I just wanted to send out a thank you note to the CEO of DNKN, Nigel Travis, for validating my research process here at Hedgeye Risk Management. Unfortunately, I was not allowed the opportunity to ask a question on the conference call this morning, but I would have thanked him personally over the phone had the chance arisen. 


I knew I had touched a nerve on the last conference call.  Two things I have learned during my career:

  1. When a management team calls out an analyst’s research as “nonsense”, the analyst is often correct.
  2. When a management team purports to paternalistically protect investors from their own analytical ineptitude, they’re usually not doing that to protect the stock from becoming over-inflated. 

Consider this quote from Nigel Travis, to me, on the most recent earnings call:


“We took a decision when we went public that we weren't going to release pipeline information. We think that's the right thing because it can be interpreted in all kinds of ways.”


On the back of some stronger-than-expected 1Q12 numbers, Travis attacked our thesis on his stock and our view that there was a lack of evidence that the company can grow in line with his guidance and the Street’s expectations.  To be clear: our thesis has, from the start, included the caveat that we can only work with the data management provides publically: the Store Development Agreements (SDA’s) on the investor relations website.  This data is limited, but the information regarding openings on the company’s investor relations website suggests a shrinking backlog of stores.  This “nonsense” thesis that we were communicating was based, in part, on the assumption outlined above in point two, above. 


On 3/19/12, we 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.”


As our clients know, our view has been based on a lack of evidence – concrete evidence – that the backlog of new unit openings was growing in line with the necessary growth rate required to meet company growth targets.  Call us crazy, but erring on the side of caution seemed most appropriate to us when valuing a stock that is being sold hand over fist by insiders while management shirked away from disclosing information on the most important component of its long term outlook.  Our stance on this stock has been solely aimed at providing a sober, transparent, and logical approach to a growth story that – to this day – is sorely lacking in transparency.  And the insiders have been selling, presumably out of a sense of civic duty to their fellow investors.


It is still a little early to say, but it seems that our thesis could be correct.  Looking at the 2Q12 numbers released today, it appears that management is likely going to be hard-pressed to meet its Dunkin’ Donuts growth targets in the U.S.  Gross openings were flat year-over-year in the second quarter, while net openings of U.S. Dunkin’ Donuts units came to 19 versus 54 expected by the Street, according to Consensus Metrix. 


The bulls have shifted from “growth” to “comps” and now have nowhere to go.  The issue of unit openings is not the end for Dunkin’ Brands.  Same-store sales missed expectations by a wide margin; meeting full-year comps estimates will require a strong sequential acceleration in two-year average trends.  If you have a list of consumer companies that is going to see a V-Bottom in two-year average trends in the back half of this year, I bet that list is short and Dunkin’ is not on it. Consensus is expecting that, as the chart on the right, below, illustrates.  Even maintaining flat two-year average trends is likely overly-bullish but that scenario, illustrated by the chart on the left, shows comps missing consensus by 190 and 270 basis points in 3Q and 4Q, respectively.   We don’t think comps are overly material for Dunkin’ Brands; it is a franchised business whose future earnings growth is primarily predicated on unit growth.  Nevertheless, we do not think the same-store sales numbers over the remainder of the year will help franchisee demand for the Dunkin’ Donuts brand, however good Mr. Travis “feels” about it.


DNKN: ALL GLORY IS FLEETING (PART DEUX) - dnkn pod 1 consensus



Howard Penney

Managing Director


Rory Green





SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more