Dunkin’ Brands: Still a Sweet Treat?

Abstract

A publicly traded company, Dunkin’ Brands, consists of two quick service restaurant segments, Dunkin’ (formerly Dunkin’ Donuts) and Baskin-Robbins. Investors became aware of Dunkin’ Donuts in the late 1980s when Peter Lynch wrote in his book, One up on Wall Street (1989), that he bought the company’s common stock because “[he] loved the coffee.” Now, over thirty years later, this case asks if loving the coffee is still a good reason to invest in the company’s common equity. Through examination of the firm’s financial statement, students can evaluate the company’s financial leverage and discuss the risks associated with its use of debt. The case provides the opportunity to use both relative and discounted cash flow measures to determine its intrinsic value. Students must then decide if they would recommend investing in Dunkin’ Brands.

Case

Learning Outcomes

By the end of this case study, students should be able to:

  • Understand the difference between the use of book and market values when discussing financial leverage ratios.
  • Calculate value using relative valuation metrics such as Price-to-Earnings (P/E) and Price-to-Earnings Before Interest, Taxes, Depreciation, and Amortization (P/EBITDA).
  • Use discounted cash flow measures to calculate Dunkin’ Brands intrinsic value.
  • Compare the intrinsic value from the relative and discounted cash flow measures to the current market price and discuss whether or not to recommend investment in the firm’s common equity.

Introduction

On May 5, 2020, Dianne Wixom, an investment advisor for Mayberry Lentz, examines the financial statements of Dunkin’ Brands. One of her clients mentioned that he sees the line of cars at the drive-through for Dunkin’ (formerly Dunkin’ Donuts) and wonders if he should invest in the company. She recalls that a legendary fund manager, Peter Lynch (1989, p. 19) once wrote that he invested in Dunkin’ Donuts because he loved the coffee. Dianne wonders if it is still a good enough reason to invest in the firm.

History

In the years immediately following World War II, two companies that ultimately became well known in the United States were founded. In 1945, brothers-in-law Irvine “Irv” Robbins and Burton “Burt” Baskins started their family-friendly neighborhood ice cream parlor in Glendale, California. By 1960, they had franchised more than 400 stores in the United States (History, www.baskinrobbins.com). Three years later, on the opposite side of the United States, William Rosenberg opened his donut shop, Open Kettle, in Quincy, Massachusetts. In 1950, he changed its name to Dunkin’ Donuts and in 1955 the chain began franchising stores. By 1963, the company became part of Universal Food Systems. Over the years, other parts of Universal Foods were either closed or sold and the company was renamed Dunkin’ Donuts (Dunkin’ Donuts, www.wikipedia.org).

In 1967, United Brands acquired Baskin-Robbins. Later, in 1972, the company had an initial public offering (IPO), with 17% of company equity being available publicly. The British firm J. Lyons & Co. acquired Baskin-Robbins in 1971. In 1978, Allied Breweries merged with J. Lyons to form Allied Lyons (https://en.wikipedia.org/wiki/Baskin-Robbins). In 1990, Allied Lyons acquired Dunkin’ Donuts. The combined chain, now operating as Dunkin’ Brands, was acquired by private equity firms Bain Capital, Carlyle Group, and Thomas H. Lee Partners in 2005 from Allied Domecq (successor firm to Allied Lyons). In 2011, the company filed for its IPO (Cordeiro, 2011). Dunkin’ Brands’ stock started trading on July 27, 2011 using the symbol DNKN.

Industry

Dunkin’ Brands franchises Dunkin’ (coffee and baked goods) and Baskin-Robbins (ice cream and cake specialty restaurants) quick service restaurant (QSR) chain. According to a report from the United States Department of Agriculture, the QSR sector has grown faster than full service restaurants between 2003 and 2018 and grew even during the 2007–2009 Great Recession (McLaughlin, 2018). The New York Times reported that before the COVID-19 pandemic, 70% of QSR sales were from the drive-through window (Yaffe-Bellany, 2020). Dunkin’ Brands operates in the coffee/bakery and dessert/snack subsections of the QSR industry. Dunkin’ is the second largest chain coffee/bakery behind Starbucks and Baskin-Robbins is second to Dairy Queen in the dessert/snack subsection. Data for competitors is given in Table 1. Dianne Wixom plans to include the use of multipliers (relative valuation) in her analysis of DNKN.

