Starbucks or Dunkin' Brands: Which Coffee Giant Had the Better Quarter?

Starbucks  (NASDAQ: SBUX  )  and Dunkin' Brands  (NASDAQ: DNKN  )  widely outperformed the overall market in 2013, with rises of 46.2% and 45.3%, respectively. However, the two have gone in separate directions to start 2014 despite both reporting very strong quarterly earnings. Let's take a thorough look at the two reports to find out which company had the better quarter.

The kings of coffee
Starbucks is home to the world's largest chain of specialty coffee shops. It currently operates in more than 50 countries, with the United States as its largest market, but China and Japan are growing quickly. The company also owns the La Boulange cafe and bakery and Teavana, a high-growth tea retailer.

Source: Starbucks.

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 and Baskin-Robbins is the world's largest specialty ice cream chain. The company is nearly 100% franchised, which gives it the competitive advantage of being asset-light.

Source: Dunkin' Brands.

The earnings reports
Starbucks released first-quarter earnings after the market closed on Jan. 23, and the results were mixed compared to analysts' expectations. Here's a breakdown of the report and a year-over-year comparison:

Metric Reported Expected
Earnings per share $0.71 $0.69
Revenue $4.24 billion $4.29 billion
  • Earnings per share increased 24.6%
  • Revenue rose 11.8%
  • Comparable-store sales:
    • Americas: 5% increase
    • Europe, Middle East, Africa: 5% increase
    • China, Asia-Pacific: 8% increase
  • Operating income increased 29%
  • Operating margin expanded 260 basis points to 19.2%
  • Surpassed the milestone of 20,000 locations worldwide

Dunkin' Brands released fourth-quarter earnings before the market opened on Feb. 6, and the results either met or exceeded analysts' expectations. Here's an overview of the report and a year-over-year comparison:

Metric Reported Expected
Earnings per share $0.43 $0.43
Revenue $183.20 million $183.13 million
  • Earnings per share increased 26.5%
  • Revenue rose 13.3%
  • Comparable-store sales: 
    • Dunkin' Donuts U.S.: 3.5% increase
    • Baskin-Robbins U.S.: 2.2% increase
    • Dunkin' Donuts International: 0.3% decrease
    • Baskin-Robbins International: 1.6% increase
  • Operating income increased 11.8%
  • Operating margin expanded 110 basis points to 48.7%
  • Raised its quarterly dividend by 21% to $0.23 and authorized a $125 million share repurchase program.

Outlook on the year
In the reports, Starbucks and Dunkin' Brands also updated their guidance for fiscal 2014. Here's what each company had to say:

Starbucks' management affirmed its full-year outlook for 2014: earnings of $2.59-$2.67 per share on revenue growth of 10% or more. Here are the expectations for each quarter:

Period Earnings per share
Q2 $0.54-$0.55
Q3 $0.64-$0.66
Q4 $0.70-$0.75

If these estimates are accurate, all three would result in record quarters for the company; a record quarter and a projection that calls for three more are just about all you can ask for from a company. If Starbucks can deliver on these expectations, I would be shocked if it did not rise to new all-time highs. 

Dunkin' Brands gave updated guidance for fiscal 2014. Here are the key targets the company aims to achieve:

  • Earnings per share of $1.79-$1.83
    • An increase of 17%-20% from fiscal 2013
  • Revenue growth of 6%-8%
  • Operating income growth of 10%-12%

This would represent the highest earnings and revenue figures in Dunkin's history, and I am fully confident that its brand strength will allow it to perform accordingly. This growth will support price appreciation in the stock and could even propel it to a performance similar to what we saw in 2013.

Expansion plans
During the first quarter, Starbucks opened 417 stores, which brought its total count to 20,184 locations worldwide. This puts Starbucks on pace to accomplish its expansion goal for the year, which calls for the opening of 1,500 locations. I think this is conservative after what Starbucks accomplished in the first quarter, but the company did not update its outlook. Here's a breakdown of where Starbucks plans to open the new locations:

Region Expected Openings
Americas 600
China and Asia-Pacific 750
Europe, Middle East, and Africa 150

If it opens all of the locations as planned, Starbucks would end up with 21,267 total stores at the end of the year. With the growing popularity of Starbucks' brand, the stores will likely see quick success in the new markets, which will drive the company's earnings and revenue even higher. I believe Starbucks will exceed 1,500 store openings in the year and open even more stores in 2015.

In the fourth quarter, Dunkin' Brands opened 309 net new locations, bringing its total openings to 790 for the year; the company now operates 18,158 locations worldwide. In the report, Dunkin' reiterated its expansion plan for 2014, which calls for 685 to 800 new locations. Here's a breakdown of planned openings by brand:

Brand and Region Expected Openings
Dunkin' Donuts U.S. 380-410
Baskin-Robbins U.S. 5-10
DD/BR International 300-400

Additionally, Dunkin' reiterated its long-term plan of surpassing 15,000 total Dunkin' Donuts locations in the United States, almost double the current count. This plan is possible because the company has virtually no Dunkin' Donuts locations in the Western United States, but this will quickly change starting in 2014; management believes California could easily hold more than 1,000 Dunkin' Donuts locations itself. I believe Dunkin' will reach the high end of its expansion plans and add 750-800 stores, allowing its popular brands to reach locations that demand them.

And the winner is...
When comparing the two companies' earnings reports, guidance, and expansion plans for the year, the winner of this matchup is Dunkin' Brands. Its earnings were spot-on with what analysts had expected and its guidance for 2014 calls for substantial growth, which made for a nearly flawless report. In addition, its expansion plans, both short-term and long-term, will allow Dunkin' to continue its rise as a global powerhouse.

One of the key factors in this decision was Dunkin's nearly 100%-franchised business model. This allows the company to fully focus on its product innovation, operations, and expansion, and leaves the day-to-day store operations to its highly experienced franchisees. Starbucks came in a very close second place and it has immense upside potential, so this should not deter those who currently hold positions in the company. With this said, investors should consider picking up shares in Dunkin' now.

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