Josh Kosman and Holly Sanders Ware report in the New York Post that Dunkin’ Brands’ aggressive growth plan has some holes.
The doughnut chain is pushing ahead with a plan to open hundreds of stores this year to meet growth targets despite a rash of franchisee bankruptcies and a near freeze in restaurant financing.
One reason for the urgency: Dunkin’ Donuts, owned by private-equity firms Carlyle Group, THL Partners and Bain Capital, needs to meet certain financial targets, including new-store openings, to extend $1.5 billion in debt coming due in the next two years.
Kate Lavelle, Dunkin’s CFO, said the company has already hit the new-store target for 2011, and expects to remain there by the time the loan comes due.
However, a source close to the situation said the company has fallen slightly behind on its store schedule but believes it will get back on track by picking up the pace again later this year.
“The next year is key for Dunkin’,” the source said.
Meanwhile, franchise owners are feeling the pinch.
Four Dunkin’ Donuts franchise operators have filed for bankruptcy since June.
Kainos Partners Holding Co., which runs 56 stores in New York, Nevada and South Carolina, filed for Chapter 11, joining three other franchise operators in Tennessee and Florida.
Aside from the economic downturn, banks have clamped down on financing, making it hard for franchisees to open new stores.
What’s more, the precarious situation facing CIT — a long- time commercial lender to many Dunkin’ Donuts franchisees — has only complicated matters.
In May, the Zale family, which owns the Zales jewelry-store chain and is one of the lead players in Dunkin’ Donuts’ expansion into Texas, abandoned plans to open 70 stores.
The Zales opened four stores when they lost their financing, leading them to sell their franchise territory back to the company for an undisclosed amount.
“The company has had trouble growing outside its core markets,” said a source who works closely with Dunkin’ franchisees.
“They pushed it to really grow and now with the economy and financing being a challenge they’re not going to meet financial goals.”
Dunkin’ Donuts, bought in an expensive leveraged buyout in 2006, borrowed $1.5 billion through a market securitization handled by Lehman Brothers that was designed to push expansion far beyond its base in the Northeast.
The debt comes due in 2011. Dunkin’ can extend repayment up to two years if it meets certain thresholds, including a set number of new-store openings.
At the end of 2008, Dunkin’ Donuts had 8,835 franchised stores, and while Dunkin’ continues to tout its planned expansion, the private-equity owners have told their investors that they are breaking even on the investment since they bought it three years ago.