Tag Archives: Dunkin’ Brands



It has been widely reported that Inspire Brands, controlled by private equity firm, Roark,  is negotiating to buy Dunkin’ Brands (DNKN) for about $8B, which, including approximately $3B of debt, values DNKN at about $11B. This amounts to about 22x EBITDA in calendar ’19, and the same multiple of consensus 2021 estimates. Franchising companies are attracting investors, including private equity owners, largely because of their supposedly free cash flow from the royalty stream. We have written many times that the cash flow is not entirely “free” because some of that income stream should be reinvested in the system to maintain its relevance and franchisee profitability. For the moment, let’s put that concern aside for the moment, since interest rates are close to zero, the music is playing and investors are dancing. More relevant in the short term is that the $3B of debt is about 6x trailing, and projected, EBITDA, so the debt load is already at the top of the range currently viewed as comfortable by the marketplace. There is therefore not too much more leverage that can be currently squeezed out of this situation.

However, executives at Roark, and Inspire Brands, are far from ignorant or reckless, so let’s think about the potential appeal. It is no secret that Dunkin’ is surviving better than most, not as well as some, due to the preponderance of drive-thru locations, while limited during the pandemic by less breakfast traffic. Indeed, same store sales in Q2 were down 18.7% at US stores. It is also well known that this fifty year old worldwide brand (forgetting about it’s much smaller sister brand, Baskin Robbins) is most heavily concentrated in the northeast, with expansion opportunities out west and abroad. On the other hand, the Dunkin’ brand can no doubt benefit from continued reinvention, as they have consistently lagged a little company called Starbucks in terms of growth, sales comps, and store level profitability. With those broad brush thoughts out of the way, it occurs to us that:

  • The $500M of historical and projected EBITDA for DNKN is after spending $507M in ’19 on advertising and $237M on G&A. Inspire Brands owns about 11,000 stores among its subsidiaries, including Sonic, Jimmy John’s, Buffalo Wild Wings and Arby’s. No doubt there are certain “synergies’ that could be achieved as advertising and SG&A are consolidated with the DNKN system that includes almost 10,000 stores within 21,000 distribution points. It wouldn’t surprise us if the numbers crunchers at Inspire have figured out that somewhere between $100 and $200M could be saved, out of the total of over $700M in ads and G&A.
  • Dunkin’ can sell coffee to 10000 new locations. If coffee is only 1% of $10B in sales, and the profit margin is 25%, that would be $25M of additional profit.
  • There is no other major brand in public hands that could as easily (and inexpensively) be rolled into Inspire’s existing ten thousand locations than Dunkin’s COFFEE and other offerings, whether or not a new daypart is desired. Dunkin’s coffee alone has a great deal of consumer acceptance and could be a meaningful addition at Inspire’s other brands. So: Dunkin 21,000 points of distribution could become more like 31,000, with minimal incremental investment by various franchisees. If 10,000 existing Inspire locations do something over $10B systemwide, a 5% addition to sales (throughout the day from Dunkin’ products) would add $500M to sales. A 5% royalty rate would amount to $25M of additional royalties, plus about $10M of additional advertising contributions. We could be high or low with these broad brush suggested numbers, but this seems like a material opportunity to us.
  • Dunkin’ franchised units an be cross sold to other Inspire brands. The same strip center housing a Jimmy John’s can house a Dunkin’ or and even a Baskin Robbins next store. Hard to quantify but another plus.

It is not hard to imagine (on a spread sheet, at least) that $500M of past (’19) and future (’21) EBITDA (forget about ’20) could become $650-$700M after G&A and advertising efficiencies, with another $50M thrown in from additional profit margin, royalties and ad contribution by way of Dunkin products spread through Inspire’s other brands. That brings the debt, as a multiple of EBITDA, down quite a bit, allows for new borrowing that can be reinvested in the business or paid out to equity holders.

