"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.
Having lived through the Great Depression, he was convinced
that coffee shouldn't cost more than a quarter a cup. A book
could be filled with his assorted old-timer economic beliefs --
such as the $5 union-rate haircut -- but I'll never forget his
reaction to the $1 cup of coffee.
I wish he would have lived to see the rise of
Starbucks (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 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-influenced company that morphed into a gourmet
coffee profit-making machine is none other than the once humble
Dunkin' Brands (Nasdaq: DNKN)
||Although the Dunkin' Donuts brand has been around since
1950, Dunkin' Brands is relatively young as a public
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'
offerings. During my travels recently, I have noticed Dunkin'
Donuts sprouting up in the same general areas as established
Starbucks locations. This strategy resembles
Burger King's (
I think my grandfather would still believe the prices at
Dunkin' Donuts are too high, but Dunkin'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. 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 also franchises) provide the
capital for the brand's expansion.
||Dunkin' Donuts has morphed into a gourmet coffee
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 should close this gap over time.
Although the Dunkin' Donuts brand has been around since 1950,
Dunkin' Brands 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 (
) 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
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'
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
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
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