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).
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 (NYSE: BKW) pursuit of McDonald's (NYSE: MCD) locations.
I think my grandfather would still believe the prices at Dunkin' Donuts are too high, but Dunkin's prices are lower than Starbucks.
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.
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 (EPS) rocketed 24% higher from the same period a year earlier, and revenue rose by nearly 6%.
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 when investing.