The only other suitor that comes to mind is Yum Brands, large enough to absorb Dunkin’ without “betting the company”, with enough scale to get administrative synergies, and enough existing units to get a material benefit from the addition of Dunkin’ products. Wendy’s already has a breakfast program and adequate debt, and doesn’t have enough units to get a material benefit from adding Dunkin’ products. Domino’s or Papa John’s or Wingstop couldn’t put Dunkin’ products to enough use. Jack in the Box is nowhere near large enough. Restaurant Brands already has Tim Horton’s. Chipotle, with their company operated locations, enjoys being debt free and wouldn’t tolerate 25-30% dilution of their equity. McDonald’s doesn’t need it, and is not in an acquisition mode.

Conclusion: The acquisition of Dunkin’ by Inspire makes more sense at a record high valuation for DNKN than is apparent on the surface. Unless Yum Brands competes for it or Inspire Brands gets discouraged somehow, Inspire will be in the coffee business, to be spread to their currently owned franchise systems, and current Dunkin’ shareholders will say “thank you very much.”

Roger Lipton



Dunkin’ Brands reported their first quarter in early May and the stock has been moving higher ever since, trading near a record high, which in and of itself encourages more buying. Our full writeup, elaborating on our summary provided last week,  is provided below.


Earnings and cash flow generation has been consistent but up only modestly in recent years and likely to remain so. DNKN stock is trading near its high not because fundamental performance has been outstanding, but because (1) institutional investors are embracing an “asset light” model with presumably “free” cash flow (2) The stock market generally has been strong, and investors are reluctant to sell good performers (which DNKN has been) because the proceeds have to be reinvested and cheaper stocks are hard to find (3) the company, led by a new CEO, tells a promising story about operating initiatives (4) a great deal of stock has been repurchased, especially the $680M worth in ’18, which supported the stock and helps to increase EPS.

One could question (and we have) the wisdom of spending a fortune to repurchase shares at over 20x expected earnings and close to 20x trailing twelve months EBITDA, far from a bargain valuation compared to roughly mid-single digit growth in earnings and cash flow. This is  especially questionable when the franchisees (who pay the bills at the end of the day) have “needs”. Perhaps the presumed “free cash flow” is not so free over the long term, especially when $3 billion of debt has to be repaid. Of course, Modern Monetary Theory doesn’t worry about the repayment of debt  🙂

Management admits that the balance sheet has been fully leveraged, with debt at over 5x trailing EBITDA so repurchases of stock will be more modest in the future and earnings per share will not benefit as much as in the past. The timing of the acceleration in US unit growth and same store sales remains to be seen. International progress has been offset by Baskin Robbins weakness so the outlook revolves around the performance of US franchised Dunkin’ locations.  We haven’t noticed that Starbucks or McDonald’s have backed down from the battle for market share. In summary,  we are not inclined to chase the breakout of DNKN common stock.


The first quarter was better than calendar ’18 as a whole. While international locations are the growth element, it is relatively immaterial  ($14M of segment profit in calendar ’18 vs. $466M  of segment profit from Dunkin’ US and $68M from Baskin Robbins) and partially offset by less profitability from the Baskin Robbins segment. The heart of this company is the US Dunkin’ store franchise system, which showed comp sales of 2.4% in Q1. (calendar ’18 was up 0.6%).  In Q1’19, consolidated revenues were up 5.9%, operating income was up 12.8%, net income was up 4.3%, adjusted net income was up 2.8%, On fewer shares outstanding, diluted earnings per share was up 8.1%.

There are lots of operating initiatives taking place here, which we will detail next week, but for the moment we will focus on the latest guidance for calendar ‘19, which remains almost exactly the same as that provided a few months ago with the yearend ’18 report, remains far from exciting and consistent with recent results. Comps will be at low single digits at US Dunkin’ and BR locations. Dunkin’ US net new units will be at the low end of 200-250 stores, contributing $130M of systemwide sales. (34 net new locations opened in Q1). Consolidated revenues will grow low to mid-single digits. SG&A expenses will be reduced at a mid-single digit pace. Operating and adjusted operating income will be up by mid-to-high-single digits. GAAP diluted EPS will be $2.63-$2.72 (previously $2.74 to $2.83) and diluted adjusted EPS will be $2.94-$2.99. In essence: a flattish performance compred with $2.90 per share in calendar 2018. According to Bloomberg, analyst consensus is $3.24 in 2020, up 8% from the $2.99 consensus for 2019


Net Cash Provided by Operating Activities was: $282M in ’16, $283M in ’17, $269M in ’18

Net Income After Taxes was $175M in ’16, $272M in ’17, $229M in’18

Additions to property, equipment and software: $21M was spent in ’16, $21M in ’17, then $52M in ’18.

