Pretzel Investors: Look to Dunkin’ Brands, Not Wendy’s

While Wendy's (NASDAQ: WEN  ) may get all the headlines for its Pretzel Bacon Cheeseburger, the one restaurant company investors might want to start noticing is Dunkin' Brands (NASDAQ: DNKN  ) , the parent company of Dunkin' Donuts. Last year, Dunkin' Donuts experimented by offering its bakery sandwiches on a pretzel roll for a limited time. This summer, Dunkin' Donuts is going back to basics and offering a much simpler option: the Pretzel Twist.

Source: Dunkin' Donuts

Why I think the Pretzel Twist has potential
The key to remember is that Dunkin' Brands  is a beverage company. Dunkin' Brands CFO Paul Carbone said so himself. Last year, he told investors, "[W]e are a beverage company." Its donuts and food items are there to help sell coffee and other drinks. Coffee and other drinks account for about 58% of its sales. It's this reason why I think the Pretzel Twist has potential.

Source: Dunkin' Donuts

To start off, what is a Pretzel Twist? It's a traditional warm, soft pretzel that is twisted and sprinkled with salt. It's available all day, every day. Soft pretzels are perfect for the summer months, and they're one of the few items that you almost need to have a cold beverage to wash down. A Pretzel Twist is a quick, on-the-go snack and will help drive sales of Dunkin' Donuts' cold beverages, such as its iced teas or iced coffees.

Wendy's brings back the pretzel bun
Much of the excitement in the fast-food industry for pretzels is due to the success of Wendy's Pretzel Bacon Cheeseburger. Last year, Wendy's sold more than 50 million pretzel sandwiches. This was enough to boost Wendy's same-store sales by 3% for the third and fourth quarters. With the Pretzel Bacon Cheeseburger off the menu, the results weren't as impressive. In the first quarter of this year, same-store sales for company-owned locations rose 1.3%, and North American franchise locations posted a same-store sales increase of just 0.6%.

Source: Wendy's

This time around, customers will be able to get any Wendy's sandwich on a pretzel bun for an additional $0.30. The original Pretzel Bacon Cheeseburger will be priced at $4.99, which is $0.30 higher than last year. It's a Wendy's burger with cheddar cheese, smoked bacon, and honey mustard sauce. It's one of the more expensive burgers in the fast-food marketplace, but customers have shown a willingness to pay up for a better quality product. To market the return of the Pretzel Bacon Cheeseburger, Wendy's is bringing back its viral "Love Songs."

Why I think investors should look to Dunkin'
Since the majority of Dunkin' Donuts locations are in the Northeast, the company's sales were lower than normal in the first quarter. If a worker misses a day of work because of bad weather, that coffee sale is never recouped. The next day, the customer will still only buy one cup of coffee. The one bright spot for Dunkin' is that in spite of the bad weather, U.S. same-store sales still rose 1.2%. Now that the winter has passed, I expect to see Dunkin' post better same-store sales numbers when it reports second-quarter numbers.

Source: Dunkin' Donuts

In comparing Dunkin' Brands with Wendy's, Dunkin' Brands has underperformed Wendy's in the past year. Shares of Dunkin' Brands are higher by only 3% in the past year, while Wendy's has gone on quite a run. Shares of Wendy's are higher by 44%. I think investors are overlooking Dunkin' Brands' potential, especially since its California invasion is set to begin.

Dunkin' Brands' operating model is more attractive than Wendy's. Dunkin' Brands has an operating margin of 39% and a return on equity of 39%. Wendy's fares much worse. Its operating margin is only 8%, and its return on equity is a dismal 4.8%.

Foolish final thoughts
While it's too early to tell if the Pretzel Twist can move the needle for Dunkin' Brands like the Pretzel Bacon Cheeseburger did for Wendy's, I think it's a smart menu item. It should help boost sales of Dunkin' Donuts' iced beverages. I know Wendy's customers are anxious for the Pretzel Bacon Cheeseburger to return; however I think a good deal of that enthusiasm is already priced into Wendy's shares. Pretzel investors should take a second look at Dunkin' Brands. I think they'll like what they see.

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  • Report this Comment On July 11, 2014, at 7:17 PM, cubsblue23 wrote:

    Dunkin has been going downhill for a while. Their quality has suffered and their decision to only make donuts once a day has left many locations running out of popular products and with angry customers. This decline in customer service is the real reason for declining sales and the situation will only become worse. Wendy's, already undervalued, with sales getting ready for a major upswing is the much better investment. Unless you are wanting to loose money.

  • Report this Comment On July 12, 2014, at 10:23 AM, toomuchgas wrote:

    Dunkin is not going downhill but the franchises have inconsistent quality. I went to one in Cocoa Beach, FL and it was outstanding with the lines out the door and plenty of help to keep the lines moving. On the other hand some of the satellite Dunkins that serve but don't bake are horrible. I had cold coffee and stale donuts at one. They should rethink that idea and just have full service outlets.

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