Donuts to Dollars: Dunkin’ Brands' Sweet Expansion

Donuts to Dollars: Dunkin’ Brands' Sweet Expansion


Coffee addicts and policemen in quest of a donut fix in the Northeast are familiar with Dunkin’ Donuts, because that’s where most of the chain’s 7,000 U.S. outlets are based. Now, six months after its IPO, the brand’s parent company, Dunkin’ Brands Group (DNKN) has announced plans for a vast, long-term expansion. The company says it will more than double the number of locations over the next two decades, taking it into regions of the country where it isn’t currently a force. That will mean going head-to-head with Starbucks (SBUX), of course, but that doesn’t seem to deter Dunkin’ Brands’ management team. After all, fans of its coffee and donuts in Seattle – Starbucks’ back yard – took to Twitter on Thursday to plead with Dunkin’ Donuts to open up shop in the Emerald CIty. (The last outlet was shuttered a decade ago.) As one Tweeter put it, “Seattle is waiting for their Dunkin’ Donuts. WHERE ARE THEY?”

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For investors, the bigger question is what this expansion plan will mean for earnings. The company has wrestled with higher commodity costs this year at both Dunkin’ Donuts and Baskin Robbins, its ice cream retailing division. Now there is a plan to tackle that as well: Dunkin’ Brands signed an agreement that makes National DCP, its franchisee-owned cooperative, its exclusive supply-chain provider. While the company can’t control the cost of coffee beans, this step will help by putting all franchisees on the same platform and ensure uniform costs.

Despite solid revenues, Dunkin’ Brands has disappointed investors when it comes to earnings, partly due to the costs of retiring some debt, expenses related to its IPO and issues related to raw materials costs. Investors have so far been willing to give the company the benefit of the doubt – the stock trades well above its IPO price of $19 a share, closing Thursday at $25.19 a share. Still, that price is well below the highs of summer and early autumn, during which time the stock traded close to $30 a share; the share price retreated after a sale of stock last fall by the giant private equity firms that still control the firm (including the Carlyle Group.)

But analysts who believed the stock was overpriced after its post-IPO surge are now warming up to Dunkin’ Brands once more: Goldman Sachs boosted its rating to “Neutral” from “Sell,” Raymond James raised the stock to “Outperform” from “Market Perform,” while Jefferies just initiated coverage with a “Buy” rating.

And Dunkin’ Brands isn’t confining its expansion plans to the United States. As has become clear from Starbucks’s experience, global growth is likely to outstrip what the company can generate at home. Baskin Robbins announced Thursday that it reached a licensing agreement with a Vietnamese firm under the terms of which 50 new outlets will open up and down that country in the next few years. The first three will open their doors in Ho Chi Minh City this week, according to media reports.

Next time you stop by a Dunkin’ Donuts outlet to grab a cup of coffee, you might want to spend the time it takes you to drink it pondering whether this might be an opportunity to snap up a strong brand at what some analysts still believe is a discount price.