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DNKN: Not A Slam Dunk(in)

Takeaway: $DNKN will have a difficult time growing SSS with a lack of new products in the pipeline. It's also expensive compared with other QSRs.

Dunkin’ Brands (DNKN) is expected to miss expectations for the second successive quarter as it struggles to grow in the coming quarters. Dunkin’ IPO’d a year ago in the midst of a coffee bubble and is running out of growth drivers to save itself as it trades at an extremely high EV/EBITDA multiple of 13.5x. Chipotle (CMG) is the only other company that trades at a higher valuation in the same QSR space.

One big problem for Dunkin’ outlined by Restaurant Sector Head Howard Penney in a note from today was that Dunkin’s same store sales accelerated from 2% to 7% due to new products and the introduction of Dunkin-brand K-CUPS for Green Mountain’s (GMCR) Keurig machines. Since these events will not reoccur in the next year, it will be hard to compare and keep SSS growth at a similar level.

Penney’s bearish case on DNKN is outlined below:

If we were conspiracy theorists, which we are not, we would likely frame the Dunkin’ Brands story something like this:

1.      The insiders could not get out fast enough, with their “swan song” leveraging up the company to buy the remaining stake this month

2.        Of the 14 members of the DNKN board, 5 are representatives of the selling stockholders 

3.        The selling to investors of the “white space” growth opportunity was made possible by the new franchise distribution agreement.  In theory, this should help accelerate franchise unit opening.  Franchise units opening have been slowing for two quarters (U.S.  Gross openings were flat year-over-year in 2Q12, while net openings of U.S. Dunkin’ Donuts units came to 19 versus 54 expected by the Street)

4.        In trying to put their best foot forward to generate investment banking fees, sell-side expectations for what DNKN can do operationally are stretched.  For example, for nearly every company we track, consensus expectations have 1 and 2 year SSS trends slowing over the next two quarters except DNKN and DNKN is lapping its most difficult SSS compares in over 5 years

5.        As you can see from the chart below, consensus expectations are for the company to reaccelerate unit opening after missing for the past two quarters

DNKN: Not A Slam Dunk(in) - DNKNchart