Group 15- Dunkin' Brands

Dunkin’ BrandsCompany Valuation

Jigar Bhakta, Alexander Bye, Victoria Kalamaras, Amanda Ladenheim, William Tamposi, David Sher

Dunkin’ Brands is fairly valued; the firm is positioned for low, steady growth and should be valued at $45.16 per share

2

Adaptable Core Business

Low Risk Franchise Model

Stable Revenue Growth

Currently Fairly Valued

● Room for expansion with limited capital investment● Collects revenue royalty, advertising contributions, and licensing

fees from franchisees and partners

● Demonstrated flexibility in their approach to attract and maintain consumers in unique segment of the market

● Implementation of technology to expand on the scope of interactions with consumers

● More than 19,000 points of distribution globally● Three consecutive years of over 5% growth in stores● Increased expansion into international markets

● The firm is valued at $6.25B, implying a target share price of $45.16

Franchise Model

Adaptability Growth Valuation


3Franchise Model












Dunkin’ Brands reduces costs and risks by spreading responsibilities

4Franchise Model Adaptability Growth Valuation

Source: DNKN Website

Sales royalties comprise of 63% of the annual revenue for Dunkin’ Brands


Source: DNKN 2015 10-K

Dunkin’ Brands is structured into four segments


75%

13%

6%

6%


7Franchise Model












Dunkin’ Brands occupy a unique market segment

8Franchise Model


High PriceLow Price

High Quality

Low Quality Source: fastfoodmenuprices.com

9

Dunkin’ is utilizing strategic promotions and advertising to declining same store sales growth

9Franchise Model


Promotions and Advertising DD Perks® Rewards

Source: Brand Promotions

Dunkin’ seeks to maximize sales revenue by responding to consumer trends and competition

10Franchise Model


Introducing healthy options

Increasing variety of popular products

All day menu items

Source: dunkindonuts.ccm

67% of Dunkin’ Donuts sales come from coffee

Introduced espresso-based beverages and cold brewed coffee

Increasingly health conscious consumers

DD Smart® labels on menus

Capitalizing on popularity of breakfast items

Directly responding to competition from McDonald’s

Dunkin’ introduces new products to reach other consumer segments and expand market share

11Franchise Model


● More than 150 million sold between May and December of 2015

● 360 million more cups of coffee sold following K-cup launch

Home

80%

70%

60%

50%

40%

30%

20%

10%

0%Work Eating Place Traveling Other

Coffee Consumption in the U.S. By Location In 2016

Source: statista.com

Source: dunkindonuts.com


12Franchise Model












GROW DD U.S. same store sales and profitability

Revenue growth is primarily driven by same store sales growth and store expansion

13Franchise Model


ACCELERATE DD U.S. store expansion

DRIVE international growth across both brands

SHORT-TERM GROWTH DRIVER

MEDIUM-TERM GROWTH DRIVER

LONG-TERM GROWTH DRIVER Source: MarketRealist

GROW same store sales growth of BR U.S.

Declining Dunkin’ Donuts U.S. same-store sales growth pose a risk to future growth

14Franchise Model


2011 2012 2013 2014 2015 2016 (E)

DD U.S. Same Store Sales Growth

5.1%

4.2%

3.4%

1.7%1.4%

2.0%

Source: Annual Reports

15Franchise Model


14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Number of Dunkin’ Donuts Stores Worldwide

U.S. International

2007 2008 2009 2010 2011 2012 2013 2014 2015

These risks are mitigated by stable growth in domestic Dunkin’ Donuts stores

Source: Dunkin’ Donuts Annual Reports

Dunkin’ Brands is aggressively expanding into international markets

16Franchise Model


● Dunkin’ signs largest development agreement in company history in China

● European Expansion: first restaurant openings in Denmark, Georgia, Iceland, and Poland

● Master franchise agreement in South Africa

Source: Market Realist

Dunkin’ is expected to experience Revenue growth of 5.5% through 2020

17Franchise Model


Source: 10-K & Projections

Revenue CAGR=5.5%


18Franchise Model












The firm value is ~$6.25B, suggesting an appropriate price per share of $45.16

19Franchise Model


Cost growth matches revenue growth, bringing DNKN gradual increases in net income

