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Geoff Gannon January 21, 2018

Carrols Restaurant Group (TAST): America’s Biggest Burger King Franchisee Comes with “Rights of First Refusal”

Guest write-up by Vetle Forsland




Carrols Restaurant Group (TAST) is the largest Burger King franchisee in the US. They are currently operating 753 Burger King restaurants on the east coast of North America, in 16 different states. That accounts for about 10.2 % of all Burger King locations in the USA.


Carrols was founded in 1960. At the time, they were operating an independent burger chain. In 1976, they started converting those stores to Burger King locations, and they became a franchisee. In the 1990s they were already one of the nation’s largest Burger King franchisees. Later, Carrols bought the Pollo Tropical and Taco Cabana brands, which accounted for about 50 % of the company’s revenue in the 2000s. In 2012, Carrols spun off the two latter businesses to Fiesta Restaurant Group, and Fiesta’s market cap is currently around $520 million vs Carrols’ $450 million. The spin-off took place shortly after 3G capital took control of Burger King’s owner, Restaurant Brands International (QSR). A part of 3G’s plan was to give more power to franchisees, as these businesses in the past were capped to a certain amount of Burger King locations, leaving BK restaurants fragmented and underperforming, as a result of little to no economies of scale.


Since the spin-off, Carrols has put significantly more focus on expanding their business and acquiring other Burger King locations. Most notably, they acquired 278 restaurants from QSR in 2012. Sales have increased 23 % annually on average since the spin-off, versus a 1 % decrease a year from 2000-2011. Additionally, the number of restaurants has increased around 24 % since 2012, compared to a 1.4 % decrease in locations in the 11-year period before the spin-off (Carrols had an IPO in 2004, so store counts before 2000 are non-existent/very difficult to find).


The 2012 acquisition of nearly 300 restaurants from QSR was financed through debt and preferred stock issued to QSR. So, Burger King’s owner basically bought a 21 % equity stake in Carrols. Executive officers and directors also own 5 % of the company, so 26 % of Carrols is owned by insiders. The 2012 deal included a preapproval by Burger King for Carrols to expand to 1,000 restaurants in “Rights of First Refusal” states, and the ability to expand beyond this region with Burger King’s approval. Carrols therefore has Rights of First Refusal in 20 states on the East Coast, paving the way for more acquisitions in the near future. 21 % of Carrols’ restaurants today are in North Carolina, 17 % of them are in New York, and 31 % are in Indiana, Ohio and Michigan. So, 69 % of their restaurants are in 5 states, diversifying their revenue but at the same time making the company vulnerable to potential economic downtrends on the east coast.




Restaurants have been around for hundreds of years, and serves as an important part of modern culture and our society today. There is no need to analyze …

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Geoff Gannon January 15, 2018

Dunkin’ Brands (DNKN): A 100% Franchised Business Built on a “Morning Ritual”

Guest Write-up by Jayden Preston



Dunkin’ Brands owns two well-known quick service restaurant (QSR) brands, i.e. Dunkin’ Donuts that sell coffee and baked goods, and Baskin Robbins, selling hard serve ice cream. Dunkin’ Brands is now purely a brand owner, as they currently employ a 100% franchised business model, with over 20,000 points of distribution in more than 60 countries worldwide.


They organize their business into four segments: Dunkin’ Donuts U.S. (DDUS), Dunkin’ Donuts International (DDI), Baskin-Robbins International (BRI) and Baskin-Robbins U.S. (BRUS)


Dunkin’ Donuts is the more important brand to the business. Despite the term “Donuts”, it has moved away from its root to become a major coffee beverage house in the US. It is a national QSR leader in serving coffee, selling more than 1.9 billion cups of hot and iced coffee and espresso-based beverages per year. For 11 straight years, Dunkin’ Donuts has been named the top brand for customer loyalty in the out-of-home coffee category in the US. In FY2016, systemwide sales of DDUS was $8.6 billion, with 58% coming from coffee and other beverages. The brand is even considering shortening its name to Dunkin’. For Dunkin’ Brands, their Dunkin’ Donuts segments generated revenues of $630.9 million, or 79% of total segment revenues in FY2016. Dunkin’ Donut’s brand equity is much stronger in the US, generating $608.0 million in revenue, while the international segment only had $22.9 million in revenue.


