According to the National Coffee Association's 2013 survey, 83% of adults drink coffee in the U.S., marking a 5% increase versus the previous year. Those who drink coffee want their 'cup of joy' irrespective of macroeconomic choppiness, recession, or pricing.
It's no wonder then that Dunkin' Brands (DNKN), which sells 1.7 billion cups of coffee globally per year, has been on a roll this year. Its stock performance has closely matched that of Starbucks (SBUX 1.00%), with a gain close to 50%. It might be not as attractive as Krispy Kreme Doughnuts' (KKD) performance, but given Dunkin's recent performance and strategic moves, investors can expect the stock to move further north.
Dunkin's growth
Dunkin' Brands, which owns both Dunkin' Donuts and Baskin-Robbins, has been growing at a brisk pace. Since it is expanding based on a franchise model, capital requirements are low--Dunkin only needs to be concerned about the location and brand value of its franchisees' locations. The healthy store growth rate is possible because of the highly attractive franchisee returns and strong sales growth that the Dunkin' Donuts brand is experiencing in the US.
Dunkin' is working on the phased roll-out of its "DD Perks loyalty program" to drive profits using targeted offers specifically designed to drive incremental sales based on guests' individual behavior. The program is expected to roll out at the beginning of 2014, which could lead to a boost in financial performance next year as a result.
With 222 new store openings this year, Dunkin's current store count stands at 10,500 Dunkin' Donuts restaurants across 31 countries, of which 7,500 restaurants are in the U.S. Going forward, the company believes that it could reach 15,000 Dunkin' Donuts in the U.S. alone. Dunkin' Brands is expanding in California to capitalize on restaurant sales of $64.7 billion that the state is expected to generate this year. It is also expanding its footprint in the state of Tennessee, which has a potential to generate restaurant sales worth $9.9 billion in 2013.
However, Dunkin' lags its peers in terms of revenue growth, as shown below.
DNKN Revenue (TTM) data by YCharts
Starbucks on a roll
Starbucks leads the pack, and its revenue grew almost 80% more than Dunkin's revenue in the period. In the fourth quarter of 2013, Starbucks' consolidated comps grew in excess of 5%, despite the challenging economic environments and consumer headwinds in many of the global markets it serves. On the back of good comps growth, its revenue increased 13% to $3.8 billion.
With over 3 billion customer visits in more than 19,000 stores in 62 countries around the world in fiscal '13, Starbucks is firing on all cylinders. Starbucks is pushing its brand abroad, especially in China where the company aims to open 1,500 stores by 2015. Looking at Starbucks' store count, Dunkin' has a lot of room to grow going forward.
Krispy Kreme's new strategy
On the other hand, Krispy Kreme investors who did not press the panic button after the last earnings miss have been rewarded for their loyalty. The stock has appreciated by more than 170%, much more than the rest, and looks good for more.
Krispy Kreme is looking to open 157 more stores in the U.S. by 2017 as it intends to reduce reliance on revenue from supermarkets and convenience stores. Krispy Kreme's doughnuts are quite famous, so much so that customers don't mind picking them up at the supermarket even though they may be two days old. However, these doughnuts do not last for more than two days, which is why the company has to put up with product returns from grocers.
The wholesale model, which contributes 80% of Krispy Kreme's revenue, is also less profitable. Hence, the company is looking to open up more stores in order to generate better returns .
Takeaway
It is clear that these three companies are enjoying good growth and have sound strategies to grow their businesses. Investors looking for a good buy now should consider Dunkin' since it is the least expensive. Dunkin's trailing P/E of 37.66 is less than half of Krispy Kreme's trailing P/E, while Starbucks' trailing P/E is quite astronomical.
Given Dunkin's ambitious store expansion plan and innovative loyalty program, investors can expect the company to continue performing well in the future. Thus, if you're looking for a stock to benefit from the snack industry, Dunkin' could be a good choice.