20Franchise Model


WACC: 3.22%Terminal Growth Rate: 2.25% Beta: 0.46

Current Market Value:$4.09B

Estimated Market Value:$6.25B

Current Share Price:$44.61

Estimated Share Price:$45.16


21Franchise Model












22Appendix

Appendix23. Historical Share Prices24. Key Financial Ratios25. Base Case DCF26. Bull Case DCF27. Bear Case DCF28. Beta Calculation29. WACC30. Sensitivity to Terminal Growth Rate31. Sensitivity to Beta32. Sensitivity to Return on Debt33. Revenue34. Cost of Goods Sold35. Selling, General & Administrative36. Other37. Franchise Logistics39. Five Part Plan40. Advertising42. Research & Development43. Supply Chain46. Debt Financing49. Advisory Boards

50. Industry at a Glance51. Market Share52. Industry Revenue53. Industry Life Cycle54. Industry Sales by Product55. Sector Costs vs. Industry Costs56. Labor Intensity vs. Capital Intensity57. Consumer Economic Demographics58. Smartphones vs. Consumerism60. Technology Trends61. Consumer Loyalty63. Mobile Payments64. Location-Based Marketing65. Mobile Ordering66. Brand Entertainment & Engagement67. Consumer-QSR Characteristics & Offerings68. QSR Menu Categories69. Size of Operations

70. Additional Risks72. Commodity Volatility74. Japan Joint Venture75. South Korea Joint Venture76. Other Joint Ventures77. Leadership and Management79. Dunkin’ Donuts Products80. Baskin Robbins Products81. Mobile Apps and Functions83. DD Perks84. DD Smart85. Dunkin’ Donuts SWOT86. Baskin Robbins SWOT87. Starbucks SWOT88. McDonald’s SWOT89. Carvel SWOT90. Coffee and Tea Industry Breakdown91. Ice Cream and Gelato Industry Breakdown92. Perceptual Map Prices93. Additional Promotions94. Social Media95. Espresso-Based Beverages

Historical Share Prices

23Appendix

Current: $44.61 High: $55.48 Low: $24.58 IPO Date: 07/27/2011

Source: Google Finance

Key Financial Ratios

24Appendix

P/E PEG P/SLeveraged

Ratio ROACurrent

RatioTurnover

Ratio D/E

DNKN 35.19 1.57 4.96 5.20 to 1 3.33% 1.33 0.26 4.91

Comparables 23.70 1.44 1.30 3.65 to 1 16.01% 1.07 0.77 58.80

Source: Yahoo! Finance

Base Case Discounted Cash Flow

25Appendix

Current Share Price as of Market Close,

07/07/2016

Bull Case Discounted Cash Flow

26Appendix


07/07/2016

Bear Case Discounted Cash Flow

27Appendix


07/07/2016

Beta Calculation

28Appendix

WACC Calculations

29Appendix

Sensitivity to Terminal Growth Rate

30Appendix

Sensitivity to Beta

31Appendix

Sensitivity to Return on Debt

32Appendix

Revenue

33Appendix

● The two important drivers of revenues are (1) same store sales growth and (2) store growth○ (1) Same store sales growth has been declining and were negative for the first time in Q4

2015 which is worrisome for Dunkin’ prospects○ (2) Over 19,000 points of distribution and steadily growing at over 5% in each of the last 3

years● Dunkin’ generates revenue from five primary sources: (1) royalty income and franchise fees, (2)

rental income from restaurant properties that are leased or subleased to franchisees, (3) sales of ice cream and other products to franchisees in certain international markets, (4) retail store revenue at company-operated restaurants, (5) other income

● Breakdown of 2015 revenue: Total- $810,933○ Franchise Fees and Royalty Income- $513,222○ Rental Income- $100,422○ Sales of Ice Cream and other products- $115,252○ Sales at company-operated restaurants- $28,340

Cost of Goods Sold

34Appendix

● Cost of ice cream and other products (pg 38): ○ $76,877 (2015), decreases 7.5% ○ $83,129 (2014), increases 4.9%○ $79,278 (2013)

● Net margin on ice cream products increased for FY2015 to $38.4M due to a decrease in commodity costs, increase in pricing, and favorable foreign exchange rates (these factors more than offset the decrease in sales volumes)

● Net margin on ice cream products increased slightly for FY 2014 to $34.4M due to favorable Australia inventory write-offs, an increase in sales volume, offset by an increase in commodity costs

Selling, General & Administrative Expenses

35Appendix

● Personnel costs always increasing (but not at a rate faster than revenue)● Incentive-based compensation● “Increase in costs incurred to support our consumer packaged goods”

○ K-Cup Pods. New to the market, costs of packaging● Gift card business● Third party product volume guarantee● Legal/litigation issues, recorded in SGA

○ Bertico and other legal issues on the horizon.○ Business in Canada. Not enough monetary aid.

