Dunkin’ Brands: It’s Just Coffee and Donuts, People, and It Isn’t Even Growing All That Fast

To many investors, Dunkin’ Brands Group (DNKN) is looking like the next Starbucks (SBUX) success story; an easy ride to big returns on the back of mainly international growth. But you might be better off just investing in Starbucks.

Dunkin’ investors are excited about expansion plans because its major brands have much room to grow both domestically and overseas. Dunkin’ Donuts and Baskin-Robbins plan to open some 800 outlets this year mostly in California and in places like China, India and Vietnam. That will boost the company’s store numbers about 4.7% but leave lots of white space on the map still to exploit later. It’s a plan that has led a couple of analysts to move their hold recommendations on Dunkin’ to buys recently.

But even with such expansion, Dunkin’s expected earnings this year aren’t as exciting as one might expect for a stock priced like a mega-growth company. Dunkin’ forecasts minimal same store sales growth (3% to 4% for Dunkin’ Donuts; 1% to 3% for Baskin-Robbins) for 2013. Overall revenues are expected to rise about 7%, and adjusted operating income is predicted to be up at about 11%. Dunkin’ PE ratio soars over those of other food and restaurant stocks. Its revenue growth hasn’t.

DNKN PE Ratio TTM Chart

DNKN PE Ratio TTM data by YCharts

DNKN Revenue Quarterly YoY Growth Chart

DNKN Revenue Quarterly YoY Growth data by YCharts

Dunkin’ has traded publicly only since July 2011, so few have closely followed the company long-term. Internationally, the company has had mixed success so far. Its first international president left in Sept. 2011, about four months after his appointment. His replacement started about a year ago. Sales from comparable stores in the international division were unchanged last quarter for both Dunkin’ Donuts and Baskin-Robbins.

Meanwhile, Starbucks is on its own opening spree again, in many of the same places Dunkin’ wants to go. Starbucks is often seen as the more widespread operation that will have a harder time opening new stores without cannibalizing existing ones. In reality, Starbucks and Dunkin’ brands are about the same size, with18,000 and 17,000 outlets respectively. But Starbucks also has a longer public track record of earning money, including in 60 countries where it already has beachheads.

Financially, analysts are expecting bigger growth from Starbucks than Dunkin’. Starbucks revenue and earnings are expected to rise about 20% in fiscal 2013, which ends Sept. 13. Same store sales gains at Starbucks usually beat Dunkin’ and were up about 6% in the latest quarter. In the analyst community, buys outnumber holds on Starbucks shares nearly three to one. Dunkin’ has a couple of more hold than buy recommendations.

The big difference between Dunkin’ and Starbucks is the massive amount of debt Dunkin’ holds from its years under private equity.

DNKN Debt to Equity Ratio Chart

DNKN Debt to Equity Ratio data by YCharts

Dunkin’ backers argue that because franchisees bear the brunt of opening and operating costs, Dunkin’s debt is inconsequential. It doesn’t need a lot of its own money to expand, and it has used its cash to initiate and raise a dividend that now has a forward annual yield of about 2%. The company expects some savings this year from refinancing. The debt, however, remains a big creature to be fed even if the expansion returns don’t live up to expectations. Starbucks usually forks out its own money for retail leases and tables, but it has still managed to raise its dividend about once a year. Its dividend yield now is 1.3%.

Investing in Dunkin’ now, when its share price is very high and its growth expectations only moderate, implies that this low-cost/high debt model can create much faster growth two or three years from now. It’s a leap of faith that Starbucks doesn’t require.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.



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