Dunkin’ Brands Group, Inc. is a quick-service restaurant chain and operates in an industry of coffee retailers such as Starbucks (SBUX) and Krispy Kreme Donuts (KKD).
It’s no big secret that Dunkin’ Donuts has the highest relative leverage in the industry. Leverage comes with a number of risks— a substantial risk is the interest paid on debt.
Dunkin’ Brands’ gross margin has been declining, but at the same time, operating margins have been on the rise. Gross margin is largely affected by increases in the production costs of ice cream.
The coffee industry is difficult to understand in terms of the relative valuation. Industry stock prices per share range from 46.0x to 15.4x earnings per share, with the average at 26.4 times earnings.
Dunkin’ Donuts’ main competitor on the coffee sales front is Starbucks, which sells coffee from its company-owned fleet of retail locations.
Dunkin’ Brands have had an international presence since 1961’s introduction into the Canadian market. Currently, their key markets for both brands are in Asia and the Middle East.
Dunkin’ Brands has a very low capital requirement relative to the rest of the coffee retail industry. This is due to its business model, centered around establishing franchises across the world.
Dunkin’ Brands Group doesn’t typically supply products to its franchises. Revenues derive from royalty fees as opposed to product distribution.
Dunkin’ Donuts has pursued an increasingly aggressive expansion strategy since its IPO. The key to this strategy is its franchise-centered business model.
Dunkin’ Donuts is an industry leader of the quick-service restaurant (or QSR) concept. Its products include coffee, donuts, bagels, muffins, and breakfast sandwiches.
Starbucks (SBUX) appears to be undervalued relative to its closest competitors based on forward PE (price-to-earnings) and estimated earnings growth.
In addition to international expansion, Starbucks executives push the importance of the consumer experience. Essentially, the firm is dynamically changing its impressions by always offering something new.
Adding additional segment offerings like perishable food allows Starbucks to generate increased revenue with the resources it already has.
Since the 2009 recession, the company has sharpened its focus on increasing international store count to mitigate the risks attributable to local unfavorable economic conditions.
Dunkin’ Brands Group is a franchisor of quick-service restaurants, serving hot and cold coffee and baked goods in addition to ice cream. It’s a strong, growing player in these segments.
Starbucks indicates that it uses derivative contracts to hedge commodity price risks. These contracts typically don’t have a lifespan longer than five years.
Starbucks’ main cost driver is its price per pound of coffee beans. The two most consumed coffee beans are Arabica and Robusta blends.
This business model has allowed Starbucks to be the first coffee firm to put retail locations in each of the BRIC nations and many more.
Starbucks’ revenue mix is weighted in favor of beverages. This should come as no shock, considering the firm’s roots trace back to a single coffee shop at Pike’s Place Market in Seattle.
Starbucks began in 1971 as a single coffee shop in Seattle. Today, it’s the world largest coffee retailer, with over 19,000 locations in more than 60 countries (as of FY2013 end).