Dunkin donuts franchise profit margin

Investment Recommendation

5. As an investor, discuss which company you would choose to invest in and provide a rationale for your decision. Support your conclusions, why or why not?

6. After concluding your research about each company and reviewing their annual report, Discuss what non-financial criteria you would consider when choosing between these two investment options? Support your conclusions, why or why not?

Executive Summary:

The Starbucks Corporation (SBUX) is a retailer of specialty coffee that is presently operating in 62 countries across the globe. Its stores sell premium coffee, tea, other beverages, and a variety of food products (Orr, 2013).

Dunkin’ Brands Group Inc. (DNKN) is a quick service restaurant that serves hot and cold coffee, various baked goods, other food items, as well as, ice cream. The company franchises restaurants under its Dunkin’ Donuts and Baskin-Robbins brands. The company has over 17,400 points of distribution in 55 countries (Zacks, 2015).

The focus of this paper will be to present background information for Starbucks and Dunkin’ Brands. This background information will consist of: conducting a financial analysis of each company, comparing the results, and providing a recommendation on which stock to purchase. The research and analysis will look at a three year history and examine each company’s balance sheets, income statements, cash flow statements, and certain financial ratios.

Known as the “Coffee Giant,” Starbucks has shown impressive growth and the next few pages of this report will clearly covey how Starbucks, which owns a little more than half of its establishments, continues to remain on top.

Introduction-Starbucks Corporation

The Starbucks Corporation started out as a wholesaler of premium coffee to local restaurants and supermarkets in Seattle, Washington. The company went through some changes before it became the brand that it is today. Everyone across the globe is familiar with the Starbucks’ logo. Starbucks was established by Gordon Bowker, Jerry Baldwin, and Zev Siegl in 1971. They all contributed $1,350 a piece and borrowed $5,000. In 1982, the team hired Howard Schultz as their retail and marketing manager.

Starbucks acquired Peet’s Coffee in 1983 and two years later Mr. Howard left the company to open up his own coffee bar called Il Giornale. After a trip to Italy, Mr. Howard believed it would be more beneficial to sell directly to the consumer via a coffee bar, instead of selling the product within the wholesale market. Mr. Howard’s idea was very successful, and in 1987 he purchased all of Starbucks units for $4M; there were six in total. He then merged them into Il Giornale, renamed his company Starbucks Corporation, and starts expanding nationally.

In 1992, the Starbucks Corporation (SBUX) went public. Currently, the company has more than 10,700 coffee shops and kiosks in the United States. Internationally, Starbucks is currently operating in 62 other countries consisting of 10,600 coffee shops and kiosks; Japan, Canada, the United Kingdom, China, Australia, and Germany, just to name a few. At the turn of the century, Starbucks Corporation’s net earnings increased more than fivefold, from $94.6M to $494.5M. The company saw revenue spikes from $2.17B to $5.39B between 2000 and 2005 (referenceforbusiness.com). In 2005, the company celebrated its 10,000th store opening.

The Starbucks Corporation is considered a “Specialty Eatery,” which is a type of Quick Service Restaurant. QSRs include companies such as: McDonalds, Burger King, Dunkin Donuts, and etc. Dunkin’ Brands Group, Inc. is one of Starbucks main competitors. These companies operate under the conditions of monopolistic competition. A monopolistic competition is a market structure with many companies selling differentiated products (Sexton, 1999).

At the surface, Starbucks and Dunkin’ sell some of the same products. However, each company has an element of monopoly power, because of its unique atmosphere, location, building structure, quality of products and services, and personnel training. When broken down into those terms, the two companies are different, yet they are the same. It is the differentiating qualities that make them a monopoly, but it is the fact that they are targeting the same types of consumers that makes them competitors.

The following tables display a portion of SBUX’s financial statements used to compare with industry standards and DNKN.