Table 1. Competitor Information (USD)

Company

Revenues

Gross margin

Net income

EBITDAa

Total assets

Total liabilities

Starbucks Corp

26,508,600,000

67.8

3,599,200,000

5,852,000,000

19,219,600,000

25,451,800,000

McDonald’s Corp

21,076,500,000

63.2

6,025,400,000

10,378,400,000

47,510,800,000

55,721,100,000

General Mills Inc

16,865,200,000

34.1

1,752,700,000

3,223,900,000

30,111,200,000

23,056,700,000

Restaurant Brands International Inc

5,603,000,000

58

643,000,000

2,109,000,000

22,360,000,000

19,870,000,000

Hostess Brands Inc

907,675,000

33

63,115,000

174,904,000

3,097,701,000

1,611,909,000

Tofutti Brands Inc

13,066,000

31.4

507,000

382,000

4,890,000

1,140,000

Company

Number of shares

Share price

Market cap

P/EBITDA

PE ratio

 

Starbucks Corp

1,168,299,040.00

72.9

85,169,000,000

14.55

25.9431

 

McDonald’s Corp

745,447,444.80

179.24

133,614,000,000

12.87

22.7462

 

General Mills Inc

606,136,097.60

59.81

36,253,000,000

11.25

17.1868

 

Restaurant Brands International Inc

300,163,332.00

48.98

14,702,000,000

6.97

29.0633

 

Hostess Brands Inc

123,090,277.80

11.52

1,418,000,000

8.11

20.9364

 

Tofutti Brands Inc

7,576,000.00

1

7,576,000

19.83

73.5

 

Average

 

 

 

12.26

31.56

 

a EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is a metric used to measure the profitability of a company.

Source: Dunkin’ Brands (2019)

DNKN Financial Statements

Tables 2 and 3 are the financial statements for Dunkin’ Brands. Dianne Wixom plans to use this information to evaluate Dunkin’s enterprise and equity values.

Table 2. Consolidated Income Statement for Dunkin’ Brands Group Inc. (USD thousands)

December 28, 2019

December 29, 2018

December 30, 2017

Sales revenue

91,362.00

95,197.00

110,659.00

Other revenue

1,278,865.00

1,226,420.00

749,842.00

Total revenue

1,370,227.00

1,321,617.00

860,501.00

Direct costs

75,771.00

77,412.00

77,012.00

Gross profit

1,294,456.00

1,244,205.00

783,489.00

Selling general and admin

824,677.00

802,913.00

309,276.00

Depreciation and amortization

36,883.00

41,045.00

41,419.00

Restruct remediation and impair

551

1,648.00

1,617.00

Other operating expense

−1,188.00

1,670.00

−627

Total indirect operating costs

860,923.00

847,276.00

351,685.00

Operating income

433,533.00

396,929.00

431,804.00

Interest income

−118,477.00

−121,548.00

−101,110.00

Gains on sale of assets

−235

−1,083.00

391

Other non-operating income

−13,076.00

-

−6,996.00

Total non-operating income

−131,788.00

−122,631.00

−107,715.00

Earnings before tax

301,745.00

274,298.00

324,089.00

Taxation

77,238.00

59,295.00

−11,622.00

Equity earnings

17,517.00

14,903.00

15,198.00

Extraordinary items

-

-

-

Accounting changes

-

-

-

Net income

242,024.00

229,906.00

350,909.00

Preference dividends and similar

-

-

-

Net income to common

242,024.00

229,906.00

350,909.00

Average shares basic

82,809.02

83,697.61

90,857.17

EPS net basic

2.92

2.75

3.86

EPS continuing basic

2.92

2.75

3.86

Average shares diluted

83,674.61

84,960.79

92,231.44

EPS net diluted

2.89

2.71

3.8

EPS continuing diluted

2.89

2.71

3.8

Shares outstanding

82,834.83

82,560.60

90,377.25

Source: Dunkin’ Brands (2019)

Table 3. Dunkin’ Brands Group Inc. Consolidated Annual Balance Sheet (USD thousands)

December 28, 2019

December 29, 2018

December 30, 2017

Cash and equivalents

621,152

517,594

1,018,317

Cash and Equivalents and ST investments

621,152

517,594

1,018,317

Receivables (ST)

133,193

140,375

102,524

Other current assets

152,956

155,504

195,994

Total current assets

907,301

813,473

1,316,835

Gross property plant and equipment

395,121

356,752

302,847

Accumulated depreciation

172,001

147,550

133,842

Net property plant and equipment

223,120

209,202

169,005

Long-term investments

154,812

146,395

140,615

Intangible assets

2,191,007

2,223,032

2,245,465

Other assets

443,784

64,479

65,464

Total assets

3,920,024

3,456,581

3,937,384

Accounts payable and accrued expenses

191,980

186,155

87,313

Accounts payable

89,413

80,037

16,307

Accrued expenses

102,567

106,118

71,006

Current debt

31,150

31,650

31,500

Current lease obligations

-

476

596

Other current liabilities

359,296

321,300

352,481

Total current liabilities

582,426

539,581

471,890

LT debt and leases

3,004,216

3,017,624

3,043,037

Deferred LT liabilities

522,527

531,360

326,407

Minority interests

-

-

-

Other liabilities

398,865

80,813

87,603

Total liabilities

4,508,034

4,169,378

3,928,937

Common share capital

83

82

90

Additional paid-in capital

561,345

642,017

724,114

Retained earnings

−1,129,565

−1,338,709

−705,007

Accumulated other comprehensive income

−19,809

−15,127

−9,690

Treasury stock

64

1,060

1,060

For curr trans (BS)

