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DNKN is trading at 14.75x EV/EBITDA NTM.  The multiple has come in as the float has expanded (secondary) but other higher quality growth names like SBUX and DPZ continue to trade at a discount to DNKN at 11.6x and 11.5x, respectively.

Dunkin’ Brands is in the news today announcing 25 new Dunkin’ Donuts and 2 new Baskin-Robbins locations set to open in Louisiana over the next several years.  As we have written in the past, comparable sales growth is important for Dunkin’ Donuts but, given that the Dunkin’ Donuts business is 97% franchised, new unit openings are far more important for EPS growth. 

The premium multiple assigned to DNKN by the Street, then, is largely dependent on the “white space” growth opportunity that lies west of the Mississippi.  Management has stated its goal to double the store base within 20 years.  In order to do this, the company must build a backlog of stores that will allow them to open 500 stores per year beginning in 2013, up from a projected range of 220-240 in 2011 (more or less flat versus 226 domestic development agreements last year).

The chart below shows two columns; the first illustrates the openings that have occurred over the past three quarters and what the company will need to open in 4Q to meet the midpoint of the 220-240 openings range for 2011.  The second, on the right, indicates the contracted openings that have been announced thus far in 2011.  The announcements of new contracted openings typically guides to the openings happening “over the next several years”.  Below the chart, we have included bullet points detailing the markets and quantity of stores detailed in each announcement of 2011.  It is also worth bearing in mind that announcements do not equal openings; attrition is a very real risk to these numbers.  Like with cash flows, a nearby penny is worth a distant dollar.

WHAT DOES DNKN RUN ON? - dunkinbacklog

  • April 27th, 2011 – Dunkin’ Donuts announced six new restaurants in Cincinnati.  Gilligan Oil Company, LLC, an existing franchisee is the development partner.  The six stores will be added to Gilligan’s set of locations and will be open and operating by 2016.
  • April 27th, 2011 – Dunkin’ Donuts announces five new restaurants in North Kansas City.  The first restaurant will open in 2012 and the remaining four units will be developed by 2016.  An agreement was struck with Savoureux Corporation to develop restaurants.  HEDGEYE: Why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces development of eleven new restaurants in Little Rock, Arkansas.  Seven units are to be developed in Ft. Smith and Northwest Arkansas by Littlefield Oil Company.  The first restaurant is slated to open in 2012 with the remaining six to open by 2018. The remaining four units are to be opened by Eric McDuffie and Sam Carter in Hot Springs and Benton.  The first unit is scheduled to open in 2012 and the remaining locations are scheduled to open by 2015.  HEDGEYE: Again, why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces twelve new restaurants in Cedar Rapids, Iowa.  The development agreement was signed with Eastern Iowa Food Service, Inc.  The first restaurant is slated to open in 2012 and the remainder by 2018.
  • October 31st, 2011 – Dunkin’ Donuts announces eighty-six new restaurants in Washington D.C. (really 64 “new” contracts – the 86 included 22 previously contracted restaurants).  15 development agreements were signed over the past year.
  • November 29th, 2011 – Dunkin’ Donuts announces twenty-five new restaurants and two Basin-Robbins locations in Louisiana.  6 development agreements were signed.  The schedules of each developer’s unit openings vary but, similar to the other announcements of 2011, the schedules are back-loaded 4 or 5 years out.

The number of contracted openings is clearly not increasing at the same rate that stores openings are accelerating.  We need to see that backlog grow considerably to gain confidence in management reaching of doubling the store base within 20 years.  The lack of disclosure during the most recent earnings call as to where the backlog stands was, in our view, less than encouraging.  K-Cups may drive same-store sales but if it is earnings growth you are seeking as an investor, we believe there are better vehicles in the restaurant (or coffee) space.

Howard Penney

Managing Director

Rory Green