Dunkin' Brands, (DNKN) the donut, coffee, and ice cream quick serve chain, has plenty of reasons to run higher even after a 51% surge this last year as it expands waistlines globally.
Reasons to run much higher
1. Room to linger: Starbucks (SBUX -1.02%) always had the advantage of being a cozy place to write the Great American Novel on your laptop while nursing a $5 latte. Starbucks calls itself "the third place," after the home and office.
Dunkin' Brands is refreshing its look like so many other fast food companies, including Wendy's, Burger King, and McDonald's. Dunkin' is offering franchisees their choice of five different decor options. It's part of a growing trend to get guests to "linger."
Franchisees can choose the more traditional Fresh Brew or Main Street options or updated versions like the Cappucino Blend option which looks more like an upscale wine bar than a fast food joint. The franchisee photo catalog explains,"The Dark Roast design offers darker tones in a warmer environment with minimal vibrant colors, ideal for urban locations." The Jazz Brew concept pictured below is described as a, "contemporary upscale look."
This remodeling initiative was one of the key drivers of 20%+ earnings-per-share growth cited by Miller Tabak analyst Stephen Anderson when he upgraded Dunkin' Brands to a Buy and raised the price target to $53.
source: dunkinfranchising.com
2. Room on the menu: Dunkin's menu offerings are reading more like a Panera Bread (PNRA) menu lately. Breakfast and lunch sandwiches, wraps, and specialty coffees simply weren't available at Dunkin' just a few short years ago.
Expanding the menu is part and parcel of getting people to linger along with what they call in the restaurant biz,"extending dayparts". Dayparts are what used to be clearly delineated times of day for serving restaurant meals.
Panera Bread still has the upper hand when it comes to a more varied menu with pastas, salads, and soups but Dunkin's offerings are slightly cheaper.
3. Room to grow: Founded in 1950 in Needham, MA Dunkin' Brands is available globally but still has plenty of room to grow. In the US new franchise opportunities are available with the frontier pushing out to Alaska and Pacific Northwest, Starbucks' home turf. On the third quarter conference call CEO Nigel Travis stated the company plans an additional 5,000 Dunkin' Donuts in the Western US and 3,000 east of the Mississippi.
Dunkin' Brands has more locations than Burger King Worldwide or Wendy's. Only three publicly traded chains have more locations: McDonald's, Yum! Brands, and Starbucks. Dunkin' Brands is rapidly catching up to Starbucks' 19,767 locations with 17,940 Dunkin' Brands locations.
Both Panera Bread and Dunkin' Donuts offer franchise opportunities. Dunkin's less stringent franchisee requirements will allow Dunkin' to grow much faster, however. Panera requires a commitment to open an average of 15 bakery/cafes within six years and requires net worth and liquid asset requirements of $7.5 million and $3 million respectively. Dunkin offers individual units and its net worth bar is much lower at a minimum of $250,000 in liquid assets and $500,000 in net worth.
Dunkin' Brands is nearly 100% franchised, which brings in fee and royalty income and creates an asset-light business model in which franchisees basically do all the heavy lifting. Starbucks also franchises but slightly less than half of its locations are franchised.
Continuing new Dunkin' openings at the high end of management guidance was another growth driver the Miller Tabak analyst noted.
4. We all scream for ice cream: Dunkin' Brands is dominant in specialty ice cream worldwide with its Baskin-Robbins brand. How can anyone compare a McDonald's vanilla soft serve or a Wendy's Frosty to the hand-packed varieties of Baskin-Robbins?
Not just Americans scream for ice cream. Baskin-Robbins International is a huge hit in Japan, comprising 40% of that division's sales. In Korea an ice cream cake called the Piece Cake earns more than half of all international ice cream cake sales. Baskin-Robbins does well in the Middle East, especially Saudi Arabia.
5. Keeping up with local tastes: Dunkin' Brands is doing something abroad that McDonald's has been doing for years--tweaking the menu for local tastes. In China Dunkin' Donuts patrons can get a shredded pork pastry along with coffee.
This willingness to bend to local taste is partly why that same Miller Tabak analyst said, "We also think a fifth factor—accelerated expansion of the Dunkin' Donuts brand overseas—will support our top-line growth thesis, particularly in China [italics mine] where we think Dunkin' can gain market share from weakened rivals such as KFC (owned by YUM)."
Caveats
Dunkin' Brands has a fairly high debt/adjusted EBITDA ratio at 4.8 to 1. With a franchisee model one might expect that to be lower but it did generate free cash flow of $50.8 million in the third quarter and raised its dividend, which now stands at 1.60%.
This compares with a 1.30% yield at Starbucks and similar trailing earnings multiples of 37.3 for Dunkin' Brands and 36.31 for Starbucks. Panera Bread's pullback after a disappointing third quarter, blamed on efficiency problems, has taken it down to a 24.84 trailing earnings multiple.
Good to the last drop
Dunkin' Brands has a promising future as it morphs into a global, all-day quick-serve restaurant from a coffee shop/ice cream parlor. All three of these are strong stocks but with Starbucks at 52 week highs and Panera disappointing, Dunkin' Brands may be just the java jolt your portfolio needs.
