“One dollar for a cup of coffee — they are out of their minds!” my frugal, land-speculating grandfather said when we stopped at the local corner gas station on the way to visit one of his properties.
I wish he would have lived to see the rise of Starbucks Corporation (NASDAQ:SBUX) and its $6 cups of coffee. He would have certainly had a few choice words for people like myself who patronize the wildly popular high-end coffee emporium.
Not only did Starbucks Corporation (NASDAQ:SBUX) change the way coffee is viewed, but the company has made its investors wealthy. Shares have tripled in value to around $75 over the past three years. This success has spawned a variety of copycat operations. Some of these are established companies that have added gourmet coffee products to their existing lines; others are regional startups.
One Starbucks Corporation (NASDAQ:SBUX)-influenced company that morphed into a gourmet coffee profit-making machine is none other than the once humble Dunkin Brands Group Inc (NASDAQ:DNKN).
|Although the Dunkin’ Donuts brand has been around since 1950, Dunkin’ Brands is relatively young as a public company.|
I was pleasantly surprised that a Dunkin’ Donuts I recently visited in South Carolina offered free Wi-Fi, a lounge area full of leather chairs, a variety of coffee flavors, sandwiches and, of course, donuts that are vastly superior to Starbucks Corporation (NASDAQ:SBUX)’ offerings. During my travels recently, I have noticed Dunkin’ Donuts sprouting up in the same general areas as established Starbucks Corporation (NASDAQ:SBUX) locations. This strategy resembles Burger King Worldwide Inc (NYSE:BKW) pursuit of McDonald’s Corporation (NYSE:MCD) locations.
I think my grandfather would still believe the prices at Dunkin’ Donuts are too high, but Dunkin Brands Group Inc (NASDAQ:DNKN)’s prices are lower than Starbucks. This lower price point, combined with the wide variety of quality products and coffees, provides a strong incentive for many consumers to favor Dunkin’ Donuts over Starbucks Corporation (NASDAQ:SBUX). This is particularly true when the stores are as comfortable as the newly opened location I recently visited.
I like how Dunkin’ Donuts is operated, its business ideas, and the quality of the products — not to mention the fact that its stock is up nearly 30% this year.
Dunkin’ Brands is close to being a 100% franchised business. This means the owners of the 10,400 Dunkin’ Donuts restaurants in more than 60 nations (and almost 7,000 Baskin-Robbins ice cream parlors, which Dunkin Brands Group Inc (NASDAQ:DNKN) also franchises) provide the capital for the brand’s expansion.
|Dunkin’ Donuts has morphed into a gourmet coffee profit-making machine.|
This transferring of the expansion costs to the individual franchise owner is a brilliant and powerful means of growth. When compared to Starbucks company-owned and -financed store concept, the expansion potential is clearly on Dunkin’ Brands’ side. While Starbucks’ market cap of more than $53 billion dwarfs Dunkin’ Brands’ less than $5 billion, the innovative nature of Dunkin Brands Group Inc (NASDAQ:DNKN) should close this gap over time.
Although the Dunkin’ Donuts brand has been around since 1950, Dunkin Brands Group Inc (NASDAQ:DNKN) is relatively young as a public company. In 2006, a group of private equity firms purchased the company, and an initial public offering followed in 2011.
In the second quarter, earnings per share (EPS) rocketed 24% higher from the same period a year earlier, and revenue rose by nearly 6%. Perhaps more importantly, domestic same-store sales increased 4% for Dunkin’ Donuts and 2.6% for Baskin-Robbins during the same time.
This is a powerful tell on the future direction of the company. It shows that consumers are willing to purchase more products at a higher price point, which will drive the bottom line higher.
The company also recently initiated a dividend. Although nothing spectacular, the dividend is currently yielding 1.8% and was increased from last year, which may be the start of regular annual increases. Another positive move is Dunkin Brands Group Inc (NASDAQ:DNKN) repurchase of 400,000 shares of common stock; management has another $33 million available for additional buybacks.
Risks to Consider: The gourmet coffee craze may not last forever. Consumers are fickle, and tastes change. There is also fierce competition in the space with even the fast-food giant McDonald’s vying for a piece of the action. Always use stops and position size properly when investing.
Action to Take –> Price has pulled back to the 50-day simple moving average setting up a strong value buy zone opportunity. Buying now in the $43 range with stops at $42 and a 12-month target of $48 makes solid investment sense.
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