Sector financial performance:

This company, who is primarily a franchisor of restaurants serving coffee and baked snacks, has been grouped into restaurants-coffee, tea &snacks sector in foodservice industry.

It seems that the slowing down traffic is the major reason contributing to slowing down increase in comparable sales for those coffee and baked food restaurants in the past several years. Data indicates that the average increase in comparable sales all across this sector went down from around 4.7% of 2015 to around 0.8% of 2018.  Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015.  However, companies in this sector present strong ability to expand its business by opening new stores (both company-owned or franchised) and it seems, in terms of margin of new store, the demand in the newly developed market for their new stores is strong. In addition, still strong demand allowed companies in this sector to adjust menu/sale mix to generate more spending per customer to offset the decreasing traffic. This is probably why we are seeing that for most companies they have been able to present positive growth in their comparable sales while decrease in traffic.

For many companies in this industry, franchising their company-operated restaurants obviously has been the focus of their business strategies in dealing with unfavourable climate of this industry. It seems it is easy, due to high margins and strong market demand, to find franchisees for their restaurant expansion.

Our data indicate that, while slowing down comparable sales, there are general improvements in franchising companies’ gross margins (went up to 63% in 2017)  in the past several years benefiting from shifting of revenue to re-franchising and rising menu price. With an average of 22% SG&A percentage of sales, the average franchising companies’ operating reaches 44% in 2018. For companies with owned stores, the margin decreased as traffic slowed down (increasing check size was offset by promotions as estimated). The typical gross margin for non-franchising company is about 23% with 7% SG&A percentage of sales and 16% operating margin.

The average cash flow per share of companies in this sector increased slightly in 2017 and 2018 probably as a reflection of combination of decreasing margins and store &re-franchising expansion.

According to our analysis, the current companies’ enterprise price/EBI ratio is average 31with an interest/EBITDA ratio of 15%.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to other restaurants.

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Company performance:

It seems that the growth in demand for its service/products of this company has been declining in the past several years as indicted by the continuously declining traffic. The decrease in traffic seems to have been offset by the increased price/product mix. It seems that the downward trend in traffic may be slowing in 2018.

For the first six months of the fiscal 2018 compared with the same period of 2017(20180630)

•                                           Dunkin’ Donuts U.S                       Baskin-Robbins U.S

Growth in Comparable sale:   0.5% (1.4% for 2Q)                       -0.8% (0.4% for 2Q)

Comparable ticket size            up                                                    up

Traffic                                     down                                               down

 The fiscal 2017 compared with the 2016

•                                         Dunkin’ Donuts U.S                       Baskin-Robbins U.S

Growth in Comparable sale:   0.6%                                               0%

Comparable ticket size            up                                                    up

Traffic                                     down                                               down

Fiscal 2016 compared with 2015

•                                         Dunkin’ Donuts U.S                       Baskin-Robbins U.S

Growth in Comparable sale:   1.6%                                               0.7%

Comparable ticket size            up                                                    up

Traffic                                     down                                               down

Fiscal 2015 compared with 2014

•                                         Dunkin’ Donuts U.S                       Baskin-Robbins U.S

Growth in Comparable sale:   1.4%                                               6.1%

Comparable ticket size            up                                                    up

Traffic                                     down                                               up

Its gross margin (franchises costs and sales costs of ice cream) went up from about 73% to about 79% since 2015 primarily due to leveraging of expenses as a result of increased revenue and re-franchising. As its SG&A as percentage of sales went down to 28% primarily due to leveraging of sales increase, its operating margin has gone up to about 50.5% in 2018 from 42% of 2015.

Stock price

This stock currently has an enterprise price/EBI ratio of 30. We think that its stock is being relatively fairly valued considering that its performance compared with its historical multiple.