Throw This Stock Away

Each week in this column, I bash a stock that I think will head lower. But I offset that sting by recommending three potential portfolio replacements. Who gets tossed out this week? Come on down, Dunkin' Brands (Nasdaq: DNKN  ) !

D'oh! Nuts!
I'm still shocked at how ravenously the market gobbled up Dunkin' Donuts' parent company last week.

I thought it was richly valued when it went public at $19 last week, for a market cap of $2 billion. But Dunkin' has now become a $3.5 billion company, closing higher in each of its four trading days.

What's the appeal here? There is clearly expansion potential on the West coast, but why Dunkin' Donuts? Its comps have been negative in two of the past three years, and its smaller Baskin-Robbins scoop shops in the U.S. have posted negative store-level comps for three years in a row. Folks will argue that doughnuts or ice cream cones matter less than Dunkin's increasingly popular cups of java. Even so, the company's store-level growth hasn't been able to keep pace with inflation for years.

The franchise model is supposed to yield chunky margins, but we're not seeing that at all here on the net margin line. Growth is stagnant at Dunkin', and its brand may be more of a liability than an asset in a health-conscious future.

There's a reason why Krispy Kreme (NYSE: KKD  ) has spent most of the past three years trading in the single digits. Selling doughnuts and coffee isn't as dramatic a breakthrough model as Dunkin' investors seem to think.

That said, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho:

Teavana (NYSE: TEA  )
This specialty retailer of premium loose-leaf teas and artisan teas wares also went public last week, and it's everything that Dunkin' is not.

Revenue grew 38%, to $124.7 million last year, fueled by expansion and an 8.7% spike in comps. Earnings more than doubled to $12 million -- or $14.1 million on a pro forma basis. In other words, this small chain of a mere 180 stores is already generating healthier net margins than Dunkin'.

Teavana generated $994 in sales per gross square foot last year, trouncing most of its mall neighbors. Selling 100 different varieties of teas at steep markups may seem like a lousy business during an iffy economy, but Teavana has managed to post strong comps in each of the past three years.

J.M. Smucker (NYSE: SJM  )
If the retail potential of Dunkin' Donuts coffee is the main attraction here, why not go directly to the source? Smucker distributes Dunkin's packaged coffee in grocery stores.

On its own, the jelly and java giant is a pretty good investment. It yields a respectable 2.5% dividend, and trades at an earnings multiple in the teens. J.M. Smucker has also beaten Wall Street's profit targets in each of the past 12 quarters. Maybe Dunkin' will grow enough to beat this market-beater, and return money to its shareholders through a generous payout policy, but why chance it? Smucker is already there, and Dunkin's licensing deal with Smucker will also fuel retail sales for the latter if Dunkin' can successfully expand its territorial reach.

Panera Bread (Nasdaq: PNRA  )
There are plenty of quality coffee plays out there. Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and Starbucks (Nasdaq: SBUX  ) run circles around Dunkin'. The two companies teamed up earlier this year to make Starbucks the exclusive "super-premium" offering available through Green Mountain's single-serving Keurig K-Cup platform.

However, I'm turning to a darling baked-goods shop for my final replacement. Unlike Dunkin' Donuts, Panera stays busy long after the breakfast crowds have moved on. Its sterling reputation for freshly baked sandwiches and hearty soups has helped Panera deliver reliable double-digit growth for years. That's unlikely to change in the years to come.

I'm sorry, Dunkin'. Just call me Cruller de Vil.

The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have variously recommended buying shares of Panera Bread, Green Mountain Coffee Roasters, and Starbucks; creating a lurking gator position in Green Mountain; and shorting Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

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  • Report this Comment On August 02, 2011, at 11:15 AM, chadscards1274 wrote:

    Rick, you are the second person to compare Dunkin to Krispy Kreme and you are the second person to miss the point. These two companies couldn't be more different. First, Dunkin Donuts is known for....it's coffee not it's donuts. Krispy Kreme was always known for it's donuts and then once it realized the South Beach and Atkins diets were killing it they tried unsuccessfully to come up with a drinks line. Second, Dunkin Donuts has the most loyal customer base because of....the coffee. Having family from New England where Dunkin comes from let me tell you New Englanders don't go to Dunkin to get donuts they go for....the coffee. See a theme?

    I would actually compare Dunkin to a faster more limited selection Panera. Dunkin has many varieties of coffee creations, plus they are constantly introducing new sandwiches and flatbread sandwiches. The true growth story is Dunkin isn't in many places west of the Mississippi and their international growth should be the growth driver as they have a well known brand.

  • Report this Comment On August 02, 2011, at 11:17 AM, David369 wrote:

    Also, Krispy Kreme products are in wal-marts, some grocery stores and seems like every other gas station (at least down here in the south). Can't say I've ever seen a dunkin doughnut for sale anywhere else than one of their shops.

  • Report this Comment On August 02, 2011, at 11:51 AM, David369 wrote:

    Ok, what happened to the previous comments that were here? One guy said coffee was the big draw to DD not doughnuts and he had a convincing blog (to me anyway).

    I commented that Krispy Kreme unlike DD is found in wal-marts, some grocery stores and a bunch of gas stations.

    Who hit the delete button on the comments? Who hasn't had their DD coffee this morning?

  • Report this Comment On August 02, 2011, at 11:51 AM, David369 wrote:

    Ok, that's better.

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