Stock pick: Why Dunkin’ Brands has performed exceptionally well




Dunkin’ Brands’ gross margin has been declining, but at the same time, operating margins have been on the rise. Gross margin is largely affected by increases in the production costs of ice cream. However, operating margin is a much more valuable metric to look at. This is because the majority of expenses the corporation incurs manifest themselves in the forms of sales, general, and administrative expenses. Dunkin’ Brands has consistently led the industry operating margin figures through the most recent recession. This is largely attributable to the company’s business model, which effectively cuts out costs of goods sold by offsetting them onto store level managers. If the company continues to grow under this business model, it will be able to more efficiently leverage economies of scale via its centralized manufacturing locations and further compete with its high margins relative to the industry.

Coffee industry op margin

Revenue growth

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Historically, revenue growth hasn’t been as strong for Dunkin’ Brands compared with the rest of the industry. For the last 12 months, revenues have grown at a rate of 4.1%, whereas number-one competitor Starbucks has grown sales upwards of 12%. Likewise, same-store sales growth is weaker in Dunkin’ Brands stores (4.2%) compared with Starbucks locations (7.0%). This scenario could be the result of any number of shifts in consumer demands. As the United States economy recovered after the recession, consumer confidence may have prompted a switch to premium blended coffee as opposed to value-oriented brands.

YOY coffee rev growth

Similarly, Dunkin’s competitors have a large presence both in and out of urban areas. Same-store sales growth is likely down due to the concentration of Dunkin’ Donuts franchises (most franchises have another franchise located within a small radius). Compared with its closest peers, Dunkin’ Brands has a similar number of locations as Starbucks but is dwarfed by the giant McDonald’s. Dunkin’ executives suggest in previous earnings calls that they see growth opportunities in the western United States, which aren’t yet saturated with a value-oriented coffee QSR chain. McDonald’s and Starbucks both compete in this market but have historically focused on lunch and dinner offerings as well as fast casual and premium coffee, respectively.


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