$1.4 billion of long term debt was added in ’17.

Repayments of long term debt were $25M in ’16, $754M in ’17, $32M in ’18

Stock repurchases were : $55M in ’16, $127 in ’17, $680M in ’18

Dividends paid were: $109M in ’16, 117M in ’17, $114M in ’18

Total Effect on Cash for year was -275M in ’16, +572 in ’17, -538M in ’18

Bottom line, looking at the big numbers: – Cumulatively over 3 years, Total Net Income After Taxes was $676M. Adding back depreciation of a total of $136 provided $812M of after tax cash flow. Total capex (reinvestment in the system) was $94M ($52 of which was spent in ’18) and dividends were $340M, leaving $378M of “free cash flow”. Stock  repurchases amounted to a cool $862M, exceeding free cash flow by $484M and that was financed by incremental long term debt of $589M ($1.4 billion of new debt less repayments of old debt). Cash in hand at year end went from $432M at 12/31/16 to $1.11M at 12/17 to $598M at 12/18.

COMPANY OVERVIEW (2018 10-K):  Dunkin’ Brands Group is one of the world’s leading franchisors of Quick Service Restaurants (QSR) serving hot and cold coffee and baked goods as well as hard ice cream. They franchise restaurants under the Dunkin’ Donuts and Baskin-Robbins brands. They have over 20,900 points of distribution (retail stores) in more than 60 countries worldwide.

Dunkin’ brand is a 100% franchised business model and they believe that this model offers strategic and financial benefits; such as being able to focus on menu innovation, marketing, franchisee coaching and support, and other initiatives to drive overall success of their brand. Financially their franchised model allows them to expand points of distribution (retail stores) and brand recognition with limited capital investment by the Corporation.

Dunkin’ divides its business into four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International.

Dunkin’ Brands History:   – Both of Dunkin’ Brands, Dunkin’ Donuts and Baskin-Robbins, history dates back to the 1940’s. Baskin-Robbins and Dunkin’ Donuts were individually acquired by Allied Domecq, PLC in 1973 and 1989, respectively. The Brands were organized under the Allied Domecq Quick Service Restaurant subsidiary being renamed Dunkin’ Brands, Inc. In 2004, Allied Domecq was acquired by Pernod Ricard SA. In March of 2006 Dunkin’ Brands, Inc. was acquired by investment funds affiliated with Bain Capital Partners LLC, the Carlyle Group, and Thomas H. Lee Partnerships LP through a holding company incorporated on November 2005 and was later renamed Dunkin’ Brands Group, Inc. An IPO in July 2011 brought Dunkin’ public once again. completed.


Dunkin’ Donuts – U.S. – Dunkin’ Donuts is the QSR leader in donut and bagel categories. Dunkin’ Donuts is also a national QSR leader for breakfast sandwich servings. Since the late 1980s, Dunkin’ Donuts has transformed itself into a coffee and beverage-based concept and is a national QSR leader in servings in the hot regular/decaf/flavored coffee category and the iced regular/decaf/flavored coffee category, with approximately 1.7 billion servings of total hot and iced coffee annually. Over the last ten years, Dunkin’ U.S. systemwide sales have grown 5.4% compounded annually and total Dunkin’ U.S. retail stores grew from 6,412 to 9,419 as of December 29, 2018. Approximately 85% of these locations are traditional restaurants made up of end-cap, in-line and stand-alone restaurants; many with Drive Thru. In addition, Dunkin’ Brands has special distribution opportunities (SDO’s) such as full or self-serve kiosks in offices, hospitals, colleges, airports, grocery stores, wholesale clubs and various small footprint properties.

