We expect leading doughnut and coffee chain, Dunkin' Brands Group, Inc. (DNKN), to beat expectations when it reports third-quarter 2014 results on Oct 23, before the opening bell. Last quarter, the company posted in-line earnings. Let us see what is in store for the company this quarter.
Why a Likely Positive Surprise?
Our proven model shows that Dunkin' Brands is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.13%. This is a very meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Dunkin' Brands has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Dunkin' Brands’ Zacks Rank #3 and +2.13% ESP makes us confident of an earnings beat.
What is Driving the Better-Than-Expected Earnings?
Dunkin' Brands operates through its Dunkin’ Donuts and Baskin-Robbins brands. In the first half of 2014, although Baskin Robbins performed well, comps at the U.S. Dunkin’ Donuts outlets were sluggish sales due to tough competition in the breakfast segment, non-seasonal rainy weather and sluggish macroeconomic conditions. Also, the company is not doing well in its international markets.
However, we believe that the company will be able to turn around its fortunes in U.S. through its various initiatives. The introduction of more drive-through locations, coupled with breakfast-menu optimization will help the company stand out in an immensely competitive sector.
Also, newly launched digital initiatives and global expansion – especially in the emerging markets – would help the company in its international markets. However, a drastic change is not expected yet, particularly with a slowdown in the emerging markets. Additionally, competition with local brands should further hurt sales.
Further, like other restaurants chains Dunkin' Brands might be particularly hurt this quarter by the food price inflation. As Dunkin’ Donuts and Baskin-Robbins are almost entirely franchised, cost inflation may force the franchisees to hike menu prices. This, in turn, may lower comps, leading to margin contraction.
Other Stocks to Consider
Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Burger King Worldwide, Inc. (BKW) with an Earnings ESP of +3.70% and a Zacks Rank #2 (Buy).
Red Robin Gourmet Burgers Inc. (RRGB), with an Earnings ESP of +2.94% and a Zacks Rank #3 (Hold).
Buffalo Wild Wings Inc. (BWLD), with an Earnings ESP of +0.94% and a Zacks Rank #3.
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