The breakfast market has become increasingly competitive and is indeed the most rewarding categories for all the fast food chains. It has been growing at a fast pace as people want ready-to-eat breakfasts since they have to rush to work. Therefore, companies such as Dunkin Brands (DNKN, Financial) have become quite popular.
But the retailer is witnessing a host of problems, which has affected its performance in its most recent quarter. Its second-quarter results were mixed accompanied with a lowered guidance, resulting in a sharp fall in its share price.
Analyzing the quarter
Revenue jumped 5% over last year, clocking in at $190.9 million. However, it failed to meet the estimate of $199 million. The increase in top line was driven by higher royalty income as sales increased throughout all the channels. Also, the company opened 151 new stores during the quarter, which added to the revenue base.
Further, same store sales grew by 5.7% as volumes grew. The coffee retailer offered steep discounts in order to attract customers, which resulted in higher sales. However, it did hurt its margins. Therefore, it plans to increase its product prices by 1% by the end of the year.
Although sales in the U.S. division surged, the international market showed weakness. Internationally, comps at Dunkin Donuts dropped 3.1% and that of Baskin Robbins declined 1.6%. This was mainly because of weakness in South Korea and Japan.
On the contrary, comps of Dunkin Donuts, U.S., surged 1.8% and that of Baskin Robbins increased 4.2% during the quarter. Promotional offers at Baskin Robbins, such as a free waffle cone on the purchase of second scoop, lured more customers to its stores. Also, efforts such as the introduction of online ice cream cake ordering boosted revenue.
Fierce competition
Nonetheless, the company faces stiff competition in the breakfast segment. For instance, Yum Brands (YUM, Financial) introduced a new breakfast menu at its Taco Bell chain in March this year. This has attracted much customer attention, since the retailer is already witnessing gains. In fact, it now makes 7% of the TexMex chain’s revenue. Also, the coffee giant Starbucks (SBUX, Financial) registered a 40% jump in its newly launched breakfast sandwiches. This led to a 7% increase in its comparable store sales.
Efforts in line
Dunkin Donuts is dealing with a host of problems, including cost inflation, which is making its products costlier and its margins thinner. Therefore, it plans to forego the discount program and instead increase product prices during the year.
Moreover, it keeps adding new items to its menu, which attracts people to its stores. In fact, innovation is very important to keep customers hooked on to its stores. New items include products such as an Angus steak platform, grilled and breaded chicken lines. Also, it has launched a new loyalty program, which already has 1.3 million rewards members. Also, its mobile app already has 8 million downloads of the brands’ app.
Further, the company plans to expand its footprint globally and have more drive through locations, making it easier for people to access it. It plans to open 300 to 400 new restaurants internationally, during the year. These efforts should help Dunkin boost its sales.
Key thoughts
Although it has a number of initiatives to bank upon, the coffee retailer itself are not sure about its future. It lowered its outlook for the year, which disheartened its investors. On the other hand, Dunkin announced that it repurchased 1.3 million shares and a third quarter dividend of $0.23 per share, which came as a relief to investors. Since it is difficult to rely on its future, investors should stay on the sidelines and wait for some clear signs of improvement.