Baskin-Robbins – U.S. –  Baskin-Robbins is one of the leading QSR chains in the U.S. for servings of hard-serve ice cream and sells a full range of frozen ice cream treats such as cones, cakes, sundaes, and frozen beverages. Baskin-Robbins U.S. segment has experienced comparable store sales growth in six of the last seven fiscal years. Baskin-Robbins enjoys an unprecedented Brand recognition in the U.S. known for its “31 Flavors” and its popular “Birthday Cake” program.

International Operations

 Dunkin’ Brands International operations is primarily based on joint venture and country or territorial license arrangements with “master franchisees” who operate and sub-franchise within their licensed areas. Dunkin’ International is predominantly located in Asia and the Middle East. 2018 International systemwide sales were $2.2 Billion which represented approximately 19% of Dunkin’ global sales. As of December 28, 2018, Dunkin’ had 3,452 International restaurants/points of distributions, up from 2,405 in 2008. As of December 2018, there are 5,491 Baskin-Robbins in their International market base which represents $1.5 Billion in sales.

SOURCES OF REVENUE (2019 QTR-1 10-Q): – For QTR-1 ending March 30, 2019, Dunkin’ Brands had total revenue of $319,091,000. Dunkin’s revenue is generated from primarily five sources: (1) franchise fees and royalty income, (2) advertising fees and related income, (3) rental income, (4) sales of ice cream and other products, (5) other revenues. Systemwide sales for the period ending March 30, 2019 were $2.768 Billion compared to same period last year of $2.660 Billion; a 4.1% increase.

Other noteworthy QTR-1 highlights, further described under Recent Developments:

  • Dunkin’ U.S. comparable store sales grew 2.4%.
  • Baskin-Robbins U.S. comparable store sales grew 2.8%.
  • Dunkin’ added 34 net new locations in the U.S. and a total of 8 new combos of Dunkin’/Baskin-Robbins locations globally.
  • Revenues increased 5.9%.
  • Diluted EPS increased by 10.5% to 63¢.

STRATEGIC INITIATIVES (Updated – Source: QTR1 10-Q March 30, 2019; Earnings Call Slides):

Dunkin’ Brands provided updates on their management’s strategic initiatives during their Earnings Call Presentation on May 2, 2019.  Dunkin Brands’ Slide Presentation offers a detailed look into the Company’s initiatives designed to balance near-term operational initiatives with longer term strategic outlook in an effort to modernize the Dunkin’ Brand while staying true to its core culture.

Dunkin’ USA:

 New Unit Growth Plan: Dunkin’ USA’s new unit growth plan was updated to include the strategic initiative of offering different development strategies for different markets. Regional focus will be based on maturity and store penetration. The U.S. is broken down as follows: The Northeast – a mature market with very heavy penetration. Its development plan is to transform/optimize existing assets. The East market – a mature market with heavy penetration. Its development plan is incremental growth to drive convenience. The West market is younger, with shallow penetration. Its development plan is one of accelerated growth to establish the Brand presence. Lastly, the Frontier market, which consists of the northwestern U.S., has no development as yet.

  • 2019 Target: 200-250 new units with the majority being the Next-Gen design.
  • 3 to 5 Year Target: 200-250 new units annually. 80% of new development outside of core markets.

Restaurant Excellence: This strategic initiative is centered on improving the guest experience through restaurant simplification, new technologies aimed at improving the ordering process/speed of service, and new programs designed to eliminate unnecessary procedures hindering a seamless transaction. A refocus on training at all levels is designed to drive effective customer interaction.

Influence Brand Relevance: Continuing the reimaging of existing locations to the Next-Gen store design. This new design is aimed at improving guest and crew experience. The main features are:

  • Dedicated Mobile Order & Pick-Up area.
  • Front facing bakery cases which promotes impulse purchases.
  • A Tap system to serve iced beverages.
  • Relaunch of the espresso platform.
  • Transition from foam cup to double walled paper cups.

