Aside from Starbucks (NASDAQ:SBUX), Dunkin' Brands Group (NASDAQ:DNKN) is perhaps the most well-known name in coffee across the globe. In 2012 alone the company brought in sales of $658.2 million, and it has a market cap of $5 billion. However, despite the company's size, should management consider splitting it up to create more shareholder value? In an effort to explain the benefits of doing so, I've provided the following discussion of the company's strengths and weaknesses.
Dunkin' can't quite measure up to Starbucks
Over the past four years, sales at Dunkin' have grown at a nice clip. Between 2009 and 2012, revenue rose 22.3% from $538.1 million to $658.2 million. Although this growth isn't necessarily bad, it is far lower than the 39.1% growth seen by Starbucks. Over the same time-frame, revenue at Starbucks grew from $10.71 billion to $14.89 billion.
Looking at net income, we see a similar disparity between Dunkin' and Starbucks. In the case of Starbucks, we are excluding the company's 2013 results since Dunkin' has yet to release results for this period. From 2009 through 2012, the net profit margin at Dunkin' has ranged from 4.7% to an impressive 16.5%, averaging 8.3%. What this means is that, for every dollar in revenue the company received, it would have earned a profit of $0.083 over this time-frame.
Starbucks has performed slightly better. Between 2009 and 2012, the net profit margin at Starbucks has ranged from a low of 4% to a high of 10.6%. Averaged out, the company's net profit margin came to 8.5%. When compared to the company's superior revenue growth, this proves that Starbucks has been able to grow more rapidly than Dunkin' while essentially matching its profitability.
Dunkin's results are mixed across segments
For Dunkin,' most of this growth has stemmed from two operating segments; Dunkin' Donuts U.S., and Dunkin' Donuts International. Between 2009 and 2012, revenue at Dunkin' Donuts U.S. grew 25.3% from $387.3 million to $483.4 million, while its international segment grew revenue 26% from $12.3 million to $15.5 million.
In comparison, the company's Baskin-Robbins brand saw reasonable but far from attractive growth. Over the same time horizon, revenue at its Baskin-Robbins U.S. and Baskin-Robbins International segments grew, in aggregate, 13.4%. In its U.S. segment, Baskin-Robbins saw revenue shrink 9.1% but this was more than offset by a 26.2% rise seen by its international operations.
Currently, the company's Baskin-Robbins International segment is its largest in terms of revenue after its Dunkin' Donuts U.S. segment. At $102 million, this portion of the company comprised 15.5% of sales for Dunkin's 2012 fiscal year. This, combined with the company's fast growth, might lead investors to believe that the future of Dunkin' could be in Baskin-Robbins more so than in any of its other segments. However, there is some downside to these operations; namely, low margins.
Pursuant to the company's most recent annual report, its Baskin-Robbins International segment enjoyed a segment profit of 41.2% throughout 2012. Initially, this segment's profit may appear strong, but it pales in comparison to the rest of the business's segments.
Source: SEC Edgar Database
Using the table above, we see that while the company's international Baskin-Robbins arm is growing faster than any of its other segments, and its profitability is far lower than the other segments. At the same time, the company's U.S. Baskin-Robbins arm is profitable but shrinking, so that's a negative for the brand as well.
In an effort to continue its growth while improving its bottom line, Dunkin' may want to consider a spin-off of its Baskin-Robbins segments, whereby it would place these interests into a separate company. This would slice its revenue considerably but it would increase the company's profitability while allowing Baskin-Robbins to operate independently. By doing so, management at Dunkin' wouldn't have to decide how to divide up the company's resources, and it might be able to compete more effectively with Starbucks.
Thus far, this idea doesn't seem to be on management's mind. On Jan. 13, 2014, the company announced that it opened 277 new Baskin-Robbins locations internationally and struck a deal to open another 375 over the next ten years. Domestically, the company opened four new locations and it expects another five to ten to be opened throughout 2014. Fortunately, the company did open 509 Dunkin' locations globally and it believes another 480 to 510 could be opened within the next year or so. This should help mitigate the lower profitability brought about by Baskin-Robbins, but Dunkin' Brands will likely fall short of its full potential as long as it's still stuck with the Baskin-Robbins brand.