LOS ANGELES (Reuters) - Investors eagerly bought the shares of Dunkin’ Donuts parent Dunkin’ Brands Group Inc (DNKN.O), sending them up as much as 56 percent on their first day of trading on Wednesday.
The stock gained almost 47 percent to close at $27.85 after hitting an session high of $29.62 during its first day of Nasdaq trading.
The company’s new market value of more than $3.5 billion is still significantly smaller than rivals McDonald’s Corp (MCD.N) and Starbucks Corp (SBUX.O), but the Dunkin’ Donuts chain has a devoted U.S. following and plenty of room for domestic growth, particularly on the West Coast.
The chain, whose advertising slogan is “America Runs on Dunkin’,” has set a 20-year target for 15,000 U.S. stores — more than Starbucks’ 11,000 and up from about 6,800 currently.
“The market’s really going to like the growth story,” said Morningstar senior analyst Joscelyn MacKay. “Even though the Dunkin’ Donuts brand has been around for 70 years, there’s still great potential for the brand to increase its awareness around the United States.
Dunkin’ Donuts sells coffee drinks, doughnuts and other foods like bagels and sandwiches. It is the primary growth engine for Dunkin’ Brands, which gets 60 percent of its revenue from coffee.
Dunkin’ Donuts customers are the most loyal in the U.S. coffee business, ahead of fans of Starbucks, McDonald’s and Canadian chain Tim Hortons Inc THI.TO, according to consulting firm Brand Keys Inc.
Most Dunkin’ Donuts stores are on the East Coast, and the chain sees the U.S. West, where it has just over 100 outlets, as a key growth market.
Dunkin’ Donuts plans to steadily add stores across the United States “in a contiguous and disciplined manner,” Chief Executive Nigel Travis told Reuters.
That means it could take “some time” to get to California, the nation’s most populous state, which is already Dunkin Donuts’ biggest market for grocery sales of coffee, he said.
“When you can build another 3,000 stores relatively closer to where we already are, I think that’s the right decision to make,” said Travis.
The chain added more than 200 stores in the United States last year and plans to add 250 this year.
“We’re going to be extremely disciplined,” said Travis, who vowed that the brand would support its franchisees, who are key to profitable growth.
While Starbucks has built a global brand selling fancy coffee drinks to relatively upscale consumers, Dunkin’ Donuts takes pride in its more working-class clientele — a group also targeted by the expanded McDonald’s McCafe coffee drink lineup.
Dunkin’ Donuts also has opportunities to expand in international markets, where it now has 3,000 outlets.
Starbucks has saturated the domestic market and is focused on building more cafes overseas in markets such as China. McDonald’s, which has 14,000 restaurants in the United States, also is eyeing international growth.
The Baskin-Robbins ice cream chain is Dunkin’ Brands’ more international brand, with just over 2,500 of its nearly 6,500 worldwide stores in the United States. The chain contributes about one-fourth of company revenue, and its closely watched sales at established U.S. restaurants have been falling for some time.
Baskin-Robbins’ U.S. business is in the middle of a revival, and its same-restaurant sales are improving under new leadership, Travis said.
Canton, Massachusetts-based Dunkin’ Brands sold $422.75 million worth of stock on Tuesday in the biggest initial public offering of the week. The IPO price of $19 a share landed above the expected range of $16 to $18.
Morningstar’s MacKay said she wasn’t surprised to see the shares price above the expected range and pop in their first trading day, given that other popular restaurant chains are richly valued.
Her fair value estimate of $17 per share for Dunkin’ Brands implies a price-to-earnings ratio of around 24 times fiscal 2011 earnings. That compared with multiples of 50 for Chipotle Mexican Grill (CMG.N) and about 30 for both Panera Bread Co PNRA.O and Starbucks, she said.
Lawrence Levine, managing director at accounting firm RSM McGladrey, said the market is pricing Dunkin’ Brands and Starbucks nearly the same at an enterprise level — which he says is a better yardstick since Dunkin’ Brands has more debt than Starbucks and, unlike the world’s biggest cafe chain, does not own most of its stores.
Private equity firms Bain Capital, Carlyle Group CYL.UL and Thomas H. Lee Partners bought Dunkin’ Brands from global spirits company Pernod Ricard SA (PERP.PA) for $2.4 billion in 2006.
Those firms sold shares in the IPO, reducing their combined stake to 26 percent from 32 percent.
Reporting by Lisa Baertlein; editing by Lisa Von Ahn, John Wallace and Andre Grenon