Dunkin Brands (DNKN) Stock is a Buy Ahead of the Restart Narrative

Iconic quick-service restaurant chain Dunkin Brands (NASDAQ: DNKN)   has been mostly operational in U.S. regions throughout the COVID-19 pandemic. The “asset-light” 100% franchise model enables Dunkin to remain agile and ahead of the curve as the economic restart narrative takes shape. The company is ready to hit the ground running as jurisdictions turn towards re-opening businesses as stay-at-home restrictions unwind throughout the nation and worldwide. Investors seeking a post-pandemic restart play should monitor DNKN stock for opportunistic pullback entry levels as outlined below.  

Systemic to Specific Risk

Feb. 20^th, 2020 marks the day when the COVID-19 black swan struck the markets as stocks commenced their descent into the bear market. Systemic risk underscored the four-week S&P 500 (NYSEARCA: SPY) plunge collapsing (-35%) off the all-time highs before bottoming in the final week of March 2020. While the markets have recovered more than half the losses, not all stocks are equal in the recoveries. Stocks that fit the “stockpiling” narrative have managed to thrive, which leisure and travel stocks continue to underperform. The restaurant and hospitality stocks have generally underperformed the SPY. As each company reports its results and guidance, the “lens” will shift from systemic to company-specific. Dunkin may outpace its peers if the bar remains low during this earnings season. Investors are hoping that companies can bridge the gap between last quarter and next quarter. Companies are pulling FY 2020 guidance out of an abundance of caution, but those that are bold enough to provide transparency will likely gain a premium over their peers.

Takeaways for Q4 2019 Earnings

The Q4 2019 earnings saw 5.1% year-over-year (YoY) growth but guidance of lowered to a range of $3.16 to $3.21 versus $3.29 consensus analyst estimates. The company has 13,000 Dunkin and 3,000 Baskin-Robbins restaurants operating under a pure franchise model. Expresso sales grew 40% YoY and accounted for 10% of total sales. Dunkin K-Cups grew more than 7% YoY outpacing Maxwell House expanding its market share to 8% of the total coffee category. The DD Perks loyalty program grew membership 38% YoY to 13 million users. Mobile ordering rose 20% YoY, as half the DD Perks members use the app for mobile ordering. The company plans to open 200 to 250 new stores in the U.S. and a total of 350 worldwide contributing an estimated $140 million in top-line revenue streams for 2020.

NextGEN Remodeling

Dunkin initiated remodeling of its stores starting with the top producing locations in 2019 at a pace of 500 locations annually. The NextGEN transformations outfit stores with wi-fi smart brewers embedded with internet of things sensors that pull robust data for analytics to harvest efficiencies for perpetual margin improvement. These smart brewer machines produce less waste, are easier to clean, hold longer calibrations, and produce more consistent and higher quality drinks served faster.

Shaping the Restart Narrative

As regions move towards reopening businesses, Dunkin will hit the ground running. While the company has projected a 30-40% drop in revenues during the shutdown period, they should be able hop over the bar that was purposely set low. While other restaurants have been minimized to takeout service at best, Dunkin’s asset-light model is efficiently designed primarily for takeout. The upcoming earnings are due for release on April 30, 2020. Investors are awaiting more transparency on the effect of the COVID-19 pandemic and hoping for the company to provide guidance figures for the rest of 2020. The question is whether management will take that risk to refine the narrative or pull guidance and take the safe way out. Competitor Starbucks (NASDAQ: SBUX) will set the tone with their earnings release on April 28^th post-market.

Opportunistic Entry Levels

With earnings release expected pre-market on Apr. 30^th, its best to gauge the potential reaction trajectories first and then the opportunistic entry levels. Using the rifle charts on weekly and daily time frames to lay out the playing field is suitable for swing traders and investors. The weekly market structure low (MSL) buy triggered above $57.44 and the daily MSL triggered above $45.05. The weekly stochastic is in a make or break with a rising stochastic mini pup. The weekly 15-period moving average (MA), daily upper Bollinger Bands (BBs) and monthly 5-period MA resistance overlap around the $66.29 Fibonacci (fib) level. This would be the most likely upside trajectory target if management is able to “knock it out of the park” with the narrative. Chasing the stock is not an option to consider. The daily stochastic will eventually form an oscillation down and that’s where the opportunities lie if price levels can test. The four opportunistic pullback entry levels are at the $54.89 weekly 5-pd MA/overlapping fibs, $52.50 stinky 2.50s zone, $46.78 fib and $45.05 daily lower BBs. Traders can use these and in-between fib levels to scalp reversions utilizing intraday time frames. Swing traders can scale for overnight to multi-day holds on converging daily/60-minute stochastic. Longer-term investors may consider a pyramid sizing dollar-cost averaging approach with a covered call strategy to buffer downdrafts.