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Log In / Register | Dec 21, 2014

Responsible Reporting for Burger King, DineEquity, Dunkin Brands

Over the next two weeks there will be several “pure play” restaurant franchisors that will report earnings: Dunkin Brands (DNKN), Burger King (BKW), and DineEquity (DIN). It should also be mentioned that Sonic Drive In (SONC) and Domino’s (DPZ), which are both 90% franchised, reported in last week.

Each of these have moved towards (DIN, BKW) or have always been a hundred percent franchised model (DNKN) for years. Wall Street likes “capital light” line of thinking for corporations as well as the thought that "franchisees are exposed to commodity risk, while the franchisor is not” logic lines. Lofty stock valuations typically follow.

That raises questions for investors.

  1. Who is paying for expansion or for commodities?
  2. If the franchisor essentially sells franchises, what is the underlying health of the franchising company being reported or analyzed?

Franchisors rarely talk about this. In earnings calls, there is typically not a question from the analyst community on this. Perhaps analysts anticipate resistance from the company. McDonald's (MCD) has presented a franchisee owner/operator cash flow (EBITDA) narrative on several recent calls, and Domino's (DPZ) once did it as well.

 In the past, the few questions asked by the sell side revolved around (a) same store sales levels, (b) stores opening and closing or (c) franchisor bad debt expense from uncollected royalties. While these factors are interesting, they only collaterally get at the true health of a franchise system.

 Here are several factors that should be asked by the sell side community and reported by companies in order to improve investor disclosure:

  • What is the store development pipeline (stores under franchise agreement that haven’t been opened yet)?
  • What is the 5 year historical miss of stores in the pipeline that don’t get opened?
  • How many franchisees are in default of their franchise agreements but still open?
  • Is the franchisee operator expanding number of stores or not?
  • What percentage of total franchisee operators are franchisee cash flow positive (store level EBITDA isn’t the best number, but its something.
  • How many franchisees are remodeling or current on their remodels?      

These are all metrics that the franchisor has or should have, that could be reported either annually, or on a trailing twelve months basis.

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