Delectable Deals Headline This Week's Busy IPO Calendar

Includes: CHEF, DNKN, SBUX
by: Renaissance Capital IPO Research

This week's lengthy list of IPO offerings, poised to be the busiest week since November 2007, includes a choice collection of consumer centric companies that may prove enticing to prospective investors. Teavana (TEA), Dunkin' Brands (NASDAQ:DNKN) and Chefs' Warehouse (NASDAQ:CHEF) all recognize that the way to an investor's heart is through his stomach, and to that end, these companies each address a different niche on the food pyramid. These delicious deals are three of 12 IPOs scheduled to price this week on the U.S. IPO calendar.


Dunkin' Brands owns the Dunkin' Donuts breakfast and Baskin-Robbins ice cream chains. Through these franchised quick serve restaurants, the company stimulates the tummies of its customers with a leadership position in hot and cold coffee, baked goods and hard serve ice cream. The company now registers nearly 16,000 points of distribution in 57 countries, including large distribution chains in South Korea, Japan and various countries in the Middle East. The company generates the majority of its revenues through the initial franchising rights ($40,000-$80,000) and royalties as a percentage of gross sales (62% of 2010 sales). Central to Dunkin' Brands' continued success will be the opening of new locations in the relatively untouched western states, as well as continued expansion overseas. As of December 25, 2010, there were 109 Dunkin' Brands stores in the entire western U.S., or equivalently one store per 1.2 million people vs. one store per 9,700 in New England and New York. Dunkin' Brands was purchased by Pernot Richard S.A. in 2005 and subsequently acquired by Bain Capital, Carlyle and Thomas H. Lee for $2.4 billion in 2006. There have been 21 (22% of total deals) private equity-backed deals to come to market this year, raising $16.2 billion (59% of total proceeds) with an average return of 20%.

Teavana is a specialty retailer of loose-leaf tea. Unlike Dunkin' Donuts or Starbucks, Teavana is not a quick serve station for hot drinks. Rather, the company presents itself as a purveyor of premium teas, offering 100 single-estate and blended premium varieties that it sources from premium tea gardens, estates and brokers in China, India, Japan and Korea. Teavana's teas retail between $3 and $40 per 2 oz. container, and it also offers a host of tea-related merchandise with a price range of $4-$250. Founded in 1997, the company has grown from just one store in Atlanta to 161 company-owned stores and 19 franchised locations primarily in the U.S. The company aims for continued growth and has plans for an additional 300 stores to be opened in the U.S. alone.

Chefs' Warehouse had humble beginnings as a family-owned local dairy business, but in the 1990s the company emerged from its culinary chrysalis, becoming a national purveyor of specialty foods to thousands of upscale eateries. The company counts over 7,000 fine dining restaurants, country clubs, hotels, caterers, culinary schools and food stores as current clients, and offers over 11,500 SKUs of specialty cheeses, oils, vinegars, meats and more. This broad menu helps to distinguish the company, which offers nearly 10 times as many SKUs as the average specialty provider. The company's growth is focused on its recent entry into food distribution markets in Los Angeles, Las Vegas and Miami. One might think that continued expansion into these markets and the recent acquisition of the Harry Wils customer list and inventory would leave Chefs' Warehouse with a lot on its plate, but its logistics system reportedly filled an average 11,000 orders weekly with 99% accuracy throughout 2010.


In the most recent quarter, each of these companies demonstrated the results of their growth initiatives.

Dunkin' Brands posted revenue growth of 9.3%, bringing total revenues to $139 million, up from $127 in the prior year period. The company's sales growth is mostly attributable to Dunkin' Brand's continued expansion through its international joint ventures, the success of which can be seen in the 10% jump in the Dunkin' Donuts International segment, despite the market disruption caused by the Japanese tsunami. Chefs' Warehouse posted revenues of $83 million in the most recent quarter, representing growth of 19% from 1Q 2010. The company benefited from increases in food prices, particularly dairy, meat, seafood and oil, and translated them into improved margins by successfully hedging against rising costs. Teavana's 1Q 2011 sales growth was the most pronounced of our picks at 36% ($35 million total sales) owing to 43 new store openings since the end of 1Q 2010. With a total of 161 stores, and 15 opened in the first quarter alone, the company is clearly dedicated to quickly increasing the size of its footprint. Despite this rapid expansion, sales per square foot have also been growing, reaching $231, an increase from $228 in the prior period.


As discretionary spending-centric firms, each of these companies is exposed to continued weakness in consumer spending. Dunkin' Brands demonstrates the dangers of being leveraged to consumer spending through the shrinking sales at its Baskin-Robbins chain in the U.S. over the past few years. The company's cost structure is closely tied to commodity price inputs, with rising coffee, milk and sugar prices posing potential pressures on margins. Further, the company will maintain a heavy debt load (6x LTM EBITDA) at a variable rate.

Teavana too is subject to many of the same business risks. The habit of tea drinking is still very much dependent on discretionary spending and significant increases in tea prices could put a damper on otherwise impressive growth and margins. Additionally, its aggressive store expansion (the company expects to triple in size by 2015) creates significant execution risk and its sales per square foot may soften as it moves beyond high-end malls.

As a distributor, Chefs' Warehouse's profits are very much tied to soft commodity prices and its ability to pass on price increases to its customer base. With soaring commodity prices coinciding with a decrease in consumer spending on restaurants and catering, the company suffered from 2H 2007 to 1H 2009. The company doesn't distribute through long term contracts, and the proliferation of group sourced food orders may damage the company's already limited margins.


These deals spice up the IPO schedule as their unique growth prospects should serve to fatten investors' wallets, if not their waistlines. Dunkin' Brands' international and U.S. expansion should see the franchise grow in a wealthy market where brand recognition is already strong, and its margin profile should benefit from increased operational efficiency and continued deleveraging. Should Teavana match management's expectations, the company will increase its annual sales by 25% through 2015 with the opening of new stores and increased Internet sales. This growth should provide more than enough cash flow to cover store opening capex, and still provide returns to the investor. Chefs' Warehouse fasted its way through the lean years of the recent recession, but now sees the market firming. Management has been able to maintain consistent gross margins throughout and now believes that its continued expansion in new markets in Florida, Los Angeles and Las Vegas, coupled with a better consumer environment will result in growth, without expansion induced indigestion.