How Expansion Into Hawaii Will Impact the Valuation Of Dunkin’ Brands?

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DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

The Dunkin’ Donuts division of Dunkin’ Brands (NASDAQ:DNKN) recently announced an agreement with a new franchisee group, Aloha Petroleum, under which it will develop 15 new Dunkin’ Donuts restaurants in the state of Hawaii. The first restaurant is planned to open in 2017 and Hawaii will become the 42nd state in the U.S. where Dunkin’ Donuts has a presence. Alhoa Petroleum is one of the largest gasoline marketers and convenience store operators in the state of Hawaii and we believe this partnership should enable Dunkin’ Donuts to effectively expand in the region. Achieving a rapid expansion of its outlets is one of the key goals of the company and Dunkin’ Donuts offers reduced royalty rates on new contracts in initial years as an incentive for franchisees. Our estimates assume a steady increase in the number of Dunkin’ Donuts outlets in the U.S. Thus, the company’s ability to meet this expansion target will be key for its valuation.

See full analysis for Dunkin’ Brands

Faster Pace of Growth In Number Of Outlets Can Lead To A 15% Upside In Our Price Estimate

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Dunkin’ Brands added 430 net new Dunkin’ Donuts units in the U.S. in the fiscal year 2015 and the company has a long term goal of 17,000+ Dunkin’ Donuts outlets in the U.S.  We estimate the number of outlets to increase steadily from nearly 9,000 in 2016 to more than 11,000 Dunkin’ Donuts outlets by the end of our forecast period.

If the company is able to expand its outlets at a faster pace and reach 13,000 outlets by the end of our forecast period, there can be a nearly 15% upside to our price estimate.  While the number of outlets planned in Hawaii are only 15, which is not a very significant number compared to the overall estimated annual growth in the outlets of the company (around 500 outlets per year), the company’s entry into a new state in the U.S. is of significance. This will allow Dunkin’ Donuts to become a more ubiquitous brand in the region by its presence in more than 80% of the states in the U.S.

The company is aggressively pursuing initiatives to attract more customers.  These include:   an attractive rewards point system, new innovative menu items, and digital initiatives such as on the go mobile ordering for its DD rewards members in metropolitan New York.  Some of these initiatives are aimed towards attracting consumers from competitors such as Starbucks, whose modified rewards program has led to dissatisfaction in a section of its consumers. We believe that, as Dunkin’ Brands pursues its growth strategy in the U.S.it will enter new markets in addition to this expansion into Hawaii. However, the company’s ability to meet its aggressive expansion targets will be key for its valuation.

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