LOS ANGELES (Reuters) - Investors hungry for restaurant growth gobbled up shares in Dunkin’ Brands Group Inc (DNKN.O) on its Wednesday debut, betting its popular coffee-and-breakfast chain will outpace rivals like Starbucks Corp (SBUX.O) in U.S. market growth.
Shares in Dunkin’ Brands jumped as much as 56 percent on their first day of trading and closed at $27.85 -- a gain of 47 percent.
The company’s unpretentious Dunkin’ Donuts brand drives its growth, has devoted fans and has plenty of room for domestic expansion, particularly west of the Mississippi River.
But some analysts warn that bitter competition looms in the coffee and other beverage business that accounts for 60 percent of revenue at Dunkin’ Donuts.
“It’s soon to be a battle for share as opposed to taking advantage of a growth market,” said Bob Goldin, executive vice president at food consulting firm Technomic.
Goldin said that McDonald’s Corp (MCD.N) -- which has boosted profits of late by selling coffee, smoothies and other new drinks -- also is a “hugely formidable” foe. Beyond that, he said, convenience stores all around the United States are expanding specialty coffee sales.
When the closing bell rang on Wall Street on Wednesday, Dunkin’ Brands had a market value of more than $3.5 billion.
“It’s a very rich multiple. They’re going to have to have a solid top and bottom line growth story to justify it,” Goldin said.
Morningstar senior analyst Joscelyn MacKay said Wednesday’s share pop showed how much Wall Street likes Dunkin’ Donuts’ growth prospects .
While Starbucks 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 lineup.
Dunkin’ Donuts sells coffee drinks and other foods like bagels and sandwiches. It has set a 20-year target for 15,000 U.S. stores -- more than Starbucks’ 11,000 and up from about 6,800 currently.
Most of its 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 customers already 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.
“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,” MacKay said.
Dunkin’ Brands’ Chief Executive Nigel Travis told Reuters that he plans to steadily add Dunkin’ Donuts stores across the United States “in a contiguous and disciplined manner”.
That means it could take “some time” to get to California, the nation’s most populous state, which already is the biggest market for grocery sales of Dunkin’ Donuts packaged coffee.
“We’re going to be extremely disciplined,” said Travis, who added that Dunkin’ Donuts plans to open 250 more U.S. restaurants this year.
Starbucks already 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.
Dunkin’ Donuts has opportunities to expand in international markets, where it now has 3,000 outlets, and will certainly run into those familiar rivals in the process.
Canton, Massachusetts-based Dunkin’ Brands sold $422.8 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 her fair value estimate of $17 per share for Dunkin’ Brands implied 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.
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. They have kept a large stake in the company.
Reporting by Lisa Baertlein; editing by Lisa Von Ahn, John Wallace, Andre Grenon and Bernard Orr