Summary
- Dunkin' Brands generates great margins and cash flow thanks to its 100% franchised coffee and ice cream brands.
- Management has leveraged this asset light business model to maximize debt in order to buy back stock.
- This approach is risky over the long run without higher organic growth (same store sales). The pressure is on Dunkin' to perform better in this area.
- Until this happens, we recommend approaching this "cash cow" of a stock with a bit of caution.
Coffee has become a "hot" commodity in the investing community. The success of Starbucks (SBUX) has forced the market to respect coffee as a growth engine thanks to the need for consumers to get their daily "fix" of morning joe. This trend has been recently emphasized by beverage king Coca-Cola's decision to go out and buy U.K. coffee chain Costa for $5.1 billion. Dunkin' Brands (DNKN) has been an "under the radar" player in the sector since going public in 2011. With an asset light business model, strong performance metrics, and a growth runway via store expansion and international markets - we are bullish on the long term prospects of Dunkin' Brands. However, there are some key risks that investors should be aware of. Potential investors in Dunkin' Brands can do well over the long term if some caution is used.
Dunkin' Brands is a holding company that franchises the Dunkin' Donuts and Baskin Robbins brands of restaurants. The company has almost 21,000 combined franchise locations worldwide. Approximately 82% of the company's $882 million in total revenues are generated within the US market. The company's US Dunkin' Donuts brand is the far and away revenue leader.
