Dunkin' Brands - More Donuts, More Profits
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dunkin' Brands (NASDAQ: DNKN) recently released earnings that seemed pretty sweet to investors. The company reported overall revenue up 9.5%. Earnings per share rose from a loss of $0.51 a share last year, to a profit of $0.25 per share this year. In addition, same store sales were strong at both Dunkin' Donuts (up 7.2%) and Baskin-Robbins (up 9.4%). I've made the argument before, that this is primarily a coffee company being hidden behind doughnuts and ice cream. In today's market, earnings reports are more about the future which begs the question what's next?
What's next for the company is more growth, and Dunkin' Donuts becoming an ever bigger part of the company's footprint. Looking at this last quarter, Dunkin' Donuts store growth was 3.2% over the prior year, and Baskin-Robbins store growth was 4.2% over the prior year. This put the company's total store count at 16,876. If this pace keeps up, Dunkin' Brands will soon overtake Starbucks (NASDAQ: SBUX) as the largest worldwide purveyor of coffee and foods at least when it comes to store count. With the company expected to open somewhere between 550 and 650 units, Dunkin' Brands would end the year with between 3.25% – 4% more stores. The split of how these stores will be opened is important. Of the total, about 260 – 280 stores will be opened in the U.S. under the Dunkin' Donuts brand. Baskin-Robbins is expected to actually close somewhere between 60 – 80 stores in the U.S. Since Dunkin' Donuts U.S. already represents 83% of profits, and their store count will grow by the largest amount, this is good news for investors. The Dunkin' Donuts U.S. division showed profit up 13% with solid gains in both royalties paid by franchisees, and new franchise licensing fees. With new store growth at 3.5% – 4% and 4 – 5% higher same store sales, you can see why management believes overall revenues will grow by 7-8% this year.
When it comes to the Baskin-Robbins chain, unfortunatly things are not looking quite as good. The combined U.S. and international divisions only make up about 9% of profits for Dunkin' Brands and that's probably a good thing. In the U.S. Baskin-Robbins closed 3% of its stores versus last year, and that actually increased profits by nearly 22%. On the international front, the fact that 8.8% new stores were added, and this caused an 8.8% decline in profits is not reassuring. With management expecting 2-4% same store sales growth at Baskin-Robbins, this smaller chain won't be growing as fast as Dunkin' Donuts either.
In the end, Dunkin' Donuts growth is expected to produce 12-14% growth in operating income, and between 29-32% growth in EPS. In fact, management's guidance for EPS was right in the middle of analysts expectations. The fact that Dunkin' Brands has beaten estimates every quarter since going public should help investors sleep well at night. If there is anything that the company could do to improve its fortunes, it would be considering a split of the two companies. The Dunkin' Donuts chain already contributes 91% of the profits to Dunkin' Brands. This year the company expects to open as many as 465 Dunkin' Donuts stores, versus at most 185 Baskin-Robbins stores which shows that the company knows their growth engine.
I could see two companies as possible suitors for the Baskin-Robbins chain.
First, would be Yum Brands (NYSE: YUM). With the Taco Bell, KFC, and Pizza Hut brands, the company has the traditional meal covered. The Baskin-Robbins brand would seem to dovetail perfectly with these concepts. This would give Yum Brands the sort of whole meal and dessert concept to compete internationally. The fact that Yum has successfully navigated the international market (in particular China) and seen good growth, makes me think that the international division of Baskin-Robbins in particular would be a good addition.
The second company I could see making the Baskin-Robbins brands better, as crazy as this sounds is McDonald's (NYSE: MCD). McDonald's already operates over 1,500 McCafe locations in Europe that are smaller stores serving select beverages and desserts. What better way to expand this presence than to acquire Baskin-Robbins? This would give McDonald's additional locations that could be re-branded McCafe, and would now be able to serve premium Baskin-Robbins ice cream. McDonald's also operates kiosks in the Asia-Pacific region that only serve desserts. Again, bringing in the Baskin-Robbins brand would give a recognized name brand to these dessert only locations.
Any proceeds from a Baskin-Robbins sale could be used to shore up Dunkin' Donuts balance sheet which I know is a concern for investors. This would also help Dunkin to focus on its largest and most profitable brand. The company's recent earnings were good, but there is always a way to make things better. A possible spin-off or sale of the Baskin-Robbins brand would likely unlock value for shareholders. After all, “America runs on Dunkin'” but to keep running, Dunkin' needs to consider all possibilities.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend McDonald's, Starbucks, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
