They may not brew the strongest coffee at Dunkin' Donuts. But
the venerable Canton, Mass.-based chain has been churning out
some pretty strong earnings reports.
And for a well-established coffee and ice cream chain with
more than 17,000 stores worldwide,Dunkin' Brands (
) has surprisingly strong growth prospects.
In the U.S., Dunkin' plans westward expansion. Meanwhile, its
Baskin-Robbins ice cream chain, more of a hit overseas than
domestically, is expanding eastward to South Korea, Vietnam and
other Asian venues where ice cream is enjoyed outside the
Unlike rival Starbucks, which had to cut back on its store
count several years ago due to overexpansion, Dunkin' Donuts has
been expanding cautiously from its New England core. Now it
stands poised to crack Western markets where it currently has
"It's an open template west of the Mississippi," said William
Blair analyst Sharon Zackfia.
After five years under private equity ownership, Dunkin'
Brands went public in July 2011. Since then, the chain has been
able to report solid revenue and earnings growth based on a a mix
of expansion and improving same-store sales.
Dunkin' Donuts stores, mostly in the U.S., will contribute
more than $530 million in 2013 revenue, JPMorgan analysts
Ice Cream Shops
Baskin-Robbins will contribute roughly $160 million, most of
it from international outlets. In the U.S., Baskin-Robbins just
limps along. CEO Nigel Travis said it best when he told analysts
in late January that Dunkin' now sees the Baskin-Robbins brand as
a "slow growth" rather than "zero growth" business.
Dunkin' gets a cut of revenue from every cup of coffee its
franchisees sell. And coffee remains the chain's best seller. But
in expanding to such items as breakfast burritos, turkey sausage
sandwiches, and single-serve K-cups, Dunkin' has added numerous
kickers to store sales. Last year, same-store sales rose by
Meanwhile, Dunkin' has expanded chiefly in Midwestern and
Southern markets contiguous to its core store base in New England
and New York. Because nearly all Dunkin' units are
franchise-owned, the company can expand without onerous capital
Now, the chain hopes to deepen its footprint out west.
Longbow Research analyst Alton Stump believes Dunkin' Donuts
has "a huge opportunity" west of the Mississippi. Noting that
there is one Dunkin' Donuts shop for roughly 9,600 residents in
core Northeast markets, Stump says the chain has just one store
per 1 million residents in much of the West. Stump reasons that
there is "a good chance" Dunkin' could double its U.S. store base
"in less than 20 years."
Dunkin's early success in opening stores out west augurs well
for the future. "First year average weekly sales are higher in
Western emerging markets than in core and established markets,"
With just over 7,300 U.S. stores, Dunkin' has plans for 330 to
360 openings this year. Nearly 20% will be in Western markets,
says Zackfia. One expansion target is Denver. Dunkin' will enter
California by 2015.
Meanwhile, aggressive national TV advertising has enhanced
Dunkin's brand awareness. By the time Dunkin' opens in
California, says Zackfia, consumers there will have been exposed
to five years of TV ads. "Brand recognition is definitely
improving," she concluded.
All this should be a kicker to a formula that has been working
well in Dunkin's core markets.
Earnings have been growing steadily. Earnings per share grew
in 2012 to $1.28, a 51% increase from 85 cents the prior year.
Analysts tracked by Thomson Reuters forecast 2013 EPS to grow 20%
and 17% in 2014.
Pretax margin grew in 2012 to 35.5% from 26.5%.
In Dunkin's spare and unpretentious shops, the coffee is not
quite the same as the rich upscale brews served up at Starbucks.
Dunkin's coffee is "middle of the spectrum," according to
But the coffee is priced below premium alternatives. And many
prefer a weaker blend. "Consumers like the fact that the coffee
isn't as strong as Starbucks," Stump noted.
Over the years, Dunkin' has moved beyond hot coffee and
doughnuts to sell bagels and a broad array of sandwiches and
sugary coffee-based novelty drinks.
"What they've been able to do is transcend the brand identity
as strictly a coffee and doughnut shop," said Wedbush Securities
analyst Nick Setyan. He explains how Dunkin' has held its own
against rival chains: "Dunkin' Donuts has been able to position
itself at a slightly lower price point with a larger mix of
That larger mix has been driving same-store sales gains. In
the fourth quarter, Dunkin' comps rose by 3.2% in a quarter that
had one less week than the prior year's. Same-store sales grew by
7.2%, 4.0% and 2.8% in the first three quarters of 2012.
Sharon Smith manages 19 stores for a multiunit Dunkin' Donut
franchisee in Florida and Massachusetts. Sitting at a plain
plastic table during rush hour in one of her Boston-area stores,
Smith noted that the new sandwiches had extended high traffic to
the afternoon and evening hours. Still, coffee sales typically
account for about 70% of store revenues, Smith says.
Many analysts like Dunkin's entry into the home-brewing market
with its sales of single-serve K-cups. Sales of K-Cups at her
shops were very strong last year, notes Smith, but not quite so
impressive early this year.
The availability of cheaper home brew alternatives may have
also had a bit of a cannibalizing effect. "There are regular
customers we're not seeing three times a day, seven days a week.
Now we see them once a day four times a week," she said.
That's still pretty good attendance. More worrisome is the
threat of a reversal in low interest rates.
Like many firms with a private equity past, Dunkin' is loaded
up with debt. "It's one of the more levered balance sheets,"
noted Stump. To date, the Fed's stubborn insistence on
rock-bottom rates has been a boon to heavy borrowers. Should
rates reverse, Dunkin's floating rate interest payments will
rise. "Yes, there's definitely interest rate risk,' allowed
But it's probably manageable. For one thing, its business
model of franchisee ownership limits capital costs. And if
interest rates rise because of improved economic activity, the
hit of higher payments should be offset by higher sales
With is loyal customer base in core markets, Dunkin' has a
reliable base on which to grow, and because franchisees pay the
freight in expansion, its risk in expansion is basically the risk
to its growth profile, not its core financials..
But Dunkin' needs successful expansion to sustain that growth
profile. "They seem to be cognizant of the fact that there's not
a whole lot of room to grow in core markets," said Stump.