Coffee and Pastries: Which One's the Creme de la Creme?
After Krispy Kreme Doughnuts released its fourth-quarter earnings report for its 2013 fiscal year on March 12, investors can now see how it stacked up to other rival pastry and coffee companies like Starbucks , Dunkin' Brands Group , and Einstein Noah Restaurant Group during the year.
With this data in, what does this mean for the Foolish investor who is contemplating an investment in one of these businesses? Does Krispy Kreme look like an attractive opportunity because of its performance last year or should investors look elsewhere for stellar returns?
Krispy Kreme demonstrated phenomenal growth
During its 2013 fiscal year, Krispy Kreme did well and rewarded its investors. The company reported revenue of $460.3 million, which represents a 6% increase from the $435.8 million the company reported in the prior year. Although it benefited from the addition of 80 locations around the world, a 6.7% rise in comparable-store sales over 2012 served as the primary driver.
In terms of profits, the business did even better. For the year, the company saw its net income rise an impressive 65% from $20.8 million to $34.3 million as higher sales and lower costs positively affected its bottom line. Along with the benefit of a 30% decline in taxes as income tax benefits and tax credit carryovers kicked in, the company's direct operating expenses fell from 83.2% of sales to 81.7%. Management chalked this up to lower compensation and legal expenses for the year.
Dunkin' also did very well
If you thought Krispy Kreme was the only coffee company that saw attractive top- and bottom-line growth last year, you should take a gander at Dunkin' Brands. During the year, the company saw its revenue soar more than 8% from $658.2 million to $713.8 million. In its release, management attributed the rise in sales to the addition of 790 restaurants across the globe, which included 371 Dunkin' Donuts locations in the U.S. where the company enjoyed a 3.4% rise in comparable-store sales.
In terms of profit, the company did even better but it fell shy of Krispy Kreme's growth rate. For the year, Dunkin' Brands saw its net income jump 36% from $108.3 million to $146.9 million. In addition to benefiting from higher revenue, the company saw its general and administrative expenses decline from 36.4% of sales to 31.9%. The company chalked this up to increases in royalty income, franchise fees, and improved margins on its ice cream products.
Here comes the king
While both Krispy Kreme and Dunkin' Brands did quite well in terms of revenue growth, they both paled in comparison with larger rival Starbucks. For the year, the coffee giant saw its top line rise 12% from $13.3 billion to $14.9 billion. In part, this came because of a 9% increase in its number of locations in operation, but a 7% increase in comparable-store sales also drove this result.
In terms of profit, the picture isn't so clear-cut. Officially, the company's net income declined 99% from $1.4 billion to $8.3 million, but this number includes a $2.8 billion (pre-tax) charge the business booked after it lost a lawsuit against Kraft.
Excluding this one-time expenditure, Starbucks actually saw its net income climb 24% from $1.4 billion to $1.7 billion. This drop stemmed from a reduction in its cost of goods sold as coffee prices declined, in combination with lower store operating expenses that the business attributed to its store portfolio optimization initiatives (i.e. cost reductions).
Could Einstein become a coffee powerhouse?
Another interesting play on coffee is Einstein Noah Restaurant Group. During the year, Einstein saw its revenue rise only 2% from $427 million to $434.5 million. This higher revenue came because of an 8% increase in the number of stores in operation, with a 0.3% drop in systemwide comparable-store sales partially offsetting this increase.
Despite timid top-line growth, Einstein saw its bottom line climb 14% from $12.7 million to $14.6 million. Drivers included a 4% drop in marketing costs, an 8% decrease in depreciation and amortization, and a 10% decline in taxes.
At this point in time, Einstein is not a major coffee business and it is, instead, far more focused on its pastries. However, in 2011, the company began operating a new program under which it would sell premium coffee to its customers. Since then, coffee sales have increased to represent 9% of the business's sales and management expects this trend to continue.
From a purely fundamental perspective, it looks as though Krispy Kreme may be able to provide investors with some nice long-term profit growth, and Dunkin' looks like a nice prospect as well. If, however, you are looking for revenue growth more than profit growth, Starbucks has done quite well and it has done so while improving its bottom line at a respectable rate.
In terms of both top- and bottom-line performances Einstein appears to have done the worst over the past year, but its foray into premium coffee could provide patient investors with some nice growth down the road. Moving forward, it's difficult to tell which of these companies will be the best and which will be the worst, but all of them have something that the Foolish investor should find appealing.
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The article Coffee and Pastries: Which One's the Creme de la Creme? originally appeared on Fool.com.Daniel Jones 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.
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