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.
- Who is paying for expansion or for commodities?
- 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.
Comments
New F'ee Growth
Existing franchisees seasoned 3 years or less, might not have the financial fortitude to rapidly grow. Whereas franchisees with 10 years or more experience in the system, would have greater aptitude to put more eggs in their basket or diversify elsewhere.
DNKN economics were different when franchisees built their own hub-n-spoke models. The sweet spot was 4-5 stores. New growth markets are being developed under JBOD economics. As an analyst, I'd be curious to know if the franchisees developing out West are eager to develop more stores or not. And, as Mr. Gordon pointed out, how of those Western development agreements are sold but not opened?
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DNKN Growth
Doesn't seem like many western franchisees will be developing more stores, since Nigel Travis communicated on CNBC this morning that DNKN has plenty of more growth east of the Mississippi.
"While future development will focus on the West, there is also still room for 3,000 new stores east of the Mississippi River."
-nigel travis
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Another great article ...
John, How have the G&A expense reductions that typically follow a pivot toward the 100% or near 100% franchise model affected things like franchise support, new product introductions, etc.? In your view, are the G&A cuts surgical (meaning that they are principally linked to fewer co.-owned stores) or meat axe or somewhere in between? Mike
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Another great article ...
John, How have the G&A expense reductions that typically follow a pivot toward the 100% or near 100% franchise model affected things like franchise support, new product introductions, etc.? In your view, are the G&A cuts surgical (meaning that they are principally linked to fewer co.-owned stores) or meat axe or somewhere in between? Mike
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100% Franchised Systems
Actually, product innovation ramps up - well actually, off the shelf LTOs - as field services get more spread out. Systems that have proven themselves as 100% franchised models will be full of large multi-unit operators with deep management structures.
Franchisors of 100% franchised systems act as marketing entities and shift many of the traditional G&A functions under the franchisee marketing funds.
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Excellent suggestions on publicly traded franchisor questions
I heard John Gordon speak at our DDIFO annual meeting at Mohegan Sun last month and he was brilliant.
These are on the nose questions. I might add only a question about franchisors-franchisee relations. Of course the stock answer will be that relations are excellent and we work closely together. This requires a few follow up questions (albeit related to some John Gordon poses):
If franchisee relations are so great, why do you report XXX incidents of litigation with your franchisees in the FDD?
(Of course this requires an analyst to know what an FDD is and to read it)
What percentage of new openings were by existing franchisees that have been with you more than 3years? If it is high, why do they want more? If it is low, why don't they want more and how many franchises are resales?