−18,841

−14,307

−8,239

Other equity

18,841

14,307

8,239

Total equity

−588,010

−712,797

8,447

Total liabilities and equity

3,920,024

3,456,581

3,937,384

Source: Dunkin’ Brands (2019)

Examining the balance sheet in Table 3, Dianne is surprised by DNKN’s amount of debt (Data 1). She decides she needs to analyze Dunkin’ Brands’ capital structure further; to do this she reviews the Management’s Discussion of Risks.

Data 1. Dunkin’ Brands Total Debt (2010–2020)

Potential Risks for Dunkin’ Brands Group Inc.

  • Our financial results are affected by the operating results of our franchisees.
  • Our franchisees could take actions that could harm our business.
  • Our success depends substantially on the value of our brands.
  • Incidents involving food-borne illnesses, food tampering, or food contamination involving our brands or our supply chain could create negative publicity and significantly harm our operating results.
  • The quick service restaurant segment is highly competitive, and competition could lower our revenues.
  • If we or our franchisees or licensees are unable to protect our customers’ credit card data and other personal information, we or our franchisees could be exposed to data loss, litigation, and liability, and our reputation could be significantly harmed.
  • Sub-franchisees could take actions that could harm our business and that of our master franchisees.
  • Economic conditions adversely affecting consumer discretionary spending may negatively impact our business and operating results.
  • Our substantial indebtedness could adversely affect our financial condition.
  • We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which would adversely affect our financial condition and results of operations.
  • The terms of our securitized debt financing of certain of our wholly owned subsidiaries have restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects
  • The indenture governing the securitized debt restricts the cash flow from the entities subject to the securitization to any of our other entities and upon the occurrence of certain events, cash flow would be further restricted.
  • Infringement, misappropriation, or dilution of our intellectual property could harm our business (Dunkin’ Brands, 2019)
Table 4. Stock Price of DNKN

Last 52 weeks, September 16, 2019 to September 14, 2020

Close

62.03

High

83.8

Low

39.68

Source: Sharadar (2020)

Data 2. Stock Daily Close of DNKN (2011–May 5, 2020)

Should Dianne recommend the stock for her client’s portfolios?

Discussion Questions

  • What are DNKN’s leverage ratios? How well does it manage the debt? Why does DNKN use this amount of financial leverage? Explain how the use of debt provides a tax shield. Can DNKN effectively use this debt tax shield?
  • What are the industry P/E and P/EBITDA ratios? Using these industry ratios, calculate the intrinsic value for DNKN.
  • Calculate for DNKN:
    • the weighted average cost of capital;
    • DNKN’s sustainable growth rate;
    • cash flow from assets;
    • free cash flow to equity.
  • According to your calculations, what are DNKN’s total enterprise value and its intrinsic equity value?
  • Compare the valuation numbers you have calculated to the current market price for DNKN common stock. In May, should Dianne Wixom have recommended that her client invest in DNKN stock? Why or why not?

References

Cordeiro, B. (2011). Dunkin’ Brands Group files for $400 million IPO. https://www.reuters.com/article/us-dunkinbrands-ipo-idUSTRE7433MG20110504
Dunkin’ Brands. (2019). Form 10k 2019. Mergent Online. https://www-mergentonline-com.ezproxy.niagara.edu/compsearch.asp
Lynch, P. (1989). One up on Wall Street. Simon & Schuster.
McLaughlin, P. W. (2018). Growth in quick-service restaurants outpaced full-service restaurants in most U.S. counties. https://www.ers.usda.gov/amber-waves/2018/november/growth-in-quick-service-restaurants-outpaced-full-service-restaurants-in-most-us-counties
Sharadar. (2020, September 14). U.S. stock market prices: Stock daily close—adjusted prices | Exchange Symbol: NASDAQ | Exchange Name: Nasdaq Composite | Stock Symbol: DNKN, 07/27/2011 - 09/14/2020. [Data set]. Data Planet™ Statistical Datasets: A SAGE Publishing Resource. https://doi.org/10.6068/DP17492D4329668
Yaffe-Bellany, D. (2020, May 1). Drive-throughs are now a lifeline for fast-food chains. New York Times. https://www.nytimes.com/2020/05/01/business/coronavirus-fast-food-drive-throughs.html

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2022 SAGE Publications, Ltd. All Rights Reserved

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