Financial Statements and Analysis-SBUX

Income Statement

28 September 2014

29 September 2013

30 September 2012

Revenue

16.4B

14.9B

13.3B

Gross Profit

9.6M

8.5M

7.5M

Operations Income

3.1M

(325M)

1.8M

Net Income

2.1B

8.3M

1.4B

Earnings Per Share

Diluted

1.36

0.00

0.90

EBITDA

4M

454M

2.7M

(finance.yahoo.com) (financials.morningstar.com)

Balance Sheet

28 September 2014

29 September 2013

30 September 2012

Total Current Assets

4.2B

5.5B

4.2B

Total Assets

10.9B

11.5B

8.2B

Total Current Liabilities

3B

5.4B

2.2B

Total Liabilities

5.5B

7B

3.1B

Retained Earnings

5.2B

4.1B

5B

Total S. E.

4.1B

3.3B

5.1B

(finance.yahoo.com)

Cash Flow Statement

Cash Flow From:

28 September 2014

29 September 2013

30 September 2012

Operating Activities

608M

2.9B

1.8B

Investing Activities

818M

1.4B

974M

Capital Expenditures

(1.2B)

(1.2B)

(856M)

Financing Activities

623M

108M

746M

Free Cash Flow

(553M)

1.8M

894M

(finance.yahoo.com)

Financial Statement Analysis

The tables above show the income statement, balance sheet, and cash flows for the Starbucks Corporation over the past three years. The company had an estimated increase of $3.2B in revenues from 2012 to 2014. Sales growth was about 12% from 2012 to 2013, and 11% from 2013-2014. SBUX reported the following profit margins: Gross – 58.3% (2014), 57.1% (2013), and 56.3% (2012). The company’s operating profit margins were reported as 18.7% (2014), -2.2% (2013), and 15% (2012). The net profit margin for SBUX rose from 11.2% to 12.4%; 2013 and 2014, respectively and the industry average is 7.1%. Managers use this ratio to understand how profitable the company is. The ratio represents the amount of each dollar of sales that the company has left after all its expenses have been paid.

SBUX-Financial Ratios

Financial Ratios

Ratios

2014

2013

2012

Current

1.4

1.01

2

Quick

1.07

0.63

1.27

ROE

42.41

0.17

29.15

Financial Ratio Analysis

The current ratio average for specialty eateries is 1.3%, and SBUX’s percentages have stayed relatively close to this average. This ratio shows that Starbucks’ liabilities do not outweigh its assets, and it is probably safe to say that the company utilizes its current assets and/or manages its working capital efficiently. Starbucks’ quick ratio for 2014 was 1.07% or 1.1% (rounded), which is only 0.1% more than the industry average of 1%. Given this fact, the Starbucks’ Corporation has a high liquidity.

The company’s ROE fluctuated a bit from 29.15% in 2012 to 0.17% in 2013, and back up to 42.41% in 2014. That is 29.98% decrease between 2012 and 2013, and a 42.24% increase between 2013 and 2014. When comparing Starbucks’ ROE with the industry average of 30%: it met this average in 2012, made a drastic drop in 2013, and rose beyond the average in 2014. This ratio conveys to shareholders whether or not the company is effectively and efficiently utilizing its equity base to yield high returns for investors. It essentially lets investors know how much they have earned from their investments into the company.

Currently, the price-to-earnings ratio for specialty eateries is at 38.3%. This ratio for SBUX is presently at 31.42%, which means its stocks are 6.88% less than the average. This is not necessarily a bad or a good sign for interested investors. It tells whether a stock is over or under valued. However, it should not be the only valuation measure an investor looks at when deciding to invest or not.

Introduction-Dunkin’ Brands Inc.

