The announcement came early in 2017. New Orleans Saints quarterback Drew Brees, in conjunction with an existing Dunkin Brands Group Inc (NASDAQ:DNKN) franchisee, was planning to open as many as 69 stores of the donut and coffee franchise in New Orleans and four other Louisiana cities.
“Drew has proven his commitment to New Orleans — both on and off the field — and we couldn’t ask for a better partner to help expand Dunkin’ Donuts’ presence in Louisiana,” said Vik Patel, CEO of Bourbon Street Donuts, LLC, in the press release announcement.
It turns out the NFL star has a soft spot for New Orleans … and apparently, Dunkin Donuts as well. Should you feel the same about its stock?
The Good in Dunkin Brands
DNKN is eager to expand in the southeastern U.S. and away from their New England stronghold, so bringing a favored Louisiana athlete on board to carry the Dunkin flag in New Orleans and environs is a smart move.
Brees, who doesn’t strike me as a dumb jock, obviously sees the potential of the brand in Louisiana, and more importantly, the lucrative nature of this opportunity.
Dunkin has plans to open as many restaurants as it takes until it has 17,000 units in the U.S.; right now that sits at 8,629 as of Q3, 2016. Dunkin plans to open 5,000 stores as part of its western expansion, which includes Louisiana. Currently, there is one store for every 315,000 people in the western part of the U.S.; it wants to get that down to one store every 25,000 people.
In the third quarter ended Sept. 26, 2016, Dunkin completed the sale of its final company-owned locations and is now 100% franchised. That move brings it in line with Restaurant Brands International Inc (NYSE:QSR), whose Tim Hortons brand is also 100% franchised. This asset-light model is increasingly the wave of the future and is a positive for DNKN stock.
Just don’t tell Starbucks Corporation (NASDAQ:SBUX) because they don’t franchise, although they do provide license opportunities in airports, hospitals, etc. Approximately 5,100 of its 12,899 locations in the U.S. operate under a licensing agreement with the company.
The Bad in DNKN Stock
When it comes to comparable store sales, the metric most commonly used by restaurants and retail to determine success, Dunkin’s not exactly lighting it up. In Q3, 2016, its U.S. Dunkin Donut stores had 2% comps while its U.S. Baskin-Robbins stores took a 0.9% decrease.
Tim Hortons managed to generate Q3 2016 comp growth of 4.5% at its U.S. locations, 20 basis points better than the same quarter a year earlier. Starbucks’ Q4 2016 (October 2, 2016 or basically the same three-month period as QSR and DNKN) comparable store sales grew 4.0%, far lower than a year earlier when they grew a whopping 9%.
Even with Starbucks’ decline in comp growth, Dunkin Brands has a lot of work to do if it wants to play with the big boys in coffee. But, in fairness to Dunkin stock, the 2% comp growth is on a much bigger store base than Tim Hortons so we’re not entirely talking an apples to apples comparison.
The Ugly — Dunkin Brands
Jefferies analyst Andy Barish downgraded DNKN stock in early January lowering its rating from “hold” to “underperform” with a 12-month price target of $45, 12.5% lower than its Jan. 12 closing price of $51.42.
“Our PT stays at 13x ’17 EV/EBITDA, which implies about 14% downside… We feel as if the brand is trying to avoid getting ‘stuck in middle’ of QSR/c-store and SBUX, but not sure can fully rise above competition currently with premium beverages and products,” wrote Barish in a January 4 note to clients. “The company’s international growth (or lack thereof) has been disappointing. The ‘17 roll out of RTD coffee beverages with Coca-Cola should give EPS flexibility but we believe near-term stock performance more likely [to be] driven by SSS visibility and acceleration, which we are not projecting.”
At the end of the day, DNKN stock has an earnings yield of 2.8% which is lower than SBUX at 3.3% and marginally higher than Restaurant Brands International at 2.5%. So, all three are currently more expensive than the S&P 500 as a whole whose earnings yield is 4.9%.
As in sports drafts, you always pick the best athlete no matter your position of need. All things considered, Starbucks will always be the better stock to own.
Bottom Line
Given SBUX stock has done absolutely nothing the past 52 weeks — down 1% through Jan. 12, compared to Dunkin Brands’ 35.8% gain — and that I see Starbucks going to $100 by the end of 2018, I have to recommend that if you’re considering buying any coffee stock, it should be SBUX.
Leave Dunkin stock for Drew Brees and company.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
