvement in traffic is likely to be offset by lower level of menu pricing and a modest uptick in strategic discounting," said Wells Fargo Securities analyst Jeff Farmer in a note on Monday.