Dunkin' IPO Flies in Face of Social-Media Buzz

BOSTON ( TheStreet) -- Dunkin' Brands ( DNKN), owner of the doughnut-and-coffee chain as well as ice-cream purveyor Baskin-Robbins, is set to go public. Millions of people in the Northeast can't get enough of Dunkin' Donuts coffee. So, how will its stock fare?

First, the basics: The company, co-owned by private equity investors Bain Capital, Carlyle Group and Thomas Lee, is seeking to sell more than 22 million common shares between $16 and $18 a share for net proceeds of up to $400 million. Dunkin' amended its S-1, an initial public offering request form to the Securities and Exchange Commission, today. In it, Dunkin' indicated that it would have 126 million total common shares, after the share sale.

That translates to a market value of more than $2 billion. The company was privatized at a net cost of about $2.4 billion in 2006, when the private-equity market was hot. If you're comparing the estimated market cap. with the size of the private-equity investment and scratching your head, here's a noteworthy qualification: Even after the IPO, the private-equity owners will retain more than half of the outstanding stock. So, they're not taking Dunkin' public at any kind of realized loss, nor are they exiting their investment. The cash-flow-rich business was, indeed, an attractive buyout. Its profit stream is likely to enrich Bain, Carlyle and Lee for years to come.

The Dunkin' chain, which has a strong foothold in New England and New York, competes with the likes of Starbucks ( SBUX) and Tim Hortons ( THI), but its regional loyalties may be stronger. (Dunkin' Donuts was founded in Quincy, Massachusetts, in 1950.)

Starbucks has a whopping market capitalization of $30 billion, with concentration throughout the U.S. Interestingly, Dunkin' has about 16,000 stores in 57 countries, with U.S.-based revenue accounting for 70% of annual sales. Starbucks, which over-expanded prior to the financial meltdown, now has total locations of 17,009 in 50 countries. While Dunkin' is modestly trailing in terms of location quantity, it is a major laggard, in terms of both net sales and profit.

Starbucks generated fiscal 2010 sales of nearly $11 billion, compared to Dunkin's 2010 sales of $577 million. Dunkin' is strictly a franchiser of stores, whereas Starbucks owns all of its stores outright. Starbucks generated about $1.3 billion of 2010 operating income, for an operating profit margin of just over 12%. Dunkin's 2010 operating margin nearly hit 34%, signaling a more efficient model. It also has better domestic growth prospects, as both pricing and geographic mix are conducive to expansion. With limited locations in the South and Midwest, Dunkin' could add stores and poach market share from entrenched players. International prospects are attractive, too, with store openings slated for Russia.

Going further, a pure-play franchise model allows Dunkin' to accelerate sales and profits without significant capital investment as franchisees bear upfront costs. Over a 10-year period, Dunkin' has increased its point of sales and revenue at annualized rates of 6.9% and 8.7%, respectively. Baskin-Robbins, itself, has experienced comparable success, having increased systemwide sales 5.1%, 9.8%, and 11% for 2008, 2009 and 2010, respectively. One remarkable statistic: Dunkin' U.S. generated 45 consecutive quarters of positive comparable-store-sales growth until the first quarter of 2008, proving the brand's value.

With the majority of U.S. IPO buzz pertaining to social media, like social network Facebook, group-buying site GroupOn and online-game designer Zynga, a retail-food offering is a welcome respite to these difficult-to-value equities. Dunkin' is an IPO worth following and will be a stock that deserves consideration once trading commences. After all, Starbucks' and Tim Hortons' shares have advanced an outstanding 57% and 44% in 12 months.

-- Written by Jake Lynch in Boston.


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