Dunkin’ Donuts, (DNKN) was founded in 1955 by Bill Rosenberg in Quincy, Massachusetts. The company is a subsidiary of Dunkin’ Brands, Inc. and their headquarters is currently located in Canton, Massachusetts. The company licensed its first franchise in 1955. According to Dunkin’ Donut’s website, they claim to be the world’s leading baked goods and coffee chain, servicing over 3 million customers each day, and with more than 11,300 restaurants worldwide. Rosenberg referred to the Dunkin’ Donut’s mission statement as a philosophy, “Make and serve the freshest, most delicious coffee and donuts quickly and courteously in modern, well-merchandised stores” (Farfan.2015).

Dunkin’ Brands Group, Inc is the parent company of Dunkin’ Donuts and Baskin-Robins; which are 100% franchised. It became a publically traded company on July 27, 2011 and began trading at $19 per share. In 2014, DNKN reported disappointing sales. One investor stated, “I was confused by DNKN’s weak results and even more confused by its excuses. While competitors like Starbucks (NASDAQ: SBUX), Krispy Kreme Doughnuts (NYSE:KKD), and Tim Hortons (THI) seemed to be doing just fine, and in fact better than fine, DNKN seems to be struggling to find people to buy morning coffee and donuts as compared to expectation” (The Specialist.2014).

A snapshot of DNKN financial statements, (Income Statement, Balance Sheet and Cash Flow Statement) is displayed below.

Financial Statements-DNKN

2014-12

2013-12

2012-12

Income Statement

Revenue

749

714

658

Operating Income

339

305

239

Net Income

176

147

108

Earnings Per Share

1.65

1.36

0.93

Diluted Average Shares

107

108

117

Balance Sheet

Current Assets

443

462

420

Non Current Assets

2,735

2,773

2,798

Total Assets

3,177

3,235

3,218

Current Liabilities

356

344

354

Total Liabilities

2,809

2,827

2,871

Stockholders' Equity

368

407

347

Cash Flow

Cash From Operations

199

142

154

Capital Expenditures

-24

-31

-22

Free Cash Flow

176

111

132

(financials.morningstar.com)

Financial Ratio Analysis-DNKN

Dunkin’ Donuts reports a net income of $176M (morningstar.com). An investor uses the net income to determine how much money a company makes annually. In order to know what assets DNKN can turn into cash, the current ratio is analyzed. DNKN reports their past current ratio for the past three years as followed: 2012-1.19%, 2013-1.34%, and 2014-1.25%, (morningstar.com).

DNKN’s liquidity ratio can also be measured by calculating a quick ratio. A quick ratio is determined by subtracting DNKN’s inventories and prepaid expenses from their total current assets, and then dividing this amount by its total current liabilities. This is done, because inventories are the least liquid. Their quick ratio reports for the past three years are as followed: 2012: 0.86%, 2013-0.98%, and 2014-0.88%. Investors realize that even though a high percentage shows that DNKN can pay their short-term lenders, it also shows that less money is being used for investment opportunities.

Investors also research profitability. The profitability of a company illustrates the present value of anticipated profits in the future. One profitability ratio is the return on equity (ROE), which shows the profits after taxes divided by the book value. The ROE for the past three years are as followed: 2012-32.55%, 2013-19.83%, and 2014-38.97%, (morningstar.com).

Lastly, the Price-to-earnings Ratio, (P/E) is considered a valuable ratio that investors use to determine if the stock is over or under priced. DNKN reports a three year average of 72.76%, (morningstar.com). Please reference the following tables to see stock prices for Starbucks and Dunkin’ Brands.