Menu Innovation: Going forward, menu innovation is expected to be led by beverage innovation. From a food perspective, value messaging around sandwiches and wraps is resonating with customers in test markets. Beverage attachment rates are helping to drive higher average tickets.

Unparalleled Convenience: Upgrades to the Drive-Thru experience that seek to improve guest convenience. The Company’s digital efforts also focus on driving members into the Perks Loyalty Program (which stands at 10.6 million incremental members in 2018).

Brand Accessibility: Increased consumer accessibility through the continued development of points of distribution.

Restaurant Excellence: One of the vital components is menu simplification.

The Company has rolled out a simplified menu in many of its core markets and continued this roll out during the first quarter. A 1% improvement in COGS (largely driven by lower waste), a 1% improvement in labor margins, and a 2% increase in order accuracy were seen. The reduced menu simplifies operations, saving approximately 90 minutes/day/store.

New store equipment and technology: Company is focusing on opportunities to help ease the impact from operational bottlenecks and ongoing labor inflation through the introduction of label machines for drinks, machines that help to calibrate coffee equipment, and other speed/accuracy solutions. Other technology solutions include point of sale system improvements that support conversational ordering (improving speed/accuracy of order taking), cloud-based pricing, seamless integration with delivery partners, zero footprint training,  improved labor forecasting, and inventory/cash/labor scheduling management.


Raising the Bar: Initiatives include:

  • Improving guest experience.
  • Increase value offerings.
  • Enhance convenience through:
    • Digital in-store ordering.
    • Home delivery with DoorDash.
  • Expanding test of Moments Store Design.
  • Optimize restaurant base through strategic closures and transfers.


Focus on strategic markets and long-term growth opportunities.

  • Enhance in-store experience.
  • Establish strong delivery infrastructure.
  • Grow nontraditional channels.
  • Increase Brand accessibility and convenience.
  • Enhance Brand relevance.

 BASKIN-ROBBINS – STRATEGIC PLANS: – The Company’s goals for Baskin-Robbins is to “Raise the Bar” of total operational activities, maintaining the premium the high quality reputation of Baskin-Robbins heritage. To that end it has overhauled marketing plans and is experimenting with more attractive franchise offers, including multi-unit offers to its top performers. The principal current challenge with BR is to grow its U.S. segment once again.


Dunkin’ Brands continues to stabilize its international businesses and, along with its franchisees, is focused on driving traffic through value offerings, product innovation, and making the brands more easily accessible through digital technologies.

Delivery continues to be an opportunity for both brands, and the Company is working with its partners to further roll out delivery programs, based on the success that its Middle East and Asia franchisees are experiencing.


Dunkin’ USA:  Low single digit SSS, Low end of 200-250 net new units,  $130 Million        systemwide sales for new units opened in 2019.

Baskin-Robbins:  Low single digit SSS, 10 net unit closures.

International:  Flat Ice Cream margins, Flat JV net income.

  • Other financial targets:
    • Medium to single digit reduction to G&A
    • 28% effective tax rate
    • $2.63 to $2.72 GAAP diluted EPS
    • 84 Million full year weighted – average shares outstanding
    • $122 Million in net interest expense
    • $40 Million in capital expenditures

SHAREHOLDERS’ RETURN (Source – QTR-1 10-Q May 2019; Press Release May 2, 2019):

 Cash Dividend Declared:  The Board of Directors declared, payable on June 12th,  a quarterly cash dividend of .375¢ per share.

Shareholders’ Deficit – Equity Incentive Plans (Source QTR-1 10-Q May 2019):

 During the three months ended March 30, 2019, the Company granted stock options to purchase 619,306 shares of common stock and 50,287 restricted stock units (“RSUs”) to certain employees. The stock options vest in equal annual amounts over a four-year period subsequent to the grant date and have a maximum contractual term of seven years. The stock options were granted with a weighted average exercise price of $72.28 per share and had a weighted average grant-date fair value of $12.54 per share. The RSUs granted to employees, vest in equal annual amounts over a three-year period subsequent to the grant date and had a weighted average grant-date fair value of $69.13 per unit.

