DEAR MR. BERKO: In the fall of 2012, I bought 175 shares of Dunkin’ Donuts’ parent company at $28 because you recommended it. By the summer of last year, it was selling at about $56, but then it started to go down. I looked it up, and the sales and earnings look good. Also, my stockbroker said the company will raise the dividend because it will have more sales and earnings this year than last year. If this is true, why is the stock going down instead of up in price? And should I sell this in case it starts to go lower than $46? – JS, Jonesboro, Ark.
DEAR JS: Yes, last year, Dunkin’ Brands Group (DNKN-$46) was blithely trading in the mid-$50s, selling fair doughnuts, decent bagels, good coffee, excellent morning sandwiches, acceptable baked goods, ice cream, yogurts, tasty shakes and OK muffins. And you’re as right as a rock; DNKN’s revenues have been increasing. But they’re going up at a slower pace, and gains in same-store sales are slipping. Even some of the geniuses on Wall Street believe the fast pace of DNKN’s revenues and earnings is decelerating.
DNKN’s $56 share price was too optimistic as the competition for America’s morning fix was getting fierce. Last year, investors were enamored with DNKN’s potential growth and the promise of numerous new units. Last year, DNKN earned $1.93 a share and traded at an excitable price-earnings ratio of 29-to-1. Though 2016 earnings are expected to be $2.19 a share, investors are not so sanguine today, and DNKN trades at a P/E of 21-to-1. And the CEO’s pay package was cut by 50 percent.
I’m a doughnut aficionado and a professionally self-accredited doughnut expert. As one might trust a sommelier to select a fine wine, un connoisseur en beignet’s opinion should be sought in seeking the most exquisite doughnut. I can tell you, with a high degree of accuracy, that the fresh doughnuts offered by DNKN are ranked 3.2 holes out of 5. But that’s only between 4 a.m. and 10 a.m., when they’re fresh and DNKN’s 8,500 units generate 67 percent of their doughnut revenues. Between 10 a.m. and 2 p.m., DNKN’s doughnuts become stale, and the international rules suggest a rating between 2.1 holes and 2.4. After 2 p.m., DNKN’s doughnuts become hard and dry, and I’m required to rank them between minus 1 hole and minus 3 holes. Most DNKN units won’t make doughnuts later in the afternoon (unsold inventory is costly), so aficionados buy their doughnuts at Krispy Kreme when the “hot now” light is on. Few things are more disappointing than stale, dry doughnuts, certainly a reason for DNKN’s slower afternoon and evening traffic.
And there’s McDonald’s. In mid-September, McDonald’s announced its all-day breakfast, and almost the same day, DNKN’s shares fell 17 percent. Then add Starbucks’ 13,000 locations, with their innovative and cleverly marketed mobile/digital/loyalty offerings, tickling the appeal to the younger, freer-spending and more hip consumer. Starbucks’ Mobile Order & Pay initiative is a boon for young upwardly mobile intellectuals, or YUMIs, to whom long lines are a turnoff. As a result, Starbucks’ average ticket size is 29 percent larger than DNKN’s. Construction workers, truckers and the mobile home crowd enjoy their coffee and morning feed at DNKN. Millennials, YUMIs, recent mothers, soccer kids and studying students pollinate Starbucks, though some YUMIs and wannabes are beginning to hang at McDonald’s. At McDonald’s, the coffee and morning sandwiches are quite good, but the slow service really stinks. Too often what you order at McDonald’s is in someone else’s bag. Still, McDonald’s and Starbucks are eating DNKN’s breakfast. DNKN’s management should hire some hip marketing consultants to attract the YUMIs and the urban consumer who can afford a larger check.
Sell 115 shares and get your investment back. But keep 60 shares in case Tim Cook needs a new job!
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].