Market Data and Analysis

Stock Performance-SBUX

Stock Performances

(Beginning, Mid, and End of Year)

Closing Prices

(2014)

Company

02 Jan

02 Jun

31 Dec

SBUX

$77.17

$78.19

$82.05

(2013)

Company

02 Jan

03 Jun

31 Dec

SBUX

$55.00

$63.46

$78.39

(2012)

Company

02 Jan

01 Jun

31 Dec

SBUX

$45.29

$52.15

$53.63

(finance.yahoo.com)

Stock Performance-DNKN

Stock Performances

(Beginning, Mid, and End of Year)

Closing Prices

(2014)

Company

02 Jan

02 Jun

31 Dec

DNKN

$47.58

$45.97

$42.65

(2013)

Company

02 Jan

02Jun

31 Dec

DNKN

$33.46

$39.60

$48.20

(2012)

Company

03 Jan

02 Jun

31 Dec

DNKN

$24.74

$31.28

$33.18

(finance.yahoo.com)

Market Analysis

The Starbucks Corporation stock prices have been on a constant rise over the past three years. The price per share increased a total of $22.42 from December 2012 to December 2014. Dunkin’ Brands Group Inc. had a similar experience during 2012 to 2013, but the shares started to drop in price between the end of 2013 and the beginning of the next year; it dropped by $0.62. Throughout the year, the price fluctuated, but ultimately ended the 2014 year with a $4.93 decrease from what it started with at the beginning of that same year; from $47.58 down to $42.65.

Cash Flow per Share

(mergentonline.com-umuc)

Book Value per Share

(mergentonline.com-umuc).

For 2014, Starbucks (SBUX) had a cash flow per share percentage of 0.4%, but a 3.52% book value per share. DNKN had the same book value per share as SBUX in 2014. However, DNKN’s cash flow per share percentage was 1.9%; which 1.5% higher than SBUX. Currently, the beta value for SBUX is 0.87 and DNKN is 0.45. Both of these numbers are a little below 1.0, which means purchasing shares from either company will pose little risk. However, investors may experience low returns.

Comparison Analysis-SBUX & DNKN

Dunkin Donuts represents a more profitable company with operating margins hovering between 33% and 43% over the past five years versus 5% and 15% for Starbucks. Why is this? Dunkin brands is nearly a100% franchised company when compared to the 50% of ownership that Starbucks has. This means Dunkin’ Brands franchises foot most of the overhead for the company. However, it also means lower revenues for the company as a whole, but with a higher percentage of the profit.

With Starbucks owning about 50% of the company’s locations, it still needs to foot part of the overhead leaving a lower percentage of revenue leftover for itself and shareholders (Bias, 2015). Investors should look for companies with low long-term debt as a percentage of equity. Long-term debt creates interest which chokes out profitability and cash flow. Dunkin’ Brands has far more debt than the industry average, whereas Starbucks has a relatively clean balance sheet. Please reference the charts below. SBUX did not report any interest coverage. DNKN reported its interest ratio to be 4.78 in 2014, 3.59 in 2013, and 2.95 for 2012. This shows that DNKN is able to pay it interest obligations via operating earnings.

The debt-to-equity ratio for Dunkin’ Brands hovered between 4% and 5%. In comparison, Starbucks’ D/E ratio has been consistently at 0.39%, 0.29% and 0.11% for the past three years. The normal range is about 1.5. What this means is that Dunkin’ Brands may be financed more by creditors than from its own financial resources. While SBUX may not have this problem, the percentage is still relatively low. In some cases, a low D/E can convey to investors that the company is not taking full advantage of the profits generated from this leverage. Although, SBUX’s debt-to-equity ratio is lower than 1.5, the company is doing a great job of utilizing its leverage to go towards more expansion projects and product lines.

Debt Management-DNKN

(mergentonline.com-umuc)

Debt Management-SBUX

(mergentonline.com-umuc).

Over the last year of market action, Starbucks shares have climbed more than 13.7%. Dunkin’ Brands stock has also done well, rising nearly 10% in the same period. Due to the introduction of new products in 2015, Dunkin’ Brands has soared more than 10%; with Starbucks’ at an 8.5% rise (Yates, 2015).

The safer investment lies with Starbucks due to lower debt and better interest coverage. What is the point of possessing better operating margins when most of it goes toward paying interest? Dunkin’ Brands is attempting to pay off more of its debt and if its locations continue to boost profitability, then it may become a better deal.

