Which Donut Is More Popular- Krispy Kreme or Dunkin' Donuts?

Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Donuts. Who doesn’t love them?

America’s two most favorite doughnut brands are without question Dunkin’ Brands Group (NASDAQ: DNKN) and Krispy Kreme Doughnuts (NYSE: KKD). But which brand does America love more?

Dunkin’ Brands Group operates more than 17,400 points of distribution in nearly 60 countries worldwide, including 10,400 Dunkin’ Donuts and 7,000 Baskin-Robbins. The Krispy Kreme hot Original Glazed® doughnut can be found in 22 countries, and the company operates 773 stores.

Clearly Dunkin’ Donuts operates more stores, but everyone knows that both brands sell doughnuts in more places than just their stores. Neither company reports the number of doughnuts sold (but wouldn’t it be cool if they did?), so investors will just have to judge the companies on the numbers like they would for any other brand. (Followed by a thoughtful taste test, of course.)

Performance

For the quarter ended May 5 (Q1 FY 2014), Krispy Kreme Doughnuts beat expectations on revenue and met expectations on earnings per share. Profit increased 33% on 11% revenue growth. The company brought in revenue of $120.6 million, and GAAP reported sales were 11% higher than the prior-year quarter's $108.5 million. Same-store sales increased 11.4% from the same quarter in the year previous year, the company's 18th straight quarterly increase, giving investors something to smile about besides a hot glazed doughnut.

Dunkin’ Brands has a market cap of more than $4 billion. The dividend yield is about 1.9%. The long-term EPS growth forecast is more than 15%. The operating margin is higher than the industry average and the return on equity is more than 19%.

The company is on a roll, expanding all around the U.S., particularly in the Western states. Dunkin’ estimates it will open 330 to 360 new restaurants in 2013 -- that is nearly 50% of the number of stores Krispy Kreme operates! Nearly one-fifth of the new restaurants will be located in the Western states, and are expected to bring in 64% of sales in 2013. Dunkin’s first-year sales growth in the West and new emerging markets grew 30%, while sales growth in the established markets grew 17%.

The company’s full-year 2013 earnings guidance details 6% to 8% growth in revenue, 10% to 12% growth in adjusted operating income, and an EPS between $1.50 to $1.53, equal to a growth of about 15%. Growth for 2014 and beyond is estimated at about 17%.

Playing field

Both Dunkin’ Brands and Krispy Kreme are strong, solid, tasty investments on their own. It may appear at first that Krispy Kreme is not really in competition with Dunkin’ Donuts based on the number of stores alone. But the real truth hides in the revenue and profits -- Dunkin' Donuts (not overall Dunkin’ Brands) saw U.S. revenue of $119.6 million in the most recent quarter, and Krispy Kreme brought in revenue of $120.6 million. Krispy Kreme may not have as many stores, but it makes up for it in sales through other venues.

However, Jim Morgan, CEO of Krispy Kreme, doesn’t want you to compare his brand and Dunkin’. Krispy Kreme is happy to be just what it is -- a doughnut shop. The company is 87% doughnuts and 13% beverages. The company has not changed its style or offerings much over the years. That doesn’t mean it doesn’t see some room for growth and change.

Morgan told the Charlotte Business Journal:  

But we do need to leverage our coffee. We’ve got great coffee. We need to get out there on social media and encourage those customers already coming for doughnuts to pick up a beverage. That’s one of our biggest opportunities. I’ll be disappointed if I’m standing at a drive-through a year from now and see people picking up a dozen doughnuts and already have their chosen coffee in their cup-holder. I want people to realize they’re coming to Krispy Kreme to get their doughnuts, but they’ve got great coffee or great chillers. If we could get to 80% doughnuts and 20% coffee that would be game-changing for us in terms of profitability.

And that is good news for investors!

Following the leader

The truth is that Dunkin’ wants to be more like Starbucks (NASDAQ: SBUX). Dunkin' Brands has put a huge emphasis on its coffee in recent years, hoping to draw in more customers after that initial morning rush. Dunkin’ only makes about 40% of its sales after 11 a.m.; Starbucks makes about 50%.

Dunkin’ also wants to double its number of stores to 15,000, and has begun to revamp its franchises. The stores are becoming more relaxing with a more Starbucks-like feel inside with warmer colors, flat screen televisions, and music. Dunkin’ has also started to add more items to the menu besides donuts that are more lunch or early dinner fare, such as chicken sandwiches and iced tea.

Dunkin’ will have to work hard to keep up with Starbucks though. Starbucks had budgeted more than $900 million to refurbish existing stores and build new ones. The company plans to renovate close to 1,400 of its 11,000 U.S. locations in FY 2013.

Starbucks continues to take over the world by addicting its inhabitants to coffee with plans to have more than 20,000 retail stores on six continents by 2014. The chain saw same-store sales rise 2.9% in April compared to a 0.3% decline in February and a 1.3% increase in March. Fiscal 2013 same-store sales are expected to be up 6% in the Americas.

Dunkin’ does well to chase both dreams of coffee retailer and donut shop. Both industries are doing well. Sales at U.S. coffee shops increased 8% last year, according to researcher Technomic. And in the 52 weeks ending June 30, 2012, donuts contributed 7.4% of total bakery dollar sales across the U.S., steady from the previous year, according to ModernBaking.com (sales reported are for all bakery outlets, not just Krispy Kreme or Dunkin’ Donuts).

Conclusion

There’s no saying which donut America loves more -- Dunkin’ or Krispy Kreme. But one thing is for sure, Americans love donuts, and they love coffee. And as long as that doesn’t change (and why would it?), both companies are great investments for the future.

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Erin McBride has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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