Other Expenses

36Appendix

● The annual reports classifies operating costs and expenses into 7 categories. Their total operating costs and expenses (for example 2015: 451,051) minus the first four categories (-54,611, -76,877, -29,900, -243, 796) leaves us with our analysis numbers (approx 31,000). The last three categories: Depreciation, Amortization of other intangible assets, and long-lived asset impairments charges, therefore make up other operating costs.

● Nearly 100% franchised ● 20 year agreement, often renewable● $25,000-$100,000 agreement● Approximately 5.9% royalties, plus 5% of gross sales go to advertising● Franchises fund most of new restaurant development

37

Franchise Logistics

● Site must be approved (location, traffic patterns), meet training requirements (in-house training for franchise managers)

● Abroad, the franchise agreements cover a geographic area● Evaluate franchisees based on experience, financial background

38

Franchise Logistics, continued

Five-Part Plan

39Appendix

● Focus on Coffee leadership, espresso based drinks● Improving innovation process to successfully, quickly bring new

products to market● Targeted value and smart pricing, including promotions● Mobile ordering and delivery tests● Improve traditional service

Advertising Logistics

40Appendix

● 5% of gross sales committed to advertising fund● Contributions almost exclusively from franchisees, but fund is

controlled by Dunkin’● “Includes all expenses related to marketing, research and

development, innovation, advertising and promotion, including market research, production, advertising costs, public relations, and sales promotions” (2015 annual report, page 4)

● Less than 20% of fund is used for administrative costs

Advertising Logistics, continued

41Appendix

● Local advertising sponsored by franchisees must be approved by Dunkin’, and is occasionally reimbursed

● Goals: Brand differentiation, increase sales● DD Perks Rewards program-4.3 million members● Popular Dunkin’ Mobile App makes it easy to order on the

go, caters to Dunkin’s quick-service model

Research and Development

42Appendix

● Included in advertising budget● Lab located in Canton, MA● Includes sensory lab, test kitchen, quality assurance lab● Projects driven by consumer research, led by culinary team

Supply Chain Structure

43Appendix

Supply Chain Structure, continued

44Appendix

● Dunkin’ Brands does not supply goods to franchisees, with the exception of domestic ice cream via a contract with Dean Foods

● Principal suppliers include The Coca-Cola Company, New England Tea and Coffee Co., S&D Coffee, Inc., Silver Pail Dairy, LTD, Continental Mills, and Pennant Ingredients Inc.

● Dunkin’ Brands monitors and approves suppliers for franchises● 12 suppliers provide approximately half of Dunkin’s goods● Contingency plans help Dunkin’ mitigate this risk

Supply Chain Structure, continued

45Appendix

● CMLs are franchise-owned production centers of baked goods

● Dunkin’ has a long term agreement with the NDCP is a franchise-owned distribution center

● NDCP maintains contingency plans with its approved suppliers

● Some franchises bake donuts on site

Debt Financing

46Appendix

● Class A-2-I 1/26/2015: 7.5 million principal/month. 3.262% interest. 750 million total. Due 2/2019

● Class A-2-II 1/26/2015: 17.5 million principal/month. 3.980% interest. 1.75 Billion Due 2/2022

● No principal amortization due if leverage ratio is above 5:1. Rapid amortization if loans not paid by anticipated due dates

● Variable fund notes:repaid on or prior to 2/2020. Libor plus 2.25%, 26.3 million of letters of credit outstanding against variable fund notes

Debt Financing, continued

47Appendix

Year Class A-2-I Class A-2-II Total

2016 7,500 17,500 25,000

2017 7,500 17,500 25,000

2018 7,500 17,500 25,000

2019 721,875 17,500 739,375

2020 X 17,500 17,500

Source: DNKN 2015 10-K

Debt Financing, continued

48Appendix

● Average cost of debt 3.67%● If DNKN issues new debt when interest rates are higher, its debt

payments will increase● Debt payments divert cashflows, and higher debt increases WACC,

which lowers value● If there are not enough cashflows to pay debts, the firm will have to

refinance indebtedness, sell assets, or delay capital expenditures● Presents a risk of default, which would result in seizure of the

company’s resources

Advisory Boards

49Appendix

● Advisory boards allow franchise managers to relay information, problems, and concerns to corporate

● These boards communicate and maintain relationships with franchises

● District, regional and national level● Limits legal issues down the road by working with managers (avoid

another Bertico situation)