Conclusion and Recommendation

In this paper, research and data analysis of Dunkin’ Brands and Starbucks was conducted in order to provide a comparison of the last three years of financial history. Dunkin’ Brands now has nearly 11,000 restaurants in 33 countries (about 7,000 in the U.S.), with sales of over $9B. Starbucks has over 10,000 stores in 60 countries and a net income of an estimated $2B in 2014. Since Dunkin’ Brands is primarily a Northeast company and Starbucks being from the Northwest, both companies are expanding across the US in opposite directions. Between them, the two companies own around 60% of the country's coffee market—with Starbucks controlling an estimated 36% and Dunkin’ Brands roughly about 24%. DNKN reported that it sold 1.8 billion cups of coffee and Starbucks reported it sells approximately 4 billion cups of coffee annually (BostonGlobe, 2015).

Dunkin’ Donuts has been in operation for sixty years and is currently under the ownership of Dunkin’ Brands Group Inc., which also owns Baskin-Robins ice cream stores. The company is 100% franchised and became publically traded in 2011 at $19 per share. Dunkin' Brands recently reported a net income of $1.76 million and their current past ratio of 1.25%, quick ratio of 0.88%, profitability ratio of 38.97%, and price-to-earnings ratio of 72.76% in 2014 (morning star.com, 2015).

Starbucks has been in operation for 32 years and went public in 1992. The company has seen a steady incline of profits. From 2012 to 2014, the company had an increase in revenue of $3.2 billion, 2% sales growth, 3.7% operating profit margin, net profit margin increase of 1.3%, current ratio of 1.1%, its ROE increased 42.24% between 2013 and 2014, and price-to-earnings ratio was 31.42%. Stock prices have increased $28.42 per share in the past three years

Both companies are looking to expand globally. In the 2015 second quarter report, Dunkin Donuts opened 93 locations throughout the world. According to Schlossberg, “Dunkin' Brands CEO Nigel Travis wants 200 Dunkin' Donuts in California in the next five years. Travis also plans to re-launch Dunkin' Donuts in Brazil, where the company closed its doors a decade ago. He plans to have 100 shops there by 2020. Additionally, he is aiming to expand across the United Kingdom, with 144 new stores set to open (businessinsider.com, 2015). "Starbucks' 2015 fiscal targets are: 1,650 new stores, with 600 in the US, 850 in China/Asia, and 200 throughout Europe” (businessinsider.com).

Overall, both companies are well-built and financially sound. They have unremitting growth strategies, and are leaders in the specialty eateries industry. Both companies are opening a new window towards a better future for their customers, and also as a company. Dunkin' Brands has effectively utilized customer information to determine the market trend and new ways to grow their company. Starbucks is currently leading the market as American's fast coffee and continues to grow. In order for both companies to stay on top, they need to maintain their innovative skills and continue to offer new differentiated products, and continue to implement new investment opportunities. So, which company is better? I do not think this debate will ever be over since both companies have a loyal customer base.

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2014 SBUX DNKN 3.52 3.52 2013 SBUX DNKN 2.97 3.82 2012 SBUX DNKN 3.41 3.27 2014 LT D/E Total D/E Int. Cov. 4.9300000000000006 4.9400000000000004 4.78 2013 LT D/E Total D/E Int. Cov. 4.4800000000000004 4.49 3.59 2012 LT D/E Total D/E Int. Cov. 5.28 5.3599999999999977 2.95 2014 LT D/E Total D/E Int. Cov. 0.39 0.39 0 2013 LT D/E Total D/E Int. Cov. 0.28999999999999998 0.28999999999999998 0 2012 LT D/E Total D/E Int. Cov. 0.11 0.11 0 2014 SBUX DNKN 0.4 1.9 2013 SBUX DNKN 1.95 1.34 2015 SBUX DNKN 1.159999999999999 1.35