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03/21/2014 8:00 am EST
Our latest featured stock idea may be the best quick-serve restaurant chain in America; it is also my favorite stock in the group, says Ian Wyatt, editor of Top Stock Insights.
Dunkin' Donuts (DNKN) has over 10,858 restaurants worldwide, which accounts for 77% of revenue, while its Baskin-Robbins brand, with 7,300 restaurants worldwide, accounts for the remaining 23%.
DNKN is a well-known brand in the northeast, where there is one store for every 9,200 residents. But move west and that store count drops quickly. In fact, once you get near the middle of the country, DNKN is basically non-existent.
Every state west of New England represents a growth market for DNKN. And it's going after that opportunity, planning to double its US store count over the next twenty years.
While most quick-service restaurants employ a franchise business model, DNKN has taken the concept further—virtually all of its restaurants are owned by franchisees.
This reliance on franchisees will help the company advance its expansion plans with much lower capital costs than many competitors. Franchisees fund the majority of new restaurant development, as well as the majority of advertising costs.
Where DNKN comes up a little short is on the bottom line. When DNKN was purchased by private equity groups Bain and Carlyle in 2006, the deal was a leveraged buyout. It saddled DNKN with $2.5 billion in debt.
At the beginning of 2011, DNKN's long-term debt stood at $1.8 billion. And with a high interest rate, that debt cost them a heart-stopping $105 million in interest in 2011. That interest expense was equal to 51% of the company's operating income.
But DNKN has been able to reduce its financing costs to $80.2 million in 2013. And another Refi of the debt, to 3.4%, should reduce interest expense by a further $10 million, to $70 million, in 2014.
With strong cash flow, management increased the dividend in 2013 from $0.60 to $0.76, and, for 2014, has bumped it up by another 21% to $0.92.
Overall, DNKN has a great brand, with tremendous loyalty and recognition, in the northeast. Much of my investment thesis lies in management's ability to expand westward. At this stage, I see little reason to believe that they won't be successful.
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