The results of the first quarter of the year for Dunkin' Brands Group (NASDAQ:DNKN) were disappointing. CEO Nigel Travis said the reason for this was the harsh winter weather closed businesses and schools and disrupted the ritualistic nature of guests stopping in on the way to work or school and grabbing their morning coffee and maybe a bite to eat. That made sense to me. But then the second quarter results came out with more disappointment. What gives?
I'm actually long Dunkin' Brands Group and bullish about the long-term future. While I'm disappointed by the growth in U.S. same-store sales lately, the company is still growing, and I believe it has vast untapped territory that it will expand to and do quite well in. Still, I was left with a bit of a bitter taste in my mouth after the second quarter results.
Same-store sales growth came in at 1.8% for the U.S., which isn't terrible, but it was less than I thought it would be. Travis stated in the release,
"We believe this was largely the result of macroeconomic challenges facing consumers, as evidenced across the retail and the QSR industries, along with an unseasonably cold, rainy start to the spring season."
I'm sorry, Travis, but I have trouble believing the economy is doing much to keep people from buying your delicious coffee and a cheap donut especially when both your coffee and donuts tend to be cheaper than coffee and pastries from Starbucks (NASDAQ:SBUX) and Tim Hortons (THI), which didn't share the same disappointment with their quarters that you did.
What's more is weather was supposedly only to blame when people were snowed in with school and work physically closed, costing the company sales from people not physically being near the stores in their cars. Cold and rain is now to blame? I don't know if it's just me but when I'm cold and wet the first thing I think of is coffee. That sounds like a poor excuse.
Even if you buy that Dunkin' Donuts has a different geographical footprint than Starbucks. The number one market for Starbucks is in California - a place where cold and wet is a rarity. Fine. But what about Tim Hortons? Its U.S. market is mostly in the good ole northeast, the same place Dunkin' Donuts is mostly concentrated it.
Tim Hortons reported a 5.9% jump in same-store sales for its second quarter, which is quite impressive for that chain. Not once in either Tim Hortons' conference call or earnings release did it complain about the economy or the weather. Did a black cloud literally follow the Dunkin' Donuts stores around or something?
Personally I'd guess the weakness is really due to Dunkin' Donuts' microwaved breakfast. I thought it was a neat idea originally to serve a nice variety of hot breakfasts. I've come to change my mind, however, after sitting in line several times twiddling my thumbs as somebody holds up the line while navigating Dunkin' Donuts' vast breakfast menu. The place used to be known as a place that I can get my coffee and/or donut in and out in no time. So much for that.
Travis seemed to have danced around the breakfast issue during the call, hinting that it's a failure. He stated,
"There is no doubt that breakfast is the most competitive out-of-home eating day part. And everyone wants to be in the beverage business. While new entrants into the space don't necessarily have a direct impact on us, they increased the overall competitive intensity from existing players."
It doesn't sound encouraging. Lucky for me, I'm long Dunkin' Brands Groups for its coffee and donuts that I believe will continue to grow in popularity and more untapped regions than ever. But I'll be keeping a close eye on developments just in case. Maybe they'll do even better if they get rid of breakfast. I know I'll be back more if I know the line will move fast again.
Disclosure: The author is long DNKN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.