Everywhere you go, eatery chains are getting up pretty early in the morning. It's not just burger chains and 24-hour restaurants getting in on the breakfast fun. Even doughnut shops, coffeehouses, and smoothie shops are broadening their menus, hoping to cash in on the flow of sunrise commuters.
A couple of decades ago, your choices were pretty much limited to an Egg McMuffin or some Waffle House hash browns. These days, your choices are as varied as the many ways you can order those hash browns. Scattered. Smothered. Covered. Chunked. Topped.
Oh, my.
This is the kind of niche crowding that would normally be worrisome for investors. If more companies are fighting for the same breakfast dollars, won't everybody lose as they fight for scraps?
Not exactly. Some companies are better positioned than others. Some have real shots at incremental upside, while even some of the breakfast champions that may appear to be at risk have more on the griddle than you may think.
Let's take a look at four stocks that should ride the trend nicely.
Starbucks (NASDAQ:SBUX)
I've been skittish in recent years about the lofty valuation at Starbucks. But the opportunity to serve up more than just premium java and a limited selection of baked goods in the morning finds me revisiting the latte champ.
The experiment to install TurboChef (NASDAQ:OVEN) high-speed convection ovens and offer heartier breakfast fare began several months ago in New York City. Warm breakfast sandwiches at a Starbucks? The move may seem like something out of a Mickey Ds or Dunkin' Donuts playbook, but it should work. Those ovens can really open up the possibilities. Subway installed them throughout its chain to compete against Quizno's toasted subs, and now some Subway markets are using those same ovens to offer quickly baked pizzas. Starbucks originally projected that adding warm breakfast items may add $30,000 in annual sales per store. That's important for a chain like Starbucks where comps are watched closely.
But will Starbucks be able to serve up breakfast sandwiches without slowing down customer lines? If it works, those same ovens may also play a bigger role later in the day that isn't "baked" into Wall Street's expectations.
IHOP (NYSE:IHP)
The pancake-flipping giant posted disappointing quarterly results yesterday. Earnings before charges of $0.60 a share came in well below the $0.68-per-share target that analysts were banking on. Ouch.
To some, IHOP may represent the kind of company that would have plenty to lose in this crowding landscape. I disagree. The proof is in the comps. Despite the lackluster financials, IHOP has now rattled off 19 consecutive quarters of same-store gains. Clearly, it's not losing customers. In fact, the company's recent move to grow its takeout business may help it for compete for hurried commuters (even if I'll concede that eating a funny face pancake in a car can be a sticky experience).
Because IHOP is mostly a franchisee-run operation, the chain isn't weighed down by fluctuating dairy costs (though, obviously, a franchised concept can't expand if its operators aren't happy with their bottom lines).
The push by mainstream eateries to enter the breakfast market may also help IHOP, but you'll have to follow my logic here. Have you ever been to an IHOP for lunch or dinner? It's rarely crowded, despite a respectable non-breakfast menu. As more fast-food and casual dining chains become associated as meal makers in all three dayparts, doesn't it follow that IHOP can make the most of that perception smashing by making itself matter more later in the day? If that doesn't happen on its own, the company's pending acquisition of Applebee's (NASDAQ:APPB) should help.
Jamba (NASDAQ:JMBA)
Functional smoothies may be a limited draw. They aren't associated with breakfast items, despite their fruity bases. Smoothies are also seasonal attractions, selling mostly when the weather is warm as strip-mall thirst quenchers.
That will change if Jamba Juice has a say. The company recently introduced a line of breakfast smoothies in key markets. Adding juice blends, yogurt blends, and granola-topped dairy drinks finds the company trying to boost the cash coming in earlier in the day.
Breaking in with new morning traditions is never easy, but look at the success that Lifeway Foods (NASDAQ:LWAY) has had in getting the country to take to kefir (an Eastern European dairy beverage that's a kissing cousin to drinkable yogurt).
A successful morning play may also help Jamba shake its dependence on summer for sales, as breakfast is obviously a year-round addiction.
Wendy's (NYSE:WEN)
I was hard on the new breakfast menu at Wendy's last month, though I'm starting to warm up to it a few visits later. Given the choice among the three leading burger chains, I can honestly say that I'd prefer Wendy's in the morning at this point.
The reason why the rollout is important is because Wendy's is shopping itself around to potential suitors. Early success on the breakfast front should boost comps, and possibly lead to a higher buyout offer. Unfortunately, this is the kind of educational process that doesn't materialize overnight. Until the rollout is national and the marketing campaign is in full swing, expectations will be low. That's fine. Even with the company on the block, it really does have time on its side.
