Dunkin' Donuts Serves Investors a Bitter Brew

Lackluster sales growth at Dunkin' Donuts gets blamed on the weather, the economy, and just about everything but the product itself.

Jul 28, 2014 at 12:41PM

Sometimes it feels like it's become difficult to find a cafe or restaurant not selling doughnuts. After the cupcake fad peaked, companies popped up touting doughnuts as the next big thing. Chains are appearing all over the place, ranging from the basic to the gourmet. The going rate for a glazed doughnut at NYC's Donut Plant is over $2.  Capitalizing on the craze, Dunkin' Brands (NASDAQ:DNKN) took its Dunkin' Donuts-brand sugar bombs and its mild coffee all the way to the bank when it hit the market in 2011 -- shares jumped from $19 to $27.85 in the first day of trading.

Source: Dunkin' Brands.

Dunkin' Brands rode its rabid fan base to a high of $52.67 in March this year. Since then, the stock has fallen back about 20%. Sales have continued to rise, but at a much slower pace.

In the face of expansion and competition from Starbucks and others, is there still value in Dunkin' Donuts?

Another rain check
In its release on the second quarter ended June 28, Dunkin' put some of the blame for soft sales on "an unseasonably cold, rainy start to the spring season," as well as some "macroeconomic challenges facing consumers." 

The weather has been a common scapegoat this earnings season. Even the National Retail Federation noted the effect of severe weather when it recently revised downward its U.S. retail sales growth forecast for 2014 to 3.6% from 4.1%.  .

But it's not just the weather raining down on Dunkin' Donuts. The competition for the morning cup of joe has gotten fierce. Dunkin' cites increasing competition in the morning rush from gas stations and fast-food joints that are seeking to get in on the breakfast and coffee action. And then there's increased competition for the midday market from companies like Starbucks, which has pushed its lunch options and after-work drink potential recently. 

Due to this combination of anchors weighing the business down, Dunkin' revised its annual outlook, cutting its revenue and comparable-store sales growth targets. Things will still be moving in the right direction if the forecast holds true, but at a slower pace.

Getting licked by ice cream costs
While competition was hitting Dunkin' Donuts, which accounts for more than 70% of the company's revenue, Baskin-Robbins was feeling the pinch from an increase in milk prices. The competitive nature of the ice cream business means that those price increases are not passed on to consumers, and Baskin-Robbins took the hit. Segment profit fell 23% compared to the same period last year.

Dunkin' Brands isn't in a horrible way, but the company does need to level out. Falling sales in Baskin-Robbins' international business have hurt the bottom line, with segment profit falling 39.6% this quarter, and sluggish U.S. comparable-sales growth is holding the brand back.

If it really is the weather and the commodity prices, then the second half of the year should be much better as those issues clear. If there's a deeper problem -- like a real hit from competition -- then Dunkin' Brands could still have a lot of growing pains ahead of it.

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