Coffee Industry at a Glance

50Appendix

Source: IBISWorld.com

DNKN’s Market Share

51Appendix


Projected Industry Revenues

52Appendix


Industry Life-Cycle Stage

53Appendix


Industry Sales by Product

54Appendix


Sector Costs vs. Industry Costs

55Appendix


56Appendix


Labor Intensity vs. Capital Intensity in the Industry

Economic Demographics of Consumer Base

57Appendix


Relationship between Smartphones and Consumerism

58Appendix

Source: QSRweb Report

Consumer Reliance on Smartphones in the Food Industry

59Appendix


Technology Trends in the Corporate Sphere

60Appendix


Dunkin’ Donuts earns very high marks in Customer Loyalty

61Appendix

Source: Brand Keys

Cost of Expanding Consumer base vs. Cost of Loyalty

62Appendix


Mobile Platform Payment Revenues

63Appendix


Marketing Focused around Consumer Location

64Appendix


Ordering Options in Mobile Applications

65Appendix


Brand Entertainment and Engagement

66Appendix


Consumer-QSR Characteristics and Offerings

67Appendix

Source: FastCasual.com Report

Menu Categories for QSR Franchises

68Appendix


Size of Total Franchise Operations

69Appendix


Additional Risks

70Appendix

● Competition in QSR industry● Sub-franchisees● Changes in technology or consumer behavior● Economic conditions● Intellectual property

Additional Risks, continued

71Appendix

● Technological failure-FAST and EFTPay systems● Supply chain● International: political, social, legal, economic● General legal risk: Bertico

Milk Fluctuations

72Appendix

Source: NASDAQ

Coffee Fluctuations

73Appendix

Source: NASDAQ

14 year amortizable franchise rights (and related tax liabilities), and nonamortizable goodwill

Limited trading volume

Lack of market reaction to underperforming stock

Inability to recover the carrying amount

74Appendix

Japan Joint Venture (with B-R 31 Ice Cream Co., Ltd.)

● DNKN owns 43.3% of the Venture, Partner owns 43.3%, and Japanese shareholders hold 13.4%

● Acquired by three PE firms on 03/01/2006. Known as the BCT Acquisition● As a result, B-R 31 recorded a step-up in basis

● In Q4 2014, annual impairment test on indefinite-lived intangible assets found that carrying value exceeded fair value by $54.3M, to a new carrying value of $8.7M

South Korea Joint Venture (with BR-Korea Co., Ltd.)

75Appendix

Due to a deficit of cost relative to the underlying equity in net assets of BR-Korea

Accounted as an impairment of long-lived assets in 2011, and carries amortization through 2016:

2012: $710,000

2013: $634,000

2014: $553,000

2015: $467,000

2016: $375,000

● DNKN owns 33.3% and Korean shareholders own 66.7% of the Venture

● In 2011, BR-Korea was handed down a $19.8M impairment charge to equity method investments, reducing carrying value to $60.8M

Other Ventures

76Appendix

DNKN owns 33.3%, Coffee Alliance owns 33.3%, and shareholders own 33.3%

Very stable, incurred impairment charge of $873,000 in 2013, bringing carrying value down to $1.36M

DNKN sold 80.0% of its franchising business to equity investors in 2013, producing a gain of $6.3M

Currently retains 20.0% ownership in the Joint Venture, carrying value of $216,000

Very stable, low growth venture

● Spain (with Coffee Alliance, S.L.)

● Australia (with Palm Oasis Pty. Ltd.)

Leadership

77Appendix

● Nigel Travis,CEO, Chairman of the Board● CEO since 2009, Chairman of the Board since 2013● From 2005-2008, CEO of Papa Johns● Bachelor’s Degree in Business Administration from

Middlesex University in England● Srinivas Kumar, President● Has held various roles within Dunkin’, including Vice

President International, Interim COO, and Vice President of Europe and the Middle East

● He previously worked for the master licensee for Baskin Robbins

Leadership, continued

78Appendix

● John H. Costello● President of Dunkin’ Brands from 2009 to 2016● Innovative multichannel marketing● 2013 store redesign included new furniture and lighting● Expanded product line, followed consumer preferences

Complete List of Dunkin’ Donuts Products

79Appendix

● Espresso based drinks (hot and iced)○ Lattes○ Cappuccinos○ Macchiatos○ Espresso

● Drip coffee (hot or iced)● Cold brew coffee● Tea (hot or iced)

