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Dunk Some Funds in this Top Stock: Dunkin Brands Group Inc (DNKN)

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Dunkin Brands Group Inc (DNKN)Dunkin Brands Group Inc (NASDAQ:DNKN) owns two of the most recognizable brands in the world, Dunkin’ Donuts and Baskin-Robbins. Dunkin’ Brands operates as a franchisor, making for an incredibly strong business model since they have over 16,000 locations worldwide. This company went public on July 26, 2011, and has surged nearly 100% since then. Even with this run, they can go much higher.

The Brands

Dunkin’ Donuts is the world’s leading baked goods and coffee chain. There are over 10,000 Dunkin’ Donuts locations worldwide, with more than 7,000 in North America alone. There are over 2,600 Dunkin’ Donuts outside of North America in countries like China, Japan, Saudi Arabia, Russia, Spain, Germany, Peru, and Chile. This international presence is strong and provides them with the ability to double their locations in a short period of time if they wished.

Dunkin’ Donuts is determined to continue growing. In 2012, Dunkin’ Donuts opened 291 new locations, making them one of the world’s fastest growing quick-service restaurants. This number will be surpassed in 2013, with a planned 330 to 360 new locations being opened.

The most important thing to note about Dunkin’ Donuts is that there are hardly any locations in the western United States. CEO Nigel Travis made the most anticipated announcement of his career by saying that Dunkin’ Donuts would be expanding to Southern California in 2015. They will start by adding locations in Los Angeles, San Diego, Riverside, San Bernadino, Ventura, and Orange Counties. Travis knew the time was right to enter California because of the high sales of Dunkin’ Donuts bagged coffee in stores and K-cup sales in Baskin-Robbins locations. This expansion could end up adding over 1,000 stores in California due to the size of the state. Earnings will continue to move up as the total number of stores grows.

Baskin-Robbins is the world’s largest chain of ice cream shops who sells both ice cream and specialty desserts, along with various beverages. They operate nearly 7,000 locations worldwide, with 2,400 being in the United States. Their major international markets include Australia, India, the United Kingdom, Russia, China, and Japan. Baskin-Robbins is not going to grow nearly as much as Dunkin’ Donuts, but they have consistently performed in the ice cream market.

Same Store Growth

Dunkin’ Brands reported full year 2012 earnings on Jan. 31. In this report they showed a 4.2% increase in Dunkin’ Donuts United States comparable same store growth. Management projects a same store growth of between 3% to 4% in 2013. Internationally, Dunkin’ Donuts reported a 2.0% same store growth with no comparison from 2011.

Baskin-Robbins reported a 3.8% increase in United States comparable same store growth. This was up from 0.5% in 2011 and management projects same store growth of 1% to 3% in 2013. Internationally, Baskin-Robbins’ same store growth was 2.8% with no comparison for 2011.

Franchise Income

Dunkin’ Brands operates as a franchisor, so their income comes from franchise fees and royalties. Dunkin’ Donuts charges $40,000 to $80,000 as an initial franchise fee and takes a royalty of 5.9% of total sales. They also charge an ongoing advertising fee of 5% of total gross sales. Do not think you should run out and start up a Dunkin’ Donuts because of these reasonable numbers, because overall it costs a franchisee between $400,000 and $1,600,000 to open a store. This is due to construction, licensing and permitting, marketing, insurance, and several other costs.

Baskin-Robbins charges an initial franchise fee of just $25,000. They too charge a royalty of 5.9% of total sales and an ongoing advertising fee of 5% of total gross sales. The estimated total cost of opening a new location is much lower than that of Dunkin’ Donuts, running between $115,000 and $375,000.

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