Dunkin Donuts Hopes Big Growth Will Pay Its Big Debts

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According to the slogan, America already runs on Dunkin’ Donuts. But after a nearly $424 million IPO this morning and aggressive expansion plans to satisfy shareholder appetite, Dunkin’ Brands Group (NASDAQ:DNKN) is hoping the world will run on its doughnuts and coffee soon.

According to the company, Dunkin’ Brands plans on doubling its U.S. store count and making an ambitious move into emerging markets — adding 500 stores a year.

Well, if you’re a consumer, the Dunkin Donuts IPO means the iconic orange-and-purple DD signs might be popping up in a town near you. DNKN remains focused on the East Coast, and the influx of capital will allow the coffee-and-doughnut shop to open its doors in new markets that include the West Coast, as well as Asia and South America.

You might even see more Dunkin’ Donuts-brand packaged goods at the supermarket. DNKN was wildly successful with its 2008 push into packaged coffee that now reaches roughly 40,000 retail locations nationwide. As an encore, it could take a play from Starbucks’ (NASDAQ:SBUX) book and peddle other items — coffee ice cream, snacks, bottled drinks and so on. Retail sales would be a great way to build the profits of a newly public Dunkin’ Brands.

If you’re an investor, you also should be closely watching the stock’s growth plans. Dunkin’ Brands went public this morning priced at $19 per share. That’s a fairly steep premium above rivals in the space — and implies a trailing price-to-earnings ratio that’s staggering, coming in over 80. Compare that with SBUX, which has a trailing PE of 28. The Dunkin’ premium clearly assumes big growth.

Considering DNKN stock jumped 40% after the opening bell to over $27, at least a few investors are buying the growth plan.

There’s good reason to think the company has a bright future. In the run-up to its IPO, the company has touted the fact its sales grew 7.3% in fiscal 2010 to outpace specialty beverage rivals like Starbucks and McDonald’s (NYSE:MCD). Throw in the aforementioned growth plans in America and abroad, and you could imagine some impressive numbers in the years to come.

On the other hand, anyone looking at this stock should be painfully aware of the massive debt that offsets its impressive revenues. Consider that Dunkin’ Brands pulled in $577.1 million in revenue in 2010 — but just $26.9 million in net income. A big reason: The company paid almost $113 million in interest on its debt load last year. That’s a huge drag on profits.

The IPO will raise a big chunk of cash to pay down some of that debt load, but don’t kid yourself — the private equity firms that bought Dunkin’ Brands in 2006 for about $2.4 billion are looking to get their money back and make the debt the problem of shareholders. DNKN will have almost $1.5 billion in debt even after the IPO, and the company’s book value – or its assets minus its liabilities – is in negative territory.

My InvestorPlace cohort Tom Taulli has a good post on how all IPOs are not created equal, explaining the difference between a private equity IPO like this and a venture capital offering from a company like LinkedIn (NYSE:LNKD) that is hungry for capital so it can fund growth – not to primarily fund its creditors or enrich ownership.

So, consumers and investors alike have good reasons to watch the growth of DNKN. The difference is those who love the store’s pastries and Coolattas will have only their sweet tooth riding on the expansion. For investors who bought into this IPO, however, their investment hinges on the store’s ability to grow fast enough to offset its massive debt load.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/07/dunkin-donuts-stock-ipo-debt-dnkn-sbux-mcd/.

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