○ Regular tea○ Green tea○ Sweet tea

● Hot chocolate○ Mint○ Caramel○ S’mores

● Coolatas○ Various coffee and fruit-based flavors

● Breakfast sandwiches● Bakery sandwiches (Tuna salad;Chicken

salad; Chicken wrap; Steak wrap; Ham & cheese; Chicken bacon; Texas toast grilled cheese; Turkey, cheddar, bacon

● Bagels● Cookies● Danishes● Donuts● Muffins● Munchkins● Hashbrowns● Other bakery favorites (apple fritter, biscuit,

brownie, coffee cake, english muffin, croissant, pretzel twist

● Oatmeal

80

Complete List of Baskin Robbins Products

80Appendix

● Soft serve ice cream● Hard ice cream● Cones

○ Cake○ Sugar○ waffle

● Sundaes○ Brownie sundae○ Warm cookie sundae○ Banana split○ Chocolate-chip cookie dough, Snickers, Oreo and Reese’s Peanut

Butter Cup sundaes● Warm desserts

○ Warm brownie○ Warm cookie

● Beverages○ Milkshakes○ Cappuccino Blasts○ Fruit smoothies○ Floats

● Parfaits○ Caramel○ M&M’s○ Snickers○ Oreo○ Reese’s ○ Strawberry and Almonds

● Mix-ins○ M&M’s○ Butterfinger○ Snickers○ Oreo○ Reese’s ○ Heath○ Chocolate chip cookie dough

● Novelties and treats○ Individual treats○ Clown cones

● Pre packaged quarts● Fresh packed quarts● Cakes● Polar pizza

Mobile App and Functions

81Appendix

Source: DD Mobile App

Scan and payAccess DD PerksFind Store LocationsMenuOnline Ordering

(encouraged by giving double the points)

82

Mobile App and Functions, continued

82Appendix

Source: DD Mobile App

DD Perks® Rewards

83Appendix

Source: Promotions

8484Appendix

DD Smart

Foods and Beverages with the DDSMART® logo are:Reduced in calories, fat, saturated fat, sugar or sodium by at least 25% compared to a base

product or other appropriate reference product and/or

Contain an ingredient or nutrient that is nutritionally beneficial.

Source: DNKN Website

Dunkin’ Donuts SWOT

85Appendix

Strengths● Price/Quality value customers trust● Internationally recognized and

trusted● Innovative and responsive to

consumer and market trends

Weaknesses● Franchising model leaves gives up a

small portion of control over operating units

● Consumer preferences towards healthier food/snack product

Opportunities● Growing breakfast/snack

compliments for coffee● {Something about BR}

Threats● Variety of coffee substitutes and

competitors (smaller cafes)● Higher input costs (milk rising)

Baskin Robbins SWOT

86Appendix

Strengths● Extensive flavor varieties

Weaknesses● Lack of healthy alternatives ● Comparably small number of

locations

Opportunities Threats● Frozen Yogurt popularity● High degree of competition

Starbucks SWOT

87Appendix

Strengths Weaknesses

Opportunities● Tapping into healthier beverage and

food preferences

Threats● Increasing competition● Fluctuation in supply costs

McDonalds SWOT

88Appendix

Strengths● Internationally established brand● Low prices ● Number of locations

Weaknesses● High fat and sodium content● Consumer trends toward healthier

and lower calorie foods diverges from core offerings

Opportunities● Growing coffee market segment with

McCafé ● Increasing international presence

Threats● Large variety of consumer choices

and alternatives to products● Increasing minimum wages

Carvel SWOT

89Appendix

Strengths Weaknesses

Opportunities Threats

Coffee and Tea Industry Breakdown

90Appendix

Ice Cream and Gelato Industry Breakdown

91Appendix

Perceptual Map Prices

92Appendix

Store Price of Small Coffee Price of Small Icecream Price of Glazed Donut

Dunkin’ Donuts 1.99 0.99

Baskin Robbins 2.79

Starbucks 1.85

McDonald’s 1.00

Dairy Queen 1.99

Coldstone 5.00

Carvel 3.48

Krispy Kreme 1.57 0.66

Tim Hortons 1.59 0.99

Additional promotions

93Appendix

31 Promotion: $1.31 cone every 31st of the month highlighting their 31 flavors

Pink Day promotion where you can purchase two cones for the price of one on specialized day

9494

22.3 Mlikes

1.2 Mfollowers

1 Mfollowers

4.3 Mmembers

Facebook DD AppTwitterInstagram

Source: DNKN Newsletters

Appendix

Social Media

Espresso-Based Beverages

95Appendix

Source: dunkindonuts.com

Group 15- Dunkin' Brands

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