Seeing Limited Catalysts, CLSA Downgrades Dunkin' Brands To UnderPerform

Although Dunkin' Brands Group, Inc. (NASDAQ: DNKN) has seen a robust outperformance year-to-date, CLSA analyst Jeremy Scott believes that prospects are limited to revive traffic and a slowdown in unit growth is likely.

Scott downgraded the company from Outperform to Underperform, while lowering the price target from $53 to $49. However, the analyst expects Dunkin’ Brands to benefit from a growing shift away from McDonald's Corporation (NYSE: MCD), anticipating an improvement in comps in the second half of 2016.

Scott noted that the U.S. coffee market and morning daypart “are becoming increasingly competitive and divided between deep discount and premium specialty cafes.”

Dunkin’ Brands reaches both segments, but the analyst expressed concern about its innovation pipeline as it attempts to sophisticate its coffee credentials in conjunction with its West Coast expansion. While these products impact service time, he wrote, they don't lead to any corresponding mix and traffic benefits. Likewise, its Perks Program hasn't increased traffic, becoming diluted as franchisees raise prices and less loyal customers exit to competitors.

The fiscal year 2016 EPS estimate has been raised on expectations that the company would actively buyback shares, while the fiscal year 2017 EPS estimate has been lowered to reflect lower comps and a tighter pipeline of openings.

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