Should You Invest in Dunkin’ Brands or Starbucks?

DunkinDonuts.com

Most investors would immediately consider Starbucks (NASDAQ: SBUX) over Dunkin' Brands (NASDAQ: DNKN) based on brand strength alone, but it's important to know the key facts prior to making that decision. 

Revenue growth
Dunkin' Brands hasn't been around as long as Starbucks, so let's use July 2011 as a starting point (Dunkin' Brands IPO date) for revenue growth comparisons:

Starbucks revenue (TTM) data by YCharts

If you were to base your decision solely on revenue growth, then you would opt for Starbucks, but revenue performance can be misleading. Comps sales (sales at stores open at least one year) are a more important metric when attempting to determine demand and loyalty. However, before we get to comps, let's take a look at one important reason why Dunkin' Brands should be appealing to investors. 

Dunkin' Brands' business model
Dunkin' Brands is primarily a franchisor. In fact, it only has 36 company-owned restaurants at the time of this writing. Overall, it has 18,200 points of distribution in 55 countries.

As a franchisor, Dunkin' Brands is able to keep costs low. Franchisees are primarily responsible for restaurant development. Dunkin' Brands simply collects the majority of its revenue from franchisee fees and royalty income. Part of this revenue is then used for advertising, marketing, research, and innovation.

For the three months ended on March 29 (the first quarter), franchise fee and royalty income improved 2.8%, which moved the advertising fund to $85.2 million. The higher the advertising fund, the more Dunkin' Brands can expand brand recognition for Dunkin' Donuts and Baskin-Robbins.

Getting back to the franchise fee and royalty improvement of 2.8%, or $2.9 million, this number is better than it looks. Royalty income actually increased by $5.4 million, but this was offset by the timing of franchise renewals by approximately $2.4 million. It's important to never get caught up in temporary events or numbers related to renewals.

Now let's break down first-quarter comps numbers for Dunkin' Brands prior to moving on to Starbucks.

Dunkin' Brands' comps performance
If you look at Dunkin' Brands from a distance, then you might not see much to get excited about. But if you dig a little deeper into the comps numbers, you will notice that there are two interesting trends going on. Let's take a look at the numbers prior to revealing those two trends.

While it's not completely evident from the chart above, Dunkin' Donuts is growing and performing well in the United States. You can now find a Dunkin' Donuts in 40 states as well as the District of Columbia. Dunkin' Donuts isn't performing as well abroad, but Baskin-Robbins picks up the slack in foreign markets. Baskin-Robbins is growing the fastest in South Korea and in the Middle East. This has been partially offset by Japan, but this shouldn't be too discouraging since Japan has the oldest consumer population in the world and should play a smaller consumer role in international markets in the future.

Getting back to Dunkin' Donuts in the United States, not only is it expanding westward, but in the first quarter, it saw an increased average ticket, more items per transaction, and a positive sales mix thanks to sales of more premium products. Coffee, sandwiches, and donuts have all played roles.

In the recent past, the Dunkin' Donuts story has been about Dunkin' Donuts carrying the weight domestically and Baskin-Robbins carrying the weight internationally. That's still the case today, but there might also be some hope for Baskin-Robbins domestically thanks to recent demand for cups, cones, take-home products, and the Flavor of the Month. Marketing should play a key role going forward, and with the advertising fund at $85.2 million, there should be plenty of marketing.

Dunkin' Brands is clearly headed in the right direction, but you certainly can't take anything from the coffee giant, Starbucks.

Big brother
If Starbucks and Dunkin' Brands were twins, then Starbucks would be Arnold Schwarzenegger and Dunkin' Brands would be Danny DeVito. Starbucks is the big brother, with 20,519 locations globally. For most retailers, comps slow to the low-single digits after many years of global expansion. Starbucks has managed to buck this trend. Below are second-quarter comps numbers for Starbucks (year over year):

Try finding numbers this consistent across the board on a global basis for any other retailer in the world. This is in addition to Starbucks reinventing its Teavana business (including a partnership with Oprah), being ahead of the curve with next-generation payments (including digital pricing, digital receipts, and a streamlined user experience), and having one of the smartest and most innovative CEOs on the planet in Howard Schultz.

A Fool looks ahead
Dunkin' Brands and Starbucks are both winning companies. They both possess quality management teams that have implemented high-potential strategies. Dunkin' Brands is expanding its low-cost Dunkin' Donuts business domestically, and Starbucks is innovating to stay ahead of the technological trends.

If you're looking for steady growth with a high likelihood of long-term success, then you might want to consider Starbucks over Dunkin' Brands. If you're willing to take on a little more risk and you desire increased growth potential thanks to earlier stages of geographical expansion, then you might want to consider Dunkin' Brands.