Commentary: Serving up an expansion plan that could implode
MarketWatch:
Six years after a gang of private-equity investors took Dunkin’ Donuts private, they’ve decided the time is right to tap the capital markets and toss it back into the public arena.
The prospectus is predictably glowing and full of grand plans. The company envisions doubling its footprint. That means management wants to double its number of stores. Of course they do! Most of the revenue (62%, according to the Deal Journal) comes from royalties and franchise fees. The more Dunkin’ Donuts or Baskin-Robbins ice-cream shops that open, the fatter the revenue stream to the mother ship.
But this isn’t a slam-dunk business plan.
Dunkin’ Brands already has 16,000 “points of distribution,” as the company calls them, in 57 countries, with an especially high concentration in Dunkin’s native New England.
Dunkin’s history and much of its business model smacks of Krispy Kreme Doughnuts . After decades of slow, steady growth across the South, that company got cocky and launched a big push into other regions. It went public in 2000, offering its stock at $21 a share. The shares debuted at $32 and finished their first day of trading at $37. The euphoria lasted three years, then faded fast. So did the share price, peaking at $49.74 in August 2003 before plunging to $1.01 in February 2009. The fall raised the possibility of bankruptcy.
Admittedly, just about everyone’s stock cratered in 2009. But Krispy Kreme’s descent began well before the onset of the Great Recession. It simply got top-heavy, crushed by the weight of its own aggressive expansion and investors’ unrealistic expectations. It’s made a reasonable recovery since and now trades around $5.45 a share. But getting there required some draconian culling of its franchise empire.
There are plenty of reasons to think things might be different for Dunkin’. Its coffee business puts it more in a league with Starbucks /quotes/comstock/15*!sbux/quotes/nls/sbux SBUX +0.08% , and it has plenty of aficionados. It also has an ice-cream business. But that hardly makes it diversified. It’s still peddling sugar and caffeine, both of which are vulnerable to the vagaries of volatile commodities markets, and both of which are nonessential.
So glassy-eyed plans to double the footprint looks like a familiar case of overkill.
But, hey, hasn’t the doughnut business always been about excess? Given the public’s uncontrollable urge for food fads and all things sweet, no one should be surprised if the offer is oversubscribed. It’ll be a real sugar rush.
Hanging on to the stock much past the IPO, however, could end up looking like a kid on a sugar crash — a blubbering, sticky mess.
Admittedly, just about everyone’s stock cratered in 2009. But Krispy Kreme’s descent began well before the onset of the Great Recession. It simply got top-heavy, crushed by the weight of its own aggressive expansion and investors’ unrealistic expectations. It’s made a reasonable recovery since and now trades around $5.45 a share. But getting there required some draconian culling of its franchise empire.
There are plenty of reasons to think things might be different for Dunkin’. Its coffee business puts it more in a league with Starbucks , and it has plenty of aficionados. It also has an ice-cream business. But that hardly makes it diversified. It’s still peddling sugar and caffeine, both of which are vulnerable to the vagaries of volatile commodities markets, and both of which are nonessential.
So glassy-eyed plans to double the footprint looks like a familiar case of overkill.
