Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Coffee and Pastries: Which One's the Creme de la Creme?

By Daniel Jones - Mar 25, 2014 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After Krispy Kreme reported its full-year results on Mar. 12, shareholders now have the 2013 data for four big coffee and pastry companies. Of all of these, which stands out the most and which fell behind?

Source: Wikimedia Commons

After Krispy Kreme Doughnuts (NYSE: KKD) released its fourth-quarter earnings report for its 2013 fiscal year on March 12, investors can now see how it stacked up to other rival pastry and coffee companies like Starbucks ( SBUX -0.16% ), Dunkin' Brands Group ( DNKN ), and Einstein Noah Restaurant Group (NASDAQ: BAGL) during the year.

With this data in, what does this mean for the Foolish investor who is contemplating an investment in one of these businesses? Does Krispy Kreme look like an attractive opportunity because of its performance last year or should investors look elsewhere for stellar returns?

Krispy Kreme demonstrated phenomenal growth

Source: Wikimedia Commons 

During its 2013 fiscal year, Krispy Kreme did well and rewarded its investors. The company reported revenue of $460.3 million, which represents a 6% increase from the $435.8 million the company reported in the prior year. Although it benefited from the addition of 80 locations around the world, a 6.7% rise in comparable-store sales over 2012 served as the primary driver.

In terms of profits, the business did even better. For the year, the company saw its net income rise an impressive 65% from $20.8 million to $34.3 million as higher sales and lower costs positively affected its bottom line. Along with the benefit of a 30% decline in taxes as income tax benefits and tax credit carryovers kicked in, the company's direct operating expenses fell from 83.2% of sales to 81.7%. Management chalked this up to lower compensation and legal expenses for the year.

Dunkin' also did very well

Source: Wikimedia Commons

If you thought Krispy Kreme was the only coffee company that saw attractive top- and bottom-line growth last year, you should take a gander at Dunkin' Brands. During the year, the company saw its revenue soar more than 8% from $658.2 million to $713.8 million. In its release, management attributed the rise in sales to the addition of 790 restaurants across the globe, which included 371 Dunkin' Donuts locations in the U.S. where the company enjoyed a 3.4% rise in comparable-store sales.

In terms of profit, the company did even better but it fell shy of Krispy Kreme's growth rate. For the year, Dunkin' Brands saw its net income jump 36% from $108.3 million to $146.9 million. In addition to benefiting from higher revenue, the company saw its general and administrative expenses decline from 36.4% of sales to 31.9%. The company chalked this up to increases in royalty income, franchise fees, and improved margins on its ice cream products.

Here comes the king

Source: Wikimedia Commons

While both Krispy Kreme and Dunkin' Brands did quite well in terms of revenue growth, they both paled in comparison with larger rival Starbucks. For the year, the coffee giant saw its top line rise 12% from $13.3 billion to $14.9 billion. In part, this came because of a 9% increase in its number of locations in operation, but a 7% increase in comparable-store sales also drove this result.

In terms of profit, the picture isn't so clear-cut. Officially, the company's net income declined 99% from $1.4 billion to $8.3 million, but this number includes a $2.8 billion (pre-tax) charge the business booked after it lost a lawsuit against Kraft.

Excluding this one-time expenditure, Starbucks actually saw its net income climb 24% from $1.4 billion to $1.7 billion. This drop stemmed from a reduction in its cost of goods sold as coffee prices declined, in combination with lower store operating expenses that the business attributed to its store portfolio optimization initiatives (i.e. cost reductions).

Could Einstein become a coffee powerhouse?

Source: Wikimedia Commons

Another interesting play on coffee is Einstein Noah Restaurant Group. During the year, Einstein saw its revenue rise only 2% from $427 million to $434.5 million. This higher revenue came because of an 8% increase in the number of stores in operation, with a 0.3% drop in systemwide comparable-store sales partially offsetting this increase.

Despite timid top-line growth, Einstein saw its bottom line climb 14% from $12.7 million to $14.6 million. Drivers included a 4% drop in marketing costs, an 8% decrease in depreciation and amortization, and a 10% decline in taxes.

At this point in time, Einstein is not a major coffee business and it is, instead, far more focused on its pastries. However, in 2011, the company began operating a new program under which it would sell premium coffee to its customers. Since then, coffee sales have increased to represent 9% of the business's sales and management expects this trend to continue.

Foolish takeaway
From a purely fundamental perspective, it looks as though Krispy Kreme may be able to provide investors with some nice long-term profit growth, and Dunkin' looks like a nice prospect as well. If, however, you are looking for revenue growth more than profit growth, Starbucks has done quite well and it has done so while improving its bottom line at a respectable rate.

In terms of both top- and bottom-line performances Einstein appears to have done the worst over the past year, but its foray into premium coffee could provide patient investors with some nice growth down the road. Moving forward, it's difficult to tell which of these companies will be the best and which will be the worst, but all of them have something that the Foolish investor should find appealing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kraft Foods Group, Inc. Stock Quote
Kraft Foods Group, Inc.
KRFT.DL
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$111.24 (-0.16%) $0.18
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
DNKN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.