Can Dunkin’ Brands Survive A Covid Recession?

Yes, Dunkin’ Brands’ stock (NASDAQ:DNKN) can survive a Covid recession despite declining around 19% since the beginning of the year. The restaurant industry is rattled, with restaurants like Luby’s put up for sale. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders, will result in minimal visits for restaurants, perhaps until a vaccine is discovered and available.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Dunkin’ Brands with a focus on the company’s liquidity reserves and concludes that Dunkin’ Brands has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Dunkin’ Brands Revenues 

• If the outbreak of the virus increases, Dunkin’ Brands demand will be low until the situation improves. As a result, Dunkin’ Brands’ revenues could decline by about 25% in FY’20, as a reduction in meeting friends and colleagues for dinners and drinks, and a focus on essentials will reduce the demand.
• Even with the slow reopening of the economy as lockdowns are beginning to lift, social distancing measures may continue for months, which will impact the number of people willing to go to a restaurant. The social distancing measures will force restaurants to reduce seating capacity, too.
• In addition to that, the company derives nearly 85% of its revenues come from the US, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.

Impact On Dunkin’ Brands Cash Flows

• Dunkin’ Brands cash flows from operations are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  
• The company might have to offer meals at a discount to keep the cash flowing. 
• Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
• Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $298 million in 2019 to $162 million in 2020. Also, with expected capital expenditures of $26 million for the year, FCFO-CapEx will be $136 million in 2020.

Cash Balance Impact

• This will lead to a 2020 cash balance of $844 million, which is higher when compared to 2019. 
• This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Dunkin’ Brands can weather a recession through Q2 2020 and a 25% decline in revenues by cutting Capex, eliminating  share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

An alternative scenario for Dunkin’ Brands’ cash flows with a 40% decline in revenue instead is detailed as a part of our full analysis.

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