The Ratings Game: Dunkin’s COVID-19 turnaround likely drove Inspire Brands deal, KeyBanc analysts say

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Dunkin’ made adjustments when COVID-19 eliminated customer morning routines.

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Dunkin’ Brands Inc.’s DNKN, +6.36% third-quarter results were likely a factor in Inspire Brands Inc.’s decision to acquire the coffee-and-doughnut chain in one of the largest restaurant deals in years, KeyBanc Capital Markets said.

Inspire announced on Friday that it would acquire Dunkin’ Brands in a transaction valued at $11.3 billion, including Dunkin’s debt.

Last week, Dunkin’ also announced third-quarter earnings that topped expectations, with U.S. same-store sales that rose 0.9%.

“Recent performance during the pandemic likely sealed the deal,” said KeyBanc Capital Markets analysts led by Eric Gonzalez. KeyBanc downgraded Dunkin’ shares to sector weight from overweight after news of the deal.

Dunkin’ had been in talks about an acquisition deal even before COVID-19, The Wall Street Journal reports, but pandemic-related declines likely led to a delay.

See: Starbucks says it lost $1.2 billion in fiscal Q4 sales because of the pandemic

Companies like Dunkin’ and Starbucks Corp. SBUX, -0.73%, which rely on morning routines, including breakfast traffic, took a hit as many consumers began working from home during the coronavirus pandemic.

“Dunkin’s management team had every incentive to deliver strong results during COVID-19, even if the deck was largely stacked against it,” wrote KeyBanc.

“But this level of performance under these conditions would not have been possible had it not been for the initiatives (e.g., ‘blueprint’) it put into place beginning two to three years ago. These included menu simplification, new espresso equipment, new drive-through tools, and improvements to its digital app—the latter of which was helped by bringing the development team in house.”

Dunkin’ said it also used TikTok for the successful launch of The Charli, an existing coffee drink that the company renamed in order to promote along with 16-year-old TikTok influencer Charli D’Amelio. On the day the partnership launched, Dunkin’ said it hit a record for daily active app users.

“We’re tapping into a younger consumer by leveraging our leadership in iced beverages and bringing color and texture to our lineup,” said Scott Murphy, president of Dunkin’ Americas, on the company’s earnings call, according to a FactSet transcript.

Also: Coronavirus is driving a new generation of home cooks to Kraft Heinz products

In addition to the TikTok launch, Dunkin’ said it moved its menu focus to items like Bagel Minis that are suited for snacking, as well as premium espresso drinks that customers wouldn’t easily be able to make at home.

The pandemic made it possible for the company to try items like macchiatos and Oatmilk lattes, said David Hoffmann, Dunkin’s chief executive officer, on the call.

Drive-through and curbside pickup also gave results a boost.

“Having at least substantially reopened its U.S. and international Dunkin’ and Baskin-Robbins restaurant locations (as of late-October) amid the COVID-19 disruption, Dunkin’ appears to have seamlessly pivoted to its off-premise sales channel, fueled by continued strong digital growth,” wrote CFRA’s Tuna Amobi. 

CFRA rates Dunkin’ stock buy with a $110 price target.

Digital sales now account for more than 21% of total sales, the company said on its earnings call.

Dunkin’ stock is up 6.4% in Monday trading, and has gained 40.5% for the year to date. The S&P 500 index SPX, +1.26% is up 2.5% for 2020 so far.