Dunkin Brands, Inc - Financial Ratios, Industry Performance, Cash Flow, Corporate Governance - Example

Dunkin Brands, Inc. Dunkin Brands, Inc. is the parent company of Dunkin Donuts and Baskin-Robbins, two flagship companies and leading brands in thequick service restaurants in America. Dunkin Donuts is famous for its coffee, donuts, bagels, and breakfast sandwiches, while Baskin-Robbins is known for its ice creams and ice cream cakes. Publicly traded in the stock exchange market, Dunkin Brands, Inc. has DNKN as its ticker symbol. It is grouped in the services sector, and is classified under the restaurants industry. With $3.4B capitalization, it ranks 29th in the restaurants industry led by McDonalds and Starbucks. (Yahoo Inc.) The restaurants industry is highly competitive, with rivals engage in various strategies to acquire and sharpen their competitive advantage, and to gain market share. Michael Porter’s Five Forces framework in analyzing competition suggested that “In pursuing an advantage over its rivals, a firm can choose from several competitive moves, such as: changing prices, improving product differentiation, creatively using channels of distribution, and exploiting relationships with suppliers”. (Porter) Dunkin Brands has applied these strategic moves, such as: 1. It has kept its prices for its coffee products competitive and priced right for its target market. 2. It has formed a culinary team and a nutrition board to advice the company on how to differentiate its products from its rivals, and to introduce new products that are “fitting the lifestyles” and meeting the customer “dietary wants and needs”. (Dunkin Brands, Inc.) 3. With its world-wide presence, it has continuously improved its franchising business model to distribute its products and promote its brand. Its quick service scheme largely fits the lifestyles of consumers who are always on the go and are always busy needing quick snacks that are affordable and enjoyable. 4. Dunkin Brands sources its coffee beans from various coffee farms around the world, requiring specific qualities to meet the standards customers expect on their cup of freshly brewed coffee. Since it purchases in volumes and on a regular basis, Dunkin Brands is able to exploit its relationship with its suppliers by demanding, for example, exclusive rights to purchase quality coffee beans from its suppliers, and special prices on its beans. The 2011 Annual Report of Dunkin Brands mentioned about several trends and developments that could significantly affect the future of the company. Foremost of these concerns raised by its CEO, Mr. Nigel Travis, is the company’s dependence on its franchisees for a significant part of its revenues. Mr. Travis emphasized that their franchisees are independent business contractors who implement their own business strategies to shore up their sales revenues. While they are bound by franchisee contracts, they are still acting on their own, and sales revenues from which royalties are derived and paid to the franchisor are solely the responsibility of the franchisees. Mr. Travis also recognized the highly competitive nature of the quick service restaurants (QSR) industry. The intense competition among rivals, according to Mr. Travis, would surely result in lower revenues. He pointed out that the source of the intense completion is mainly brought about by a number of firms competing in the market, as a result of lower barriers to entry, a concept earlier described and quoted from Porter’s Five Forces framework. Other significant developments that have been recognized by top management as a potential risk affecting the future of the company includes: 1. Newer or improved technology, and alternative methods of delivery, may significantly impact on consumer behavior. Such technologies may include vending machine technology, and home coffee makers. 2. Economic conditions that may impact on consumer discretionary spending. 3. Significant amount of the company’s indebtedness, which as of December 31, 2011, has reached $1.5B. 4. The company is likewise worried about the impact of some of its debts having variable rates of interests, further constricting the flexibility of its usage of their cash assets for future expansion. 5. Trends associated with raw materials procurement, such as price increases, shortage of supplies, disruption in availability, and quality control. 6. Impact of any disruption in ICT infrastructure, the company and its franchisees being highly dependent on automated systems and modern means of communication. 7. Stock prices volatility depending on certain economic conditions beyond the company’s control. Adam Levy recently published an online article about Dunkin Donuts generating more than 50 percent of its revenues from coffee, instead of deriving it from its doughnut lines. He attributed this trend to consumers’ first love of coffee, and with health consciousness growing in people’s mind, they now forego of the doughnuts, but not a cup of coffee in their hands. (Levy) While coffee seems to be the emerging star product for Dunkin Donuts, Jim Cramer, a stock analyst, nonetheless rated Dunkin Brands an excellent stock with a recommendation to buy for two consecutive months (November and December). (Capel) Financial Ratios For the company’s financial ratios, Table 1 compares the company’s financial performance for the years 2010 and 2011, as financial data for the year 2012 are not yet available. Financial