In the ever-brewing coffee wars, Starbucks (NASDAQ:SBUX) and Dunkin� Brands (NASDAQ:DNKN) often are pitted against each other. Higher-end vs. lower-end customers. East Coast vs. West Coast.
The debate heats up during the holidays, when hostess gifts, last-minute stocking stuffers and enticing seasonal flavors send caffeine-deprived shoppers through their doors in droves. As a consumer, the choice is easy: Let your taste buds decide. For investors, however, the choice can be a bit trickier when it comes to capitalizing on this end-of-year retail push. Let�s take a look at what each has to offer:
Despite its well-known brand name, DNKN still is the new kid on Wall Street after its IPO debuted in July. It has seen slow growth ever since, as its debt mounts higher.
Dunkin� Donuts stores have an approximate 70% share of DNKN�s gross revenues, while frozen treats retailer Baskin-Robbins makes up the rest. With a shifting focus in the United States toward healthier eating choices and a shrinking ice cream industry, this is a big disadvantage and could become dead weight for the stock. Especially since Starbucks has increased its low-cal menu offerings, complemented by free Wi-Fi in an inviting environment. In fact, SBUX has capitalized on meeting consumers� appetite demands, and food is now 20% of its mix and accretive to net margins.
Starbucks also is expanding into at-home products. It celebrated its 40th anniversary in March by announcing a deal with Green Mountain Coffee Roasters (NASDAQ:GMCR) for Starbucks coffee to be the exclusive super-premium brand produced by GMCR for its Keurig single-cup brewing system. The SBUX K-Cup portion packs debuted earlier this month and just in time for the holiday season.
Coffee growth in 2010 was driven by single-cup sales of about $2 billion. With only 6% of U.S. homes having single-serve machines, the growth opportunity here is huge. Plus, the all-important international market has a single-serve segment about seven times the size of the United States.
DNKN also has a deal with GMCR to make Dunkin Donuts coffee available in K-Cups, but with a larger consumer base and the “premium” label attached to it, the advantage here remains with SBUX. Plus, when Green Mountain�s K-Cup technology patents expire next year, SBUX is a greater contender to take over the marketplace.
Both companies had earning �beats� in the third quarter, but DNKN quickly took a hit on news that some of its private equity sponsors planned to sell 22 million additional shares prior to the lock-up expiring. CEO Nigel Travis sold 200,000 of his 630,246-share stake. That�s a high percentage of shares to sell for a CEO that has only been in the position for less than three years.
Meanwhile, SBUX�s revenues increased 15% and earnings jumped to a record 37 cents per share, while management upped its dividend by 31%.
One key for both companies is global growth. Again, Starbucks has the upper hand here. Despite the global economic slowdown, global comps have increased 8% in fiscal 2011, better than Dunkin�s 6%. In the most recent quarter, DNKN�s international revenues came in at $161.5 million vs. pre-IPO guidance of $174.0 million. This further dampens enthusiasm for its global story — especially when Starbucks� international fundamentals remain strong.
In fact, the company plans to open 400 new stores internationally next year, and recently it announced it would open 200 drive-through locations in the U.K., and its biggest expansion opportunity lies in China. Management expects to have 1,500 stores open there by 2015, three times its current amount. This kind of growth opportunity just does not exist for DNKN.
The earnings future is looking bright for SBUX as well. Management is confident in its overall outlook for fiscal 2012, guiding for earnings to reach up to $1.82 per share — 20% growth over 2011. And 2013 could be even better.
DNKN and SBUX are similarly valued and have P/E ratios of 21.3 and 22.9, respectively. But with more cash and lower debt, Starbucks is the more attractive buy and therefore the better bang for your buck. This round goes to SBUX.
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