By Brian Sozzi
Welcome back, Dunkin' Donuts (DNKN), to the public markets. Perhaps I harness greater excitement on this topic since I grew up eating Baskin Robbins, made Dunkin' coffee my first choice after being allowed to indulge on hot brewed caffeine, and come from the Northeast. Still, even if a person is unfamiliar with the Dunkin' Donuts moniker, rest assured that a return to being a publicly traded company will lead to a store being opened in neighborhoods all across the U.S. That being said, and without being too wonkish, the IPO priced at the top end of its expected range at $19.00. In other words, investor appetite was strong, and with good reason. The company has an understandable business model that churns out industry leading operating margins. Moreover, there is a clear runway to new unit and new product growth.
Investor List of Likes and Dislikes
Business model: A 100% franchised business that at the minimum lends way to continued strong expansion of new units (it only costs $474,000 to open up one) and indirect exposure to inflation (a franchisee has the responsibility for supplies; higher coffee or milk costs may lead to price increases that hurt same-store sales growth, in turn hurting the performance of the parent company in the form of reduced franchisee revenues). Business is recession-resistant, not recession-proof; financials will hold relatively well during a recession due to more affordable price points compared to peers. Company is on K-Cup phenomenon.
Clear path to growth (important for IPO): Management has outlined a goal for 15,000 U.S. Dunkin' Donut stores, up from about 6,799 currently. Importantly, an investor could see it unfolding; the company only has 1.6% of its sales derived from the Western U.S., with the core markets being New England and New York. There is one Dunkin' Donuts for every 9,700 people in New England and New York.
Foothold internationally: IPO is not solely being used as a function to bring the Dunkin' Donuts and Baskin Robbins brands overseas, each brand name has exposure to international markets (South Korea, Japan; shortly India).
Superior operating margin: The company had a 1Q operating margin that was nearly double that of Tim Horton's (THI) and Starbucks (SBUX) in their latest quarters, indicative of a fine-tuned franchise model.
- Smaller store base internationally relative to Starbucks; Tim Horton's owns Canada.
- Brand is not a national brand yet.
- The aggressive store growth target may prove far-reaching given the company's debt load ($1.5 billion).
- Baskin Robbins is producing soft same-store sales growth, and the operating margin profile of the business is lower than the Dunkin' Donuts brand.
- Increased competition in the grocery aisles.