Whichever brand one favors, the harsh reality is that unemployment and declining wages has stunted Starbucks' growth. Dunkin is looking to expand in the urban markets where Stbx has been strongest. The danger for the donut gang is that overly ambitious growth plans dunked archrival Krispy Kreme.
The larger question is whether the Dunkin' premium represents a small chapter in an ongoing snack war or a larger commentary on economic trends. JL
Lee Spears and Leslie Patton report in Bloomberg:
Dunkin’ Brands Group Inc., operator of Dunkin’ Donuts coffee shops, plans to offer shares at a premium to Starbucks Corp. as it accelerates a U.S. expansion.
Dunkin’ is seeking to raise as much as $401 million in an initial public offering tomorrow selling 22.3 million shares for $16 to $18 each, according to a regulatory filing. At the midpoint, Dunkin’s market value will be about $2.15 billion, or 3.6 times trailing 12-month sales, compared with about 2.7 times for Starbucks.
After emerging from a 2006 leveraged buyout, Dunkin’ plans to more than double its U.S. locations in the next 20 years and may open more locations than Starbucks, the world’s largest coffee-shop chain. Last year, its revenue increased faster than McDonald’s Corp., which competes with the McCafe line of coffees. Canton, Massachusetts-based Dunkin’ has less than 2 percent of its stores in the western U.S., giving it “a ton more opportunity to grow” than the burger chain, according to Jack Russo, an analyst at Edward Jones & Co.
“They’ve got a really good brand name, they’ve got a really good store presence in the Northeast,” said Russo, based in St. Louis. “The question is going to be, can they bring this to the rest of the country?”
In the U.S., where it has about 6,800 points of distribution, mostly in New England and New York, Dunkin’ plans to open as many as 250 new locations per year in 2011 and 2012, with a goal of 15,000. The chain has about 9,800 global locations, almost all franchised, and may add 500 stores a year overseas this year and in 2012. Starbucks, with 16,800 stores, plans about 500 net new locations worldwide in fiscal 2011.
Coffee Ardor
Last year, revenue at Dunkin’ jumped 7.3 percent, compared with 5.8 percent at McCafe coffee-serving McDonald’s. The burger chain trades at 3.6 times trailing 12-month sales, the same as Dunkin’. Starbucks increased revenue 9.5 percent after shutting down hundreds of underperforming stores in 2008 and 2009.
Dunkin’ and its competitors are betting on Americans’ continued coffee buying. McDonald’s said last week that U.S. sales of its McCafe specialty drinks rose 29 percent during the second quarter.
“The coffee segment has been one of the fastest growing” in the restaurant industry, said Larry Miller, an analyst at RBC Capital Markets in Atlanta. “Everybody is putting on a better cup of coffee because it has been a growth business.”
Dunkin’ plans to use its estimated $348 million of proceeds from the IPO to repay debt accumulated under the ownership of private-equity firms Bain Capital LLC, Carlyle Group and Thomas H. Lee Partners LP. All three firms are selling shares in the IPO, according to the prospectus, each cutting their stake to 26 percent from about 32 percent.
Commodity Costs
While the chain has growth potential, its smaller size may present a challenge in keeping costs low as it expands, said Matt McCormick, a fund manager at Bahl & Gaynor Inc. in Cincinnati.
“This is not somebody who has massive scale and can clamp down on inefficiencies as much as Starbucks or McDonald’s,” said McCormick, who helps oversee about $4 billion including shares of McDonald’s.
Dunkin’s stores have faced rising coffee and dairy prices over the past year. Arabica coffee surged to a 14-year high in May and has gained about 50 percent in the past 12 months. McDonald’s and Starbucks have raised prices this year to help offset mounting ingredient costs.
Since most of Dunkin’s locations are owned by franchisees, it is less affected by commodity costs, the prospectus showed. Tom Johnson, a spokesman for Dunkin’, declined to comment because the company is in a quiet period ahead of the IPO.
Krispy Kreme
Overexpansion hurt Krispy Kreme Doughnuts Inc., the Winston-Salem, North Carolina-based chain that sprung from a single factory set up in 1937. In the 1980s, the company began opening stores across the U.S. By 2005, the stock tanked, several executives left amid an accounting scandal, and the company was forced to close half of its 390 stores. Krispy Kreme held an IPO in April 2000.
Bain, Carlyle and Thomas H. Lee paid about $2.43 billion five years ago for Dunkin’, whose filing names Oak Brook, Illinois-based McDonald’s, Starbucks in Seattle and Tim Hortons Inc. of Oakville, Ontario, as competitors. The acquisition was part of a wave of leveraged buyouts worth a record $1.6 trillion that were completed from 2005 to 2007, according to Preqin Ltd., a London-based research firm.
The firms each contributed $345.5 million of equity to the deal in addition to management’s $25 million, with the rest of the cost financed with debt, according to a letter from Carlyle to investors. Carlyle marked its investment at 1.55 times as of March 31, putting the enterprise value of the company at $3.5 billion, including $1.8 billion in long-term debt.
0 comments:
Post a Comment