The CEO of Dunkin’ Donuts is disputing claims by short-seller Jim Chanos after he said he was betting against the brand because of its asset-light model, which relies on collecting royalties from franchises.
“I love a challenge,” Nigel Travis, the coffee-and-doughnut chain’s CEO, said on CNBC’s “Closing Bell” on Thursday. “And that was a challenge before our earnings this morning. And I have a book coming out later this year, so I’ll take him head-on. He’s absolutely wrong.”
Dunkin’ shares fell sharply in premarket trading after Chanos told CNBC he has been short heavily franchised restaurant stocks such as Dunkin’ Brands and Restaurant Brands International, the owner of Burger King.
Dunkin’ shares, which traded as high as $62.40 and as low as $60.77 Thursday, ended the day essentially flat at $62.02.
Chanos’ bet is based on his idea that with restaurant industry same-store sales flat to down, the only other way for franchisers to grow is by adding more units or increasing their royalty rate.
“Well, you can’t increase your royalty rate, because the franchisees are already struggling at the 5 to 7 percent,” he said. “So everybody is growing their units 5 to 10 percent.”
Dunkin’ sold off its remaining company-operated stores during the fourth quarter of 2016 and is now 100 percent franchised.
The company has already made plans to slow down its U.S. expansion to focus on its new simplified menu, speed and convenience and on being a beverage-led brand. During its investor day in February, Dunkin’ said it would open some 275 new locations in the U.S. by the end of the year. In 2017, Dunkin’ opened 313 net new Dunkin’ Donuts in the U.S.
Chanos pointed to a Bank of America report that said that Northeast locations had returns of 20 percent but in the West and into California the returns are as low as 2 percent.
Travis disputed that claim.
“What he quoted was based on a report that was wrong and has since been corrected,” Travis told CNBC.
Dunkin’ has sought to expand out of the Northeast, its most highly saturated region in the U.S., and move westward. In fact, 90 percent of its proposed 2018 openings will be built outside of the Northeast.
Not to mention that 75 percent of all new restaurants will have a drive-thru lane, as restaurants with drive-thrus have 40 percent higher sales volume than non-drive-thru locations.
“I will completely challenge Mr. Chanos’ assumption that things are going badly at Dunkin’,” Travis said.
On Thursday, Dunkin’ also reported first-quarter earnings that outpaced analysts’ expectations on the bottom line, helped by a lower tax rate and share repurchases, but revenue was weak and fell below expectations.
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