How did you start your morning? If you're like the majority of people in the world, you probably jolted your day with a piping cup of fresh java.
According to the International Coffee Organization, about 1.6 billion cups of coffee are poured every day, fuelling a global industry worth over $100 billion!
Coffee is one of the most ubiquitous beverages in the world. No matter where you live, you probably drink it. However, the United States is the world's largest coffee consuming country. Each day, more than 100 million Americans drink a total of over 400 million cups of coffee!
And every day, about 20% of Americans go out to buy their coffee, rather than brewing it at home. Over the year, we're each pouring thousands of dollars into the cash registers of our favorite coffee shops.
Starbucks -- the undisputed champion of U.S. coffee sales -- has claimed a 32.6% share of the market. But one often forgotten competitor is on the verge of a massive expansion that could help it contend for the title.
According to IBISWorld research, Dunkin' Donuts (Nasdaq: DNKN) has cornered a whopping 16.1% share of the U.S. retail coffee market. This number trails only behind Starbucks, Dunkin's main rival.
However, through aggressive domestic and international expansion plans, Dunkin' Donuts is seeking to capture a greater share, making the stock a potentially attractive growth investment.
Dunkin' Donuts was founded in 1950 with a single restaurant in Canton Massachusetts. Today there are nearly 11,000 restaurants in 33 countries across the globe. The international coffee chain, which is owned by the parent company Dunkin' Brands, also franchises the world's largest ice cream chain, Baskin-Robbins.
In the most recently reported first quarter, the company added 96 new Dunkin' Donut locations worldwide, 69 of which were in the U.S. This expansion brought the total number of American restaurants to nearly 8,000.
According to Dunkin's CFO, Paul Carbone, the coffee chain ultimately intends to double its U.S. store presence with at least 15,000 restaurants.
As a predominantly Eastern U.S.-based chain, Dunkin' Donuts plans to open an additional 3,000 outlets east of the Mississippi and 5,000 in the western part of the country. For example, California -- a coffee market currently dominated by Starbucks -- is a key growth area. Eventually, Dunkin' expects to open at least 1,000 new stores in the sunshine state alone, to directly compete with Starbucks.
The coffee chain is also expanding worldwide. In the coming years, management plans to franchise at least 3,000 new international locations, with nearly 400 new international outlets planned this year.
Overseas, Germany is an important growth target. Dunkin' opened its first German store in 1999; now there are 41 locations. Over the coming years, Dunkin' Donuts plans to more than quadruple its German store count to 150 outlets.
In China, Dunkin' hopes to open 100 new outlets across the country, with plans to open the first store in Shanghai this year. Japan, South Korea, the Middle East and Australia are also targeted growth areas.
With such rampant domestic and international expansion -- drawing new consumers -- Dunkin' Donuts' financials are looking better and better.
In the most recently reported first-quarter, same-store-sales, an important metric of retail growth, increased 1.2% from the year-ago quarter -- even though cold weather in the eastern U.S. hampered sales. Over this same period, total revenue notched up 6.2% from the prior year while earnings jumped 13.8%.
Operating income, an important measure of profitability, rose 7% from the year-earlier period, to $75.6 million. As well, operating margin increased 44% from the comparable year-ago quarter, giving the company ample free cash flow.
And the firm is passing the wealth on to shareholders. During the quarter, Dunkin' repurchased $22 million shares and committed to maintain its quarterly yield of $0.23 per share, for a forward annual dividend yield of about 1.90% or $0.92 per share.
Due to increased consumer demand, furthered by domestic and international expansion, management reiterated its full-year outlook. U.S. comparable sales are projected to grow 3% to 4% while revenue is expected to increase 6% to 8% from last year, and earnings are projected to rise 15%.
Because Dunkin' Donut stores are almost entirely operated by franchisees, expansion should mean an influx of franchise fees and royalty income, along with minimal operating expenses. This formula bodes well for the future financial growth.
The stock chart confirms the bullish outlook.
In mid-March, shares hit an all-time high of $53.05. The stock has since retreated -- in part because analysts expected higher in-store sales growth -- presenting a potentially profitable entry level for investors.
Shares are currently consolidating in a technical pattern known as a rectangle. The bottom of the rectangle, or support -- which acts like a floor holding the stock from falling -- is around $44.40. The top of the rectangle, or resistance -- which acts like a ceiling capping the stock -- rests around $50.
Factors like strong monthly same-store-sales should lead shares to break $50 resistance, causing the stock to bullishly blast through the rectangle.
On this occurrence, history could repeat itself. The stock is likely to re-challenge the $53.05 peak, presenting investors with around 16% returns. So, investors should get in now for a quick gain that could go on to much larger gains, long-term.
Risks to consider: While Dunkin' Donuts has solid expansion plans, the retail coffee market is highly competitive and already tapped in many locations. If Dunkin' opens new outlets without attracting new customers, the coffee change could bleed money.
However, Dunkin' Donuts customers are some of the most loyal. For seven years in a row, the coffee chain has earned top ranking for customer loyalty. As incentive to new customers, and to hook old ones, the coffee chain just introduced a loyalty program called Dunkin' Perks. In the first-quarter, 750 million members joined; management expects to get 2.5 million members on board by the year's end.
With continued customer loyalty and growing store presence, Dunkin' Donuts appears poised to grow and should be rewarding long-term investment.
Action to Take --> Buy DNKN at market open. Sell the stock if it drops below $44.40. Set initial price target at $53.05 for a potential 16% gain by late 2014.
