National Donut Day didn’t initially start an excuse to get free donuts.  In 1938, it was a holiday established to celebrate the women who served soldiers donuts on the front lines during World War I. To celebrate this sweet holiday, check out these freebies:

Are donuts really a billion dollar business?

America runs on Dunkin’s coffee

Friend of The Ivy Investor, The Young Professionalist, enjoying Dunkin’ Donuts iced coffee and her free donut

Dunkin’ Brands (NASDAQ: DNKN), recently named the ninth largest fast food brand with $7.76 billion sales, sells all that’s right with the world—coffee, donuts, and ice cream. The Brand includes both Dunkin’ Donuts and Baskin-Robbins chains.  Its stock price has over doubled since its initial public offering (IPO) in 2011.

Over the last 30 years, Dunkin Donuts has evolved into a coffee giant serving over 1.7 billion cups of hot and iced coffee annually. Looking to position itself as a beverage-led, on-the-go brand, Dunkin generated 58% of its US sales from coffee and other beverages in 2016.

On the corporate side, Dunkin’ has a nearly 100% franchise model. The bulk of its revenue comes from royalty income and franchise fees. Advertising and labor, the biggest expenditures of a company with $7.7 billion in sales, are shouldered by the franchisees instead of the company.

Even with this great business model, Dunkin is burdened by a considerable amount of debt. According to its 2017 first quarter report, Dunkin’s long-term debt is $2.4 billion dollars, a vestige of a 2005 leveraged buyout and related transactions before its IPO. It’s unclear how the company is going to fare in the rising interest rate environment with this level of debt.

 

What do Jimmy Choo and Krispy Kreme have in common?

In 2016, the European-based private equity firm, JAB Holding Co., purchased the South’s donut darling, Krispy Kreme for $1.35 billion. This purchase ended Krispy Kreme’s sixteen-year run as a publicly traded company (The company was privately held from 1937 to 2000.)

JAB, the owner of the luxury shoe brand, Jimmy Choo, focuses on long-term investments in luxury brands with attractive growth prospects. Surprisingly, JAB is the owner of multiple American companies, acquiring Panera Bread early in 2017 for $7.5 billion. With the addition of Krispy Kreme to JAB’s portfolio, Jim Kramer, TheStreet’s founder, commented that JAB is putting together an “amazing conglomerate” to own the morning. To his point, JAB acquired Peet’s Coffee and Tea in 2012 followed by the purchase of  Minnesota-based Caribou Coffee in 2013.

Krispy Kreme has never seemed to capture a strong coffee culture as evidenced by its coffee sales at merely 5% of its total sales.  The partnership with JAB’s coffee brands should capture the coffee market easily. But unfortunately, the public won’t get a taste of this action anytime soon. The chair of JAB Holding, Bart Becht, shared his investment philosophy with the Wall Street Journal, “We’re not really looking to sell out of businesses… Our time horizon can be anywhere from 10 years to — there is no maximum.”

Donuts,  Burgers &… Chicken?!

The $1.6 billion purchase of  Popeye’s Chicken in February 2017 catapulted  Restaurant Brands International Inc. (NYSE: QSR; TSX: QSP) to the third largest fast-food restaurant company in the world.  Currently boasting $27 billion in sales through its network of franchisees, Restaurant Brands was created in 2014 with the $12.5 billion merger of  Tim Hortons, the popular Canadian donut and coffee brand, and Burger King.

The company is majority-owned by 3G Capital, a Brazilian investment company, with the remaining shares trading on the New York Stock Exchange under the ticker symbol, QSR, and the Toronto Stock Exchange under the ticker symbol, QSP.

When the purchase of Popeye’s was formally announced, Popeye’s stock jumped over 19%.  The purchase is intended to expand the international reach of the Tim Hortons brand and provide financial efficiencies for both companies. To accomplish these long-term goals, Restaurant Brands, according to its first quarter report for 2017, financed $1.3 Billion dollars of the $1.6 Billion dollar purchase.  Again, sizable debt in a rising interest rate environment is always something to watch closely.

Restaurant Brands, like Dunkin Brands, is almost 100% franchised. Recently, the relationship between Tim Hortons franchisees and the company has become challenging. The company has initiated a series of cost savings measures which the franchisees argue are harming the company’s brand and their ability to make money.  The situation has become so tense that the franchisees have sought outside representation. In March, the brand president reached out to reassure them that the company will take steps to ensure that the “Tim Hortons brand is healthy for the long run.”

 

As seen with the three major brands discussed, donuts are definitely a billion dollar business. What’s your favorite donut brand? Did you get your free donut on June 2nd? Let me know!