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Dunkin' Brands Is Cooking It Hot

February 20, 2014 | About:

We know that among the retail-restaurants industry, Dunkin' Brands Group Inc. (DNKN) is one of the most amazing examples of a robust growth company, and has been offering investors a strong free cash flow. Dunkin' owns and franchises quick service beverage-snack restaurants, and the brand includes Dunkin’ Donuts and Baskin-Robbins. Some think coffee stores and snack restaurants are the new tobacco-like industry for investment, due to the fact that caffeine is mildly addictive and is not covered by use restriction. Well Dunkin' Brands is indeed showing us the potential of this market.

Baking Innovations

Dunkin' Brands, famous for its donuts, is now installed into the breakfast market, with sandwiches and snacks such as the Turkey Sausage Sandwich, or the Bacon Egg and Cheese Sandwich, and has indeed in the past years stole some customers from McDonald’s (MCD). Nigel Travis, actual CEO of Dunkin’ Brands, said that breakfast sandwiches have been in the past years one of their biggest hits, and confirmed Dunkin’ Donuts will be releasing approximately 40 new products for 2014, as they did in 2013. The Dunkin’ Donuts special valentine heart-shaped-cookie-dough filled donut proved they are definitely baking innovations in the food field.

Rewards program

We all know brands need to create loyalty, and in the restaurant-snack industry the competition has always been tough. Starbucks (SBUX), for instance, has a loyalty program that gives you stars when paying with a registered Starbucks card. Dunkin is nowadays a very firm brand in the market, but still has created a DD Perks program, in which you ear Dunkin Points for each $1 you spend, at qualifying locations.

Geographical expansion

This program is accompanied by an expansion towards the West, which is starting to show very good results. The company has projected approximately 400 new stores for 2014. Exploring the every-day-growing West and Midwest markets, Dunkin' has come to improve its cash-on-cash returns through a better management that includes better site selection, advertising and higher-margin products. Consumers’ acceptance of the brand provides it with a strong stability, with a firm expansion opportunity in the U.S. market, and outside as well. The company has yet to explore nontraditional store formats, such as train stations and airports, which might increase its potential growth, and link the company to international targets, that might provide potential global growth.

Perfecting the System

Dunkin' Brands’ cohesive franchisee system is constantly improving, increasing average transaction sizes with low-cost rates and introducing seasonal menus, K-cup products and premium beverage offers. Also, the low franchisee bankruptcy rates and sustained cash-on-cash returns reveal a vigorous (and growing) franchisee system. The franchisees provide Dunkin' Brands a stable revenue stream, that combined with few capital needs, has shown a 10 above average P/E of 39.1. The lack of near-term debt maturities and free cash flow explains why shareholders have experienced more returns through dividend increase, and a 39.8 ROE.

Dunkin’s business model has proved to be secure, but the market has priced it pretty high. Its leading operating margins for the industry have to be regarded partly as the result of the franchisees and asset-light model. Still, Dunkin' Brands is one of the top companies in the category, and the valuation the market has set is based in long-term assumptions. Indeed, Dunkin' Brands is showing a relatively expensive share, but considering the most recent quarter EPS growth of 26.5% and a dividend yield of 1.9%, this valuation seems accurate.

Valuation and Key Stats

 

DNKN

Ind. Avg.

Burger King Worldwide Inc (BKW)

P/E

38.9

28.0

43.1

Operating Margin % TTM

41.9

14.0

38.5

Net Margin % TTM

20.1

8.7

16.8

ROE TTM

39.8

26.0

17.1

Debt/Equity

4.8

1.2

2.1

Final Comment

As we have seen, Dunkin Brands is not only increasing its earnings, but also continuously developing innovations both on their products and their marketing strategy. Analysts expect earnings of $1.51 per share for the fiscal year, and rate Dunkin as a buy. It is certain that the expansion the company is making is backed up by a rise in earnings and revenues, and is expected to increase even more. The franchisees of the growing markets of Southeast, Midwest and West are showing higher cash-on-cash returns, now among the highest in the industry. Some say the coffee-snack industry is subject to changing consumers’ preferences, and high franchise bankruptcies. Still, the industry has proved to stand firm and Dunkin' is definitely one of the few great brands. The stock is not cheap, but we should not forget it is indeed a premium stock with raising dividends.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 4.0/5 (2 votes)

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