Dunkin Brands Earnings: 3 Takeaways

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Dunkin Brands (NASDAQ: DNKN) announced fourth-quarter earnings results this week that kept its 10-year streak of sales growth alive. The breakfast specialist notched a few impressive wins in the period, including healthy coffee and sandwich sales, that more than offset a slight traffic decline.

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Here are a few highlights from the results.

Steady sales growth

Comparable-store sales ticked higher by less than 1%, or about the same pace that Dunkin had managed for the full 2017 year. That result marked the 46th consecutive quarter of positive comps for the business. It kept the company growing at a slower pace than national rivals, though. Starbucks (NASDAQ: SBUX) expanded sales at a 2% rate in the most recent quarter, and McDonald's (NYSE: MCD) comps spiked by 5.5%.

High demand for breakfast sandwiches and new drink launches like its frozen coffee beverages helped push Dunkin Brands' average spending higher. That success made up for a slight decline in traffic to yield those overall positive comps. By comparison, Starbucks managed flat customer traffic in the quarter, and McDonald's traffic slowed slightly to a 1% uptick.

Room for more shops

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Unlike these already well-established chains, Dunkin Brands has a big opportunity to expand its selling footprint as it moves westward across the United States and increases penetration in existing markets. Management believes it can double its current restaurant count, in fact, to over 18,000 units.

The company took a small step toward that long-term goal by adding 126 new locations in the core U.S. market this quarter. That brought total openings to 313 for the year, or a bit below management's original target of between 330 and 350 openings. Hurricane weather disruptions pushed about 30 launches just out of the 2017 fiscal year, though, so investors can look forward to more aggressive square footage growth in 2018.

Healthy profits

Dunkin's 100% franchised model generates robust profits, and that operating approach continued to impress in the fourth quarter. Income jumped 7% as franchise fees surged. The boost allowed operating margin to expand to 52% of sales from 50% a year ago.

McDonald's, by contrast, is aiming to get its profitability up to the mid 40% range as it lowers its proportion of company-owned locations to 5% by next year. Starbucks operates almost all of its own stores, so management accepts a lower operating margin in exchange for a much larger sales base and more control over the brand. Dunkin Brands is hoping to improve profitably more in 2018 with the rollout of a new, simplified menu.

Clashes ahead?

Dunkin Brands CEO Nigel Travis said the company is positioning itself to better appeal to afternoon diners while continuing the solid results it's seeing during the core morning hours. Food, innovative coffee launches, and a new value menu should all play a part in that initiative.

These are the same growth areas rivals are targeting. Starbucks is predicting that its comps will accelerate over the next two quarters as a bulked-up food menu lifts its afternoon customer traffic. McDonald's, meanwhile, is plowing $2.4 billion into its business in 2018, up from $1.9 billion last year as it tries to extend its impressive growth rebound into a second year. Thus, it's likely these chains will increasingly clash with each other as they fight for market share in the slow-growing, crowded industry.

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Demitrios Kalogeropoulos owns shares of Dunkin' Brands Group, McDonald's, and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.