Morningstar | New Growth Drivers and Store-Level Improvements Position Dunkin' for Long-Term Cash Flow Growth
We believe Dunkin' Brands offers investors an intriguing long-term cash flow growth story backed by a strong brand intangible asset and franchisee system, particularly in the Northeast U.S. We believe Dunkin' can extend its brand reach beyond core markets, supported by solid franchise location returns, national advertising efforts, and more technological-leveraged and drive-thru focused restaurant formats. Cash-on-cash returns of 20%-plus in nascent markets should attract franchisees and allow Dunkin' to work toward its long-term target of 17,000-plus U.S. units, compared with more than 9,300 today. We also think factors driving U.S. franchisee returns can be applied overseas, helping to improve Dunkin's international joint ventures and attract new global franchise partners.Franchisees own all Dunkin' Donuts and Baskin-Robbins locations, providing an annuitylike royalty stream with few capital requirements. This stability, coupled with strong unit growth prospects (our model calls for almost 28,000 global points of distribution by the end of 2027), inroads into the CPG channel, and supply-chain improvements, could drive 1,000 basis points of operating margin expansion over the next 10 years, implying operating margins in the low 40s by 2027 (adjusted for franchisee fee and advertising fund revenue and expense recognition accounting changes), with ROIC excluding goodwill in the mid- to high 60s. Dunkin's strong cash flow generation and lack of near-term debt maturities should lead to dividend increases and share repurchases, boosting shareholder returns.Despite our optimism about Dunkin's asset-light business model and long-term growth potential, we believe the global specialty coffee category will become more competitive amid expansion plans from existing players as well as daypart expansion from quick-service chains. However, we identify many drivers to keep Dunkin' U.S. comps growing in the low single digits, including a solid beverage and breakfast sandwich pipeline, a streamlined menu, targeted value offerings (including the nationwide "Go2" breakfast sandwich platform), new store formats, and DD Perks digital marketing/"On the Go" ordering capabilities.Dunkin' Brands Group is a franchisor of quick service restaurants serving hot and cold coffee and baked goods, as well as ice cream. Through its Dunkin' Donuts brand, the company franchises restaurants featuring coffee, donuts, bagels, breakfast sandwiches, and related products. The company licenses Dunkin' Donuts brand products sold in certain retail outlets such as retail packaged coffee, Dunkin' K-Cup? pods, and ready-to-drink bottled iced coffee. Through its Baskin-Robbins brand, the company franchises restaurants featuring ice cream, frozen beverages, and related products. The company distributes Baskin-Robbins ice cream products to certain markets for sale in Baskin-Robbins restaurants and certain retail outlets.
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