Each week in this column, I bash a stock that I think will head lower. But I offset that sting by recommending three potential portfolio replacements. Who gets tossed out this week? Come on down, Dunkin' Brands
I'm still shocked at how ravenously the market gobbled up Dunkin' Donuts' parent company last week.
I thought it was richly valued when it went public at $19 last week, for a market cap of $2 billion. But Dunkin' has now become a $3.5 billion company, closing higher in each of its four trading days.
What's the appeal here? There is clearly expansion potential on the West coast, but why Dunkin' Donuts? Its comps have been negative in two of the past three years, and its smaller Baskin-Robbins scoop shops in the U.S. have posted negative store-level comps for three years in a row. Folks will argue that doughnuts or ice cream cones matter less than Dunkin's increasingly popular cups of java. Even so, the company's store-level growth hasn't been able to keep pace with inflation for years.
The franchise model is supposed to yield chunky margins, but we're not seeing that at all here on the net margin line. Growth is stagnant at Dunkin', and its brand may be more of a liability than an asset in a health-conscious future.
There's a reason why Krispy Kreme
That said, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho:
This specialty retailer of premium loose-leaf teas and artisan teas wares also went public last week, and it's everything that Dunkin' is not.
Revenue grew 38%, to $124.7 million last year, fueled by expansion and an 8.7% spike in comps. Earnings more than doubled to $12 million -- or $14.1 million on a pro forma basis. In other words, this small chain of a mere 180 stores is already generating healthier net margins than Dunkin'.
Teavana generated $994 in sales per gross square foot last year, trouncing most of its mall neighbors. Selling 100 different varieties of teas at steep markups may seem like a lousy business during an iffy economy, but Teavana has managed to post strong comps in each of the past three years.
If the retail potential of Dunkin' Donuts coffee is the main attraction here, why not go directly to the source? Smucker distributes Dunkin's packaged coffee in grocery stores.
On its own, the jelly and java giant is a pretty good investment. It yields a respectable 2.5% dividend, and trades at an earnings multiple in the teens. J.M. Smucker has also beaten Wall Street's profit targets in each of the past 12 quarters. Maybe Dunkin' will grow enough to beat this market-beater, and return money to its shareholders through a generous payout policy, but why chance it? Smucker is already there, and Dunkin's licensing deal with Smucker will also fuel retail sales for the latter if Dunkin' can successfully expand its territorial reach.
There are plenty of quality coffee plays out there. Green Mountain Coffee Roasters
However, I'm turning to a darling baked-goods shop for my final replacement. Unlike Dunkin' Donuts, Panera stays busy long after the breakfast crowds have moved on. Its sterling reputation for freshly baked sandwiches and hearty soups has helped Panera deliver reliable double-digit growth for years. That's unlikely to change in the years to come.
I'm sorry, Dunkin'. Just call me Cruller de Vil.