2015 was a dismal year for donut stocks. Shares of Dunkin Brands (DNKN), the parent company of Dunkin' Donuts and Baskin-Robbins, have declined 9% over the past 12 months. Shares of Krispy Kreme (KKD) are down nearly 30%. Let's take a closer look at why both stocks underperformed the S&P 500, and whether or not they could make a comeback next year.
What happened to Dunkin' Brands?
Dunkin Brands operates over 11,300 Dunkin' Donuts restaurants and more than 7,500 Baskin-Robbins stores worldwide. The company beat both revenue and earnings expectations over the past three quarters.
Source: Dunkin Brands.
Last quarter, Dunkin's revenue rose 8.9% annually to $209.8 million and beat estimates by $5.7 million. Dunkin' Donuts' comparable store sales rose 1.1% annually in the U.S. and 0.8% internationally. Baskin-Robbins posted 7.5% comps growth in the U.S., but its international comps declined 2.4%. With the exception of Baskin-Robbins' domestic growth, overall comparable store sales reflected the difficult environment for quick-service restaurants (QSRs) worldwide. Dunkin's adjusted net income fell 3.8% annually to $50.2 million, or $0.52 per share, which still beat estimates by a penny.
All of Dunkin's stores are franchised. This means that it generates less revenue per store by collecting royalties and franchise fees, but gains higher margins by passing the overhead costs onto franchisees.
Dunkin's forward growth depends heavily on its ability to generate fresh cash by attracting new franchisees. During the quarter, the company added 90 new restaurants worldwide, including 68 new Dunkin' Donuts locations in the U.S. For the full year, Dunkin Brands expects revenue to grow between 6% to 8%, compared to 4.9% growth in fiscal 2014. Full-year adjusted earnings are expected to climb 7.5% to 9.8%.
What happened to Krispy Kreme?
Whereas Dunkin Brands soundly beat estimates over the past year, Krispy Kreme has repeatedly missed both sales and earnings expectations. Last quarter, the donut chain's revenue rose 5.6% annually to $127.3 million, which missed expectations by $4.7 million. Adjusted net income rose 9.7% to $9.8 million, or $0.15 per share, which came in four cents below estimates.
Source: Krispy Kreme.
Krispy Kreme has a much smaller presence than Dunkin' Brands, with about 1,000 stores in 24 countries. Unlike Dunkin' Brands, Krispy Kreme owns and operates the majority of its stores.
Last quarter, revenue from its company-owned stores rose 7.1% to $84.1 million. Revenue from its franchised domestic stores rose 19.4% to $3.9 million, but revenue from international franchises fell 2.9% to $7.3 million, partially due to foreign exchange headwinds. Revenue from KK Supply Chain, which sells donut mixes and equipment to all company stores and franchisees, rose 6.7% to $63.5 million. Looking ahead, Krispy Kreme expects its full-year earnings to rise 9% to 14% annually, which is considerably lower than its previous forecast for 14% to 21% growth.
In terms of comparable store sales, Krispy Kreme's domestic comps rose 5.5% annually (with a 2.3% gain at company-owned stores), while international comps fell 2.7% on a constant currency basis. While Krispy Kreme's comps reflect the difficult QSR environment that has also been chipping away at Dunkin' Brands, its donut business is growing at a faster rate than the much larger Dunkin' Donuts. But since Krispy Kreme doesn't run an all-franchise model like Dunkin' Brands, it also has much lower operating margins:
Source: YCharts
Valuations and verdict
Dunkin' Brands is clearly a stronger stock than Krispy Kreme. It reliably beats analyst expectations, has much beefier margins, and its trailing P/E of 26 is lower than Krispy Kreme's P/E of 31. Dunkin' Brands also has a decent forward annual dividend yield of 2.5%, while Krispy Kreme doesn't pay a dividend. That being said, neither stock is a "must buy" stock at the moment, since QSR stocks are likely to face plenty of near-term headwinds like slowing sales, rising food prices, and demands for higher wages.
