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Is Dunkin’ Brands Group Still a Slam Dunk?

By Nickey Friedman – Feb 11, 2014 at 7:00AM

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The world still runs on Dunkin’. And Krispy Kreme. And Starbucks.

Is it attack of the mini restaurants or something? When Dunkin' Brands Group (DNKN) reported its fantastic fourth-quarter results, it continued the trend seen by Starbucks (SBUX -0.21%) and Krispy Kreme Doughnuts (KKD). The coffee and pastry chain is expanding sales and profits at a robust place, but there is one metric especially interesting that Dunkin' Brands Group shares with Starbucks and Krispy Kreme Doughnuts.

Dunkin' Brands' results
On Feb. 6, Dunkin' Brands reported fiscal fourth-quarter results. Revenue jumped 13.3% to $183.2 million, and Dunkin' Donuts' U.S. same-store sales hopped up 3.5%. Operating income leaped 21.4% to $82.2 million, while diluted earnings per share rocketed 26.5% to $0.43.

In light of the excellent results, the board of directors raised the dividend by 21% to $0.23 for the first quarter and authorized a new $125 million share-buyback program.

Chief executive Nigel Travis pointed out that success came despite a "challenging year for the [quick-service industry] in general." Going forward the company plans to aggressively grow its store count as well as its brands. U.S. Dunkin' Donuts added 5% more locations in 2013 alone.

CFO Paul Carbone pointed out that Dunkin' Brands utilizes a near 100% franchise model. This means its business plan doesn't require much in the way of assets or investment in infrastructure and allows the company to return a nice chunk of its positive cash flow back to shareholders.

Dunkin' Brands credited its success in both increased guest checks and increased traffic to "operational excellence" and "marketing innovation." New donuts, new coffees, and new lunch sandwiches were all part of the innovation. That increased traffic sounds familiar...

Starbucks traffic
Starbucks, likewise, reported excellent fiscal fourth-quarter results. Sales took off 12%, same-store sales popped 5%, and earnings per share soared 25% to $0.71. What was really interesting was that CEO Howard Schultz said foot traffic saw a major decline in the malls this holiday season, yet Starbucks saw a 4% pop in foot traffic.

Are people starting to make Dunkin' Donuts and Starbucks more of a destination rather than just a pit stop? Starbucks, of course, like Dunkin' Brands, credited its own marketing and innovation for the increased foot traffic. That could be certainly possible, but the timing of both of them in conjunction with Krispy Kreme Doughnuts suggests the environment or trends may simply be more favorable lately for them all.

Krispy Kreme Doughnuts
Krispy Kreme hasn't reported its holiday quarter yet, but the doughnut and coffee chain has seen a long string of same-store sales increases. Last quarter, Krispy Kreme reported its 20th consecutive quarter of such with a healthy 3.7% increase. This was despite Krispy Kreme going against a difficult comparison last year when same-store sales rose 7%.

During the conference call, CEO James Morgan commented that traffic in the year-ago period was up 7%, so it was remarkable that guest traffic was up again this year. Krispy Kreme, like Dunkin' Brands Group and Starbucks, patted itself on the back a bit crediting its marketing, innovation, etc. While all of those no doubt are important and helped, clearly people in general are gulping coffee and eating round pastries in increasing numbers.

Foolish final thoughts
All three companies are doing extremely well and should continue to do so. While all three are competitors to each other, there certainly appears to be enough of a market for them all to split and enjoy fantastic profits and growth.

Dunkin' Brand Group, Starbucks, and Krispy Kreme all trade with P/E ratios of around 23, but Fools might want to take a closer look at Dunkin' Brand Group in particular. I personally see Krispy Kreme as more of a niche among the group, as there seems to be a lot of polarized opinions and a smaller portion of the population that likes its products. If I'm correct, the potential number of Krispy Kreme locations for a given region is limited.

Meanwhile, Dunkin' Brands Group is probably more famous and popular for its coffee than for its donuts. With around one-tenth the market cap of Starbucks, its potential growth percentage may be much higher. In certain areas that Dunkin' Donuts is currently in, I've personally noticed in my travels what seems like a Dunkin' Donuts on every corner and busy restaurants any time of the day. Meanwhile, Dunkin' Donuts is just now expanding into places such as California, where it had no prior footprint. If the chain proves even half as popular on the West Coast as it is on the East, it has much more room to grow.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Starbucks Stock Quote
$101.87 (-0.21%) $0.21
Dunkin Brands Group Stock Quote
Dunkin Brands Group
Krispy Kreme Doughnuts, Inc. Stock Quote
Krispy Kreme Doughnuts, Inc.

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