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Those in the know cannot get out of this stock fast enough.  The sequence of events since this company went public does little to inspire confidence that Dunkin’ Brand is the best growth story around.

The CEO of Hedgeye, Keith McCullough, often repeats this phrase: “Watch what people do, not what they say”.  When thinking about Dunkin’ Brands’ stock at this point, we feel that his advice is highly apropos. Here is a timeline of events that have occurred since the company went public.

  • 7/27/11: Dunkin’ Brands’ shares have a successful IPO; the stock rises ~38% on the first day of trading.
  • 11/01/11: Dunkin’ Brands announces a secondary offering of 22 million shares of common stock.
  • 11/14/11: Dunkin’ Brands says lead book-running managers are waiving the lock up restriction for certain officers and directors.
  • 1/04/12: Dunkin’ Brands signs an exclusive procurement and distribution agreement with Dunkin’ Donuts franchisee-owned cooperative.
  • 3/06/12: Dunkin’ Brands begins dividend at $0.15 per share.
  • 3/16/12: Dunkin’ Brands announces secondary offering of 22 million shares of common stock.
  • 3/16/12:  Discloses in a regulatory filing that 1Q12 same-store sales are tracking between 6.7% and 7% at Dunkin’ Donuts U.S. stores, which is a sequential slowdown in two-year average trends.

Does this timeline suggest to anyone that the people in the know are excited about the growth prospects of the company?

The most significant omission from management’s disclosure continues to be the backlog of contracted new unit openings for Dunkin’ Donuts stores in the U.S.  Dunkin’ Donuts is, by far, the primary driver of growth for Dunkin’ Brands over the next few years and the U.S. market is the “white space” opportunity that has been so heavily touted to investors.  Where is the disclosure on the most pertinent factor for the Dunkin’ growth story?  Last Friday, the company disclosed that Dunkin’ Donuts comparable store sales growth was expected to come in at 6.7-7.0% for 1Q12, which implies a sequential slowdown in two-year average trends and is disappointing in that it also raises a concern about the sustained success, or lack thereof, that the company has had with K-Cup sales versus expectations.  In addition, we would be surprised if many other restaurant companies - particularly those with strong prospects - are seeing a sequential slowdown in two-year average trends with the weather benefit that is helping industry sales this quarter.

The question at this point is; if that sales data point is what the company was willing to disclose, how disappointing is the mysterious backlog number?

DNKN: BUILDING’S ON FIRE - dnkn pod1

Howard Penney

Managing Director

Rory Green

Analyst