Dunkin' Donuts: Westward Expansion

07/13/2015 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

This featured recommendation has always been a favorite company of mine, even before it went public; it's arguably the most attractive name in the quick-serve restaurant space, suggests Tyler Laundon, editor of Daily Profit.

Dunkin' Brands (DNKN) has three locations within five minutes of where I'm sitting right now. What's amazing is they are all busy, all of the time.

I’m especially bullish given the significant growth potential as the company embarks on a westward expansion.

But before we get to that, here's a quick history lesson, because it's taken 65 years for Dunkin' Brands to become the $5 billion company that it is today.

It was started back in the 1950s when Bill Rosenberg opened his first restaurant. He named his store Dunkin' Donuts.

At about the same time, Burt Baskin and Irv Robbins were each starting a chain of ice cream shops, which later merged to become Baskin-Robbins.

These three entrepreneurs joined forces and today Dunkin' Donuts and Baskin-Robbins are owned by the publicly traded company, Dunkin' Brands.

If you live in the Northeast, as I do, you have a hard time avoiding Dunkin' Donuts. It is just that prolific throughout New England, where it has one store for every 8,200 residents.

The parent company has high gross margins and is consistently profitable. Its capital structure is largely made up of debt, which has a very attractive after-tax cost of just 2.5%.

Dunkin' is able to provide this stable financing due to its near-100% franchisee business model.

The vast majority of sales (80%) come from the group's US restaurants, with the remaining 20% of sales coming from restaurants located in over 40 countries around the globe.

While the international opportunity is sizeable, it's the US market that I'm most excited about. Every state west of New England represents a large growth market for Dunkin' Brands.

And it's going after that opportunity, with plans to double its US store count from 8,062 to over 17,000 within the next 20 years.

This westward expansion is the single most important growth driver, since it powers both top and bottom line results while creating a leveraged growth impact if same-store sales also increase.

The potential for a better-then-expected second half of the year, and the stock's price action, warrant a closer look for investors that are considering adding new growth positions to their portfolios.

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