In addition, the Company granted 47,431 performance stock units (“PSUs”) to certain employees during the three months ended March 30, 2019. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 20,681 PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 500 Composite Index (“TSR PSUs”).

Relative to the stock repurchase program: After repurchasing $650M of common stock in the open market in 2018, only $129,000 worth was bought in Q1’19.

Relative to the balance sheet, it is noteworthy that on April 30, 2019, $1.7 billion of new debt prepaid debt from 2015, with new repayment dates of  4.75 years ($600M), 7 years ($400M), and 10 years ($700M). The new annualized net interest expense, on current total debt of $3.1B is approximately $122M  with a blended rate of 3.978%.



Roger Lipton





About a year ago, two high priced acquisitions were made, namely Panera Bread and Popeye’s Chicken. We said at the time that these two deals were not harbingers of a broader trend. Panera was a strategic acquisition by a deep pocketed European buyer (JAB) . Popeye’s (PKLI) was a another franchise vehicle for the highly leveraged financial engineers at Restaurant Brands (QSR). Inexpensive capital (i.e.very low interest rates) and highly valued paper (QSR equity was trading at over 20x trailing EBITDA, with access to billions of debt) allow for some abnormal risk taking. Some have called it “misallocation of capital”.

It’s a year later, and two more highly priced deals are now on the radar screen. Zoe’s Kitchen has been bid for by Cava Grill, joined by Ron Shaich of Panera fame. ZOES is trading above the $12.75 suggested price, in the expectation that a higher bid could emerge. You can find our most recent description of Zoe’s, from our website article here:


We are not going to comment further  on this situation, at the current time, other than to alert our readers that it is an interesting case study.

Dunkin’ Brands Group, a much larger company, has been recently touted as an acquisition target, perhaps by Coca Cola (KO), and DNKN is trading at an all time high. The latest writeup, from our website, on DNKN is provided here:


Our attitude here is that, Coca Cola, or anyone else, would be paying an unnecessarily high price for a Company that is not the industry leader. The Dunkin’ brand has been lagging the dominant Starbucks by a large measure, clearly losing market share, and there is no reason to believe that will change in the foreseeable future. While Dunkin’ works to refresh it’s approach, Starbucks is more aggressive than ever as it works to overcome the “law of large numbers” and cope with industry headwinds such as the increasing cost of labor.

DNKN trades today at about 18x trailing twelve months EBITDA,  twenty seven times estimated earnings for 12/31/18, and it is difficult to project more than high single digit earnings growth in ’19 and beyond. If DNKN remains public, stock buybacks might take EPS growth into low low double digits, but DNKN has already leveraged its  balance sheet to about 5x trailing EBITDA, so stock buybacks won’t do too much more than cover executive options. Few investors are enthused about paying 25x forward earnings, and 18x TTM EBITDA,  for a company building earnings something like 10%. This is especially true in the case of DNKN, where a cash can be made that much of the free cash flow should be re-invested in the system. New and improved products, marketing, mobile order and pay, and other obviously lagging elements of the system are overdue to be addressed. The franchisees have been fighting the daily battle while the Company has bought back over a billion dollars worth of stock, and new highs in the stock have enriched the franchisor’s executives.

Asset light franchisors, with their supposedly free cash flow (because franchise systems have to be supported) are very desirable properties. Furthermore, Coca Cola, or another deep pocketed strategic acquirer could make the case, as Warren Buffet has often made, that one can afford to pay a fair price for a high quality asset run by proven dedicated executives, and the long term success will overcome the initial premium price. In this case, however, we don’t believe that DNKN has either a dominant industry position, nor is the management team outstanding.

Lastly, if KO or someone else is determined to get into the franchised coffee shop business, we suggest that this USA economic expansion and stock market boom is closer to its end than its beginning. A more opportune time to purchase almost anything may not be far away. We wouldn’t want to own DNKN at this valuation because the Company’s performance doesn’t support the stock price. We suggest, further,  that potential purchaser’s of DNKN would be better advised to play another day.

Roger Lipton