Heads Up, Dunkin' Brands Investors: There May Be More Disappointment Ahead

Dunkin’ Brands’ second quarter may be a bumpy one.

Jun 30, 2014 at 12:33PM


Two quick-service restaurant companies that are arguably joined at the hip when it comes to industrywide headwinds are Krispy Kreme Doughnuts (NYSE:KKD) and Dunkin' Brands Group (NASDAQ:DNKN). Both saw their same-store sales walloped by the snowstorms this winter, and if the pattern continues, word from Krispy Kreme says that Dunkin' Brands investors might want to brace for more pain ahead.

Results that left investors feeling dunked
Both stocks saw their prices get hit almost as hard as the Northeast got hit by snow. First, Dunkin' Brands reported its results on April 24. Domestic same-store sales in the U.S. grew by an anemic 1.2%. That wasn't terrible by any means, but it was far below the 3.5% it reported in the sequential quarter just prior and the 3.4% for the full year of 2013.

Dunkin' Brands blamed "severe weather in the regions of the country where most of our Dunkin' Donuts restaurants are located." The company believes it would have posted a much better 3.2% same-store sales result if not for the storms.

During the conference call, management explained that Dunkin' Donuts does most of its business during the morning hours and that a disruption then causes permanent sales losses for that particular day that aren't made up for later. As Nigel Travis, CEO of Dunkin' Brands Group, put it, "Some of those days people just don't leave the house."


Source: Wikimedia Commons.

Paul Carbone, CFO of Dunkin' Brands, explained it well. He said the company has many customers who come for their morning coffee every single weekday on the way to work. If the office is closed on Tuesday due to the weather and that customer doesn't come in that day, when he comes back on Wednesday, he's not getting two coffees. He's back at Dunkin' Donuts every day, but the storm caused a coffee sale to be lost forever.

The winter storms ended for the most part in March, so we should all be in the clear now, right? Not so fast.

Results that left investors feeling glazed
Meanwhile, on June 2, Krispy Kreme Doughnuts reported its fiscal first-quarter results. Unlike Dunkin' Brands Group, Krispy Kreme has an odd fiscal year in which its first quarter ends on May 4. As a result of this, we tend to get a bit more industry insight during the month of April that Dunkin' Brands Group doesn't provide.

Krispy Kreme, like Dunkin' Donuts, got hurt by the snow. Domestic same-store sales at company-owned shops declined by 1.5% and broke a 21-quarter winning streak of positive same-store sales. At domestic franchise stores, same-store sales jumped 4.5%, but this still came in stark contrast to the 6.7% and 9.9% leaps in same-store sales at company-owned and franchise locations, respectively, in the period during the last fiscal year.

Krispy Kreme management explained that "severe winter weather adversely affected both on-premises and wholesale sales." Worst of all, the most severe storms hit many areas during Valentine's Day week, which is historically the busiest week of the entire year. But what happened after the storms cleared?

April was no spring picnic, either
It's important for investors in Dunkin' Brands to pay attention to Krispy Kreme to try to get some insight into the first month of the quarter for Dunkin' Brands. It's said that March comes in like a lion and goes out like a lamb, but it seems that for Krispy Kreme -- and possibly Dunkin' Donuts, too, by extension -- March went out more like a Tyrannosaurus rex.


Source: Wikimedia Commons.

During the conference call, CEO Jim Morgan warned, "Believe it or not, this will sound funny, but [we had] more tornado warnings and stoppages in April than this area ever had in my memory." The good news is it sounds like Krispy Kreme is out of the stormy woods. The bad news is that Dunkin' Brands Group may have one more quarter to go of results that include storms.

Foolish final thoughts
As Fools, we are more concerned with the long-term outlook and fundamental multiyear picture of a business. One month, one quarter, or even one year doesn't mean a thing unless the event creates a long-term change in the investment thesis. In both cases here it does not.

However, also as long-term investors we love short-term panics that create fantastic buying opportunities. My advice is to see if Dunkin' Brands reports weakness just because of inclement weather in its next quarterly report on July 24, and if that weakness leads to a hard sell-off. If it does, the irrational move may create a rational entry point for investors for the long term.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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