Starbucks or Dunkin' Brands: Who Wins This Coffee War?

Starbucks (NASDAQ: SBUX  ) and Dunkin' Brands (NASDAQ: DNKN  ) have widely outperformed the overall market in 2013, rising 48.11% and 46.38%, respectively. In comparison, the S&P 500 has risen 23.92%. Each company has released quarterly results recently and provided updated guidance, showing strong growth from 2012. Let's do a direct comparison of the two companies and find out which is doing better and which could provide the higher returns for its investors going forward.

The coffee giants
Starbucks is home to the world's largest chain of specialty coffee shops. It currently operates 19,767 locations in more than 50 countries. The United States is its largest market, with over 13,000 locations, but China and Japan are growing quickly, and the company has just opened its 1,000th location in each of these countries. The company will exceed 20,000 stores by the conclusion of fiscal 2014, and its current plans call for much more expansion after that.

Dunkin' Brands owns, operates, and franchises quick-service restaurants under the Dunkin' Donuts and Baskin Robbins brands. Dunkin' Donuts is one of the world's largest coffee and baked goods restaurants, with 10,900 locations worldwide, while Baskin Robbins is the world's largest specialty ice cream chain with 7,100 locations worldwide. Being home to two of the world's leading brands gives Dunkin' an edge in the industry.


Recent reports

Starbucks
On Oct. 30, Starbucks released fourth quarter results that were mixed compared to analyst estimates. Here's a summary of the report:

Metric Reported Expected
Earnings per share  $0.63  $0.60
Revenue  $3.80 billion  $3.81 billion
  • Earnings per share grew 37%
  • Revenue increased 12.8%
  • U.S. comparable-store sales growth of 8%
  • Operating income increased 28.7% to $668.9 million
  • Operating margin expanded 220 basis points to 17.6%
  • Increased quarterly dividend by 24% to $0.26, resulting in an annual yield of 1.28%

Dunkin' Brands
Third quarter results were released on Oct. 24, and the numbers were also mixed compared to analyst estimates. Here's an overview of the report:

Metric Reported Expected
Earnings per share  $0.41  $0.43
Revenue  $186.3 million  $182.95 million
  • Earnings per share grew 10.8%
  • Revenue increased 8.5%
  • U.S. comparable-store sales growth of 4.2% for Dunkin' Donuts and 3.2% for Baskin-Robbins
  • Operating income increased 4.6% to $89.33 million
  • Operating margin expanded 310 basis points to 44.1%
  • Maintained quarterly dividend of $0.19, or 1.55% annually

Company outlook
In the earnings reports, Starbucks and Dunkin' Brands also provided updated guidance. Starbucks announced its new 2014 outlook, and Dunkin' narrowed its fiscal 2013 expectations. Here's an overview of what the companies expect:

Starbucks
The strong earnings report allowed Starbucks to raise its full-year guidance for fiscal 2014. The updated outlook calls for earnings per share to be between $2.55 and $2.65, an increase of 12.8%-17.3% from 2013. The company also expects 10% or greater revenue growth and the opening of 1,500 net new stores. These expectations would result in another record-setting year for the company.

Dunkin' Brands
Dunkin's management provided narrowed guidance for the full year of 2013, which will be announced in January. The company now expects to earn $1.50-$1.53, an increase of 17.2%-19.5% from 2012. It also expects revenue growth of 6%-8%, and 10%-12% in adjusted operating income growth. These expectations are at the low end of the previous guidance, but it will still result in a very strong year for Dunkin' Brands.

Conference call comments
The earnings reports tell the story of what happened over the last three months, but the conference call is where we can find out what the company is doing to continue driving sales higher. Here are two of the key comments from each conference call that discuss new moves being made by the companies:

Starbucks

"Recently we launched a national marketing campaign around coffee entitled Starbucks Higher Arabica standards that will benefit both our retail stores and CPG businesses. These initiatives underscore Starbucks ongoing commitment to bringing the world's most rare and exotic coffee for our customers and to constantly reaffirming our coffee leadership and authority worldwide." --Howard Schultz, President & CEO

"In Q4, we also made solid progress against our plans to expand our La Boulange baked goods platform. La Boulange products are now available in more than 3,500 Starbucks stores in the U.S and we're now on track off for La Boulange in all 7,000 company operated stores in the U.S by the end of fiscal 2014. Food continues to be an important component of our growth strategy and we're extremely encouraged by both customer response to La Boulange and the sales lift we're seeing over the food products La Boulange we placed." --Howard Schultz, President & CEO

Dunkin' Brands

"Last week, we launched our innovative new #mydunkin advertising campaign that, for the first time, leverages real fans and their social media content to demonstrate their passion for Dunkin' Donuts coffee... The #mydunkin campaign continues the evolution of the very successful America Runs on Dunkin' and celebrates our guests and our coffee leadership in a way that reflects the changing media environment." --John Costello, President of Global Marketing & Innovation

"I'm also very excited to announce that on November 4, we will begin the phased rollout of our new DD Perks loyalty program... I'm excited about the potential DD Perks has to drive profits using targeted offers, offers specifically designed to drive incremental sales based on guests' individual behavior." --John Costello, President of Global Marketing & Innovation

And the winner is...
After reviewing the recent earnings reports, the outlook of each company, and the comments made by the management teams on its conference call, Starbucks is our champion. Dunkin' Brands still makes for a great investment opportunity, but Starbucks' growth and guidance is practically unmatched in the market.

The Foolish bottom line
Starbucks and Dunkin' Brands were two of the best-performing public companies in 2013. Both stocks have the potential to outperform the overall market in 2014, but Starbucks is my favorite of the two at current levels. Take a look and see if your portfolio could use one of the world's coffee giants.

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