The situation reverses for Baskin-Robbins. Its international segment generated revenues of $119.0 million, while the US segment produced $47.5 million. The brand develops and sells a range of frozen ice cream treats such as cones, cakes, sundaes, and frozen beverages. The brand is highly recognizable in the US, where it enjoys 89% aided brand awareness in the US and internationally in South Korea, Japan and the Middle East.


As of December 31, 2016, there were 12,258 Dunkin’ Donuts points of distribution, of which 8,828 were in the U.S. and 3,430 were international, and 7,822 Baskin-Robbins points of distribution, of which 5,284 were international and 2,538 were in the U.S.



Franchising Agreements


Let’s talk first about their franchising agreements.


A franchisor usually has several means to make their franchisees “captive”: 1) Royalties as a percentage of gross sales, 2) Rental payments on properties, 3) Required purchases from a company-owned supply chain and 4) Marketing fund pay-ins.


As with many franchisors, the majority of the Dunkin’ Brand’s revenue comes from royalty income, usually set as a percentage of gross sales made by franchisees, and other franchisee fees, including initial franchisee fee in the US. This is an upfront payment for the right to operate one or more franchised brands from Dunkin’ Brands.


The effective royalty rates for the different segments are 5.5% (DDUS), 4.8% (BRUS), 2.4% (DDI) and 0.5% (BRI). The much lower royalty rates for BRI reflects a difference in business model for that segment. Dunkin’ Brands derives revenue from the sale of ice cream …

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Geoff Gannon January 15, 2018

NIC (EGOV): A Far Above Average Business at an Utterly Average Price

NIC (EGOV) is a company that’s – as the ticker suggests – focused on eGovernment. In particular, NIC is focused on providing internet based interactions with state governments in the United States.

This is not a truly huge market. EGOV is by far the market leader and yet it only has $331 million in revenue, $78 million in pre-tax profit, and $59 million in after-tax free cash flow. The company is valued at $1 billion (the market cap is greater, but the company has net cash). To put this in perspective, EGOV has about half the addressable market for state government portals in the U.S. So, the stock market is saying that the entire potential state government portal industry – for all 50 states – is worth no more than $2 billion.

To me, that sounds a lot like a niche. And that’s what got me interested in EGOV. Actually, my co-founder, Andrew, got me interested in EGOV. But, I think my interest in the stock quickly outstripped his own.

In the U.S., government clients can be broken down into: 1) school districts, 2) cities / towns / municipalities, 3) counties, 4) states, and 5) the federal government (including military branches and various agencies). The biggest available government contracts are at the federal level. And the greatest number of available contracts are at the local level.  For example, a Department of Defense contract would be a deal serving just one client, but the client would be very big. The Department of Defense has an annual budget of $534 billion. Meanwhile, the largest state government in the U.S. (California) only has an annual budget of $183 billion. Keep in mind, the median U.S. state by population (Louisiana) is about one-eighth the size of California. So, the average state’s budget might be 5% of the Department of Defense’s budget.

The biggest state with which NIC does business is Texas. It is the second most populous state in the U.S. (behind California) and yet we know that the revenues from providing eGovernment services through the portal are only about $64 million a year (EGOV’s 10-K tells us that Texas is 20% of NIC’s total revenues and NIC’s total revenues were $318 million last year).

It may seem like I’m throwing a lot of numbers about market size at you here for no reason. But, I think there’s a very important reason that goes to the core of whether you should or shouldn’t invest in EGOV.

How niche is this business?

How competitive is this “industry” now?

And how competitive is it likely to get?

My guess – as long as EGOV stays in its niche of providing individual online portals for the 50 U.S. states – is that isn’t not very competitive now and it’s not likely to get much more competitive in the future. However, if EGOV strays from operating “dot gov” sites for the states into trying to win business with federal agencies, city governments, etc. (which it is already …

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