First and foremost, I want to acknowledge that Dunkin’ Brands had a strong quarter.


Dunkin’ Brands posted 1Q12 non-GAAP EPS of $0.25 ex-items versus consensus of $0.23, supported by revenues of $152 million versus consensus of $149 million.  Operating margins came in 130 basis points above consensus of 41.3%.  Total U.S. Dunkin’ Donuts points of distribution increased 3.8% versus a year ago, which was an acceleration from 4Q’s 3.6% year-over-year growth.   Mine is a humbling business and, as I was anticipating a weaker quarter than what the company ultimately reported, I hold my hands up and admit that.


Nigel Travis, as CEO of Dunkin’ Brands, is obviously a successful person but having been in this business for quite some time, I would hazard a guess that he, too, has had some humble moments in his career.  On the back of some strong numbers, DNKN’s CEO did not hesitate to put the boot in, attacking my thesis on the lack of evidence that the company can grow in line with its guidance and the Street’s expectations.  I stand by my prior assertions; as an analyst, it is my job to critically analyze the prospects of the equities I cover.  Management hyperbole abounds in the restaurant industry; I try to seek out facts.  Mr. Travis, however, described my thesis as “nonsense”.  Interestingly, his rant came in response to a question from a different analyst that was raising the same issues I have raised all along.


As clients will know, our view has been centered on a lack of actual, concrete evidence that the backlog of new unit openings is sufficient to support the White Space growth story that the company has been touting.  Either the company has the backlog or it does not.  Before the 1Q12 conference call, management’s guidance on this detail was limited to “the pipeline is really strong” and in my analysis I was fully transparent about where my numbers were coming from – announced Store Development Agreements (SDA’s) within the company’s press releases.   I wrote: 


“The evidence for our view is as follows: announced new unit openings are lagging actual openings, which is leading to a decline in the backlog of potential new units being opened.  Until we are proven wrong by greater disclosure from Dunkin’, we will continue to be bearish on the company’s growth prospects per the announcements of new contracted openings by the company.”


If Mr. Travis believes that this statement amounts to nonsense, that’s fine.  I believe that it demonstrated a transparent, sober and logical approach to a growth story that at that time had been deeply lacking in disclosure.  I understand that news flow about lock up restrictions being waived and continuous selling of stock does not necessarily point to fundamental weakness, but as an analyst dealing with unnecessarily limited information it does not instill confidence.  Without that confidence, I was unable to advise clients to get behind such a richly valued stock and I believed it to be overvalued. 


Nigel Travis’ dismissal of my thesis was most surprising in that it completely ignored his own company’s failure to adequately inform the Street of its backlog.  If 80% of the company’s new units last quarter were in new units, and agreements to open stores in new markets are marked with SDA’s, then perhaps my reasoning was not so off base.  Perhaps it was the best we could do with the disclosure that was made available.  Despite prior failed attempts, I did manage to get on the Dunkin’ call yesterday and asked, following his “nonsense” remark, why there is not greater disclosure about the growth rate of the company’s pipeline.  Mr. Travis’ response to me was that the decision was taken when the company went public, that the pipeline information was not to be released to the public because “it can be interpreted in all kinds of ways”.  Management is protecting the investment community from itself! 


Little by little, against management wishes, more information is surfacing and I am happy to continue to pursue it.  During the prepared remarks, Travis said that the company plans to “accelerate development over the next few years with the goal of 5% net new unit growth”.   This is about as positive as the proverbial piece of string is long.  The company has a goal of getting there and the string has length.  How soon the company can get there is going to be a much more important issue for investors.  


I am yet to see evidence that the growth rate can be achieved.  Sweetened up deals for franchisees in new markets and a clear preference for less disclosure as opposed to more on the part of management is not encouraging. 


Executives gushing about “future demand” is not going to cut it (no offense to any individual CEO).  Looking at the comparable-store sales trend, the two-year average is declining.  High single-digit same-store sales growth is impressive but the change on the margin is not, as it stands, pointing higher.  Despite the lack of importance of comps for a franchised business, it is likely that a continuation of this trend would spur concerns more broadly about the company’s ability to grow.  If comps decline to 5% and bulls capitulate on that, but the pipeline and returns on new units are shown to be healthy, I will be the first to react by advising clients to take advantage of the selling.  As before, I will remain skeptical of this story until I see the data to convince me otherwise.  



Howard Penney 

Managing Director


Rory Green


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