Ratios 2011 2010 Liquidity Ratios Current ratio (Current Asset/Current Liabilities) 1.28 1.01 Operating Efficiency (Asset Turnover Ratios) Receivable Turn-over (Annual Credit Sales/Annual Receivables) 16.92 times 16.38 times Debt Ratios (Financial Leverage) Debt ratio (Total Debts/Total Assets) 0.77 0.90 Debt-to-equity ratio (Total Debts/Total Equity) 3.32 9.28 Interest coverage (EBIT/Interest Charges) 1.64 1.17 Profitability Ratios Gross profit margin [(Sales-COGS)/Sales] 80% 80% Return on Assets (Net Income/Total Assets) 1% 0.85% Return on Equity (Net Income/Shareholder Equity) 4.6% - 5% Valuation (Dividend Policy Ratios) Dividend Yield [(Dividend/Share)/Share Price] N/A 1.9%* *calculated by Yahoo! Finance The company has better liquidity ratio in 2011 compared to 2010 with $1.28 worth of asset to cover a dollar unit of liability in 2011, compared to the previous year’s $1.01. There was no significant change in the trend for operating efficiency parameter, with receivable turnover relatively remaining the same for both years. In terms of long term liquidity, the company has become more liquid in 2011 with a reduction in its debt ratio from 0.90 in 2010 to only 0.77 in 2011. Debt-to-equity ratio likewise improves from 9.28 in 2010 to only 3.32 in 2011. Interest coverage has also improved from 1.17 in 2010 to 1.64 in 2011, indicating the company’s improved ability to cover interest payment with its earnings. Looking at the company’s profitability, there was no significant change in terms of gross profit margin and return on assets ratios. However, a significant improvement on return on equity could be observed in 2011, when the ratio is increased from a negative 5 percent in 2010 to 4.6% in 2011. The year 2011 was relatively a good year for the company, indicating better performance compared to 2010. Dunkin Brands is a new player in the stock market, having completed its initial public offering in 2010. It declared dividends on its outstanding shares in 2010, nothing for 2011, and more than once in 2012. Industry Performance Dunkin Brands Inc. trails the industry leaders led by Whitbread PLC, as can be seen in the table below, sourced from Yahoo! Finance website. There are currently 98 players in the industry, and Dunkin Brands ranks 22nd in terms of market capitalization, and 18th in terms of P/E ratio. As of December 2012, there was a 0.125 decline in its share price, compared to 0.77% change of the leading restaurant Whitbread. Source: Yahoo! Finance Cash Flow A snapshot of the company’s cash flows in 2010 and 2011 is shown below, taken from Yahoo! Finance website. It showed that for 2010, a difference of $202,143 resulted from comparing the total cash flow from operating activities with the net income for the year. For 2011, the difference is $128,261. The difference is accounted, for one, by depreciation which is a non-cash expense item. Other items that have to be accounted for since they do not actually involve cash items are adjustments on accounts receivable, accounts payable, and inventories. Source: Yahoo! Finance Share Price There was no available beta for DNKN since its IPO was launched only recently, whereas beta measures past volatility of the stock price. A risk-free rate based on the 10-year U.S. Treasury Bill is currently quoted at 1.7%. A market risk premium of 7.7% will be used to evaluate the share price potential of the DNKN. Analysts’ mean target price based on Yahoo! Finance is $35.71. To compute for the price investor is willing to pay over the next year: Dividend expected in one year $0.60 Required rate of return 7.7% Expected future price $35.71 Present Value $33.71 Current price of DNKN shares is $32.35. Hence, the stock is undervalued, and is therefore expected to deliver value to an investor over the next year with the expected appreciation on the share price. Corporate Governance As reported in Yahoo! Finance, Dunkin Brands Inc.’s corporate governance indicators as of December 1, 2012, are as follows: Audit risk – low concern Board risk – low concern Compensation risk – low concern Shareholder rights – high concern There are 20 members of the board, 4 of whom are independent directors. There are only three female board members. The company is a “controlled” company, as mentioned in its 2011 annual report, and based on the number of “insiders” compared to its independent directors. Summary Based on the financial parameters discussed above, and the market potential of the company, Dunkin Brands Inc., is an investment worth considering. Its global presence, well-known brands, and growth potentials are promising, and would likely deliver a good return on investment given the right economic conditions. While it is not a market leader in the industry, it ranks well with other competitors, and cannot be considered as a loggerhead. There is very much potential for this company’s future. Works Cited Capel, Alex. "Cramer: Sell Express Scripts and Buy Dunkin Brands, The Blackstone Group and This Performer." 24 December 2012. Wall Street Cheat Sheet. Internet. 29 December 2012. Dunkin Brands, Inc. "Dunkin Brands Press Kit." 2007. Dunkin Brands Inc. Internet. 29 December 2012. Levy, Adam. "Coffee is Great: But It Is Not Why You Should Buy Starbucks." 28 December 2012. The Motley Fool. internet. 29 December 2012. Porter, Michael E. "Porters Five Forces." 2010. Quick MBA. Interbet. 29 December 2012. Yahoo Inc. Yahoo! Finance. 28 December 2012. Internet. Read More