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As the pandemic hammered Starbucks, Dunkin’ took advantage

The Canton, Mass.-based chain has recovered more quickly than its Seattle-based rival. Here’s why, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

Shareholders of Dunkin’ Brands enjoying the 20% premium they’re getting for their shares from Inspire Brands should send a thank you note to Starbucks.

During the pandemic, when Starbucks restaurants were closed, Dunkin’ picked up sales. The result for Dunkin’ has been a pair of unusual outperformances of its cross-country rival, and a sudden boost in the prospects of its western expansion.

Starbucks has outperformed the chain’s same-store sales in just one quarter since Dunkin’ went public in 2010. Since then, Starbucks has averaged quarterly same-store sales of 4.4%, compared to 1.7% for Dunkin’.

But that changed during the pandemic.

Dunkin’ v. Starbucks same-store sales

Source: Technomic, SEC filings

When the pandemic started, few chains were as aggressive as Starbucks was in closing locations. The chain closed its dining rooms in March. And then it closed its restaurants altogether if they didn’t have drive-thrus.

At one point in April Starbucks same-store sales in the U.S. were down more than 60%.

That provided an opportunity for Dunkin’, which largely kept its locations open. In the chains’ respective April-through-June quarters, Dunkin’s same-store sales declined 19.7%. The Seattle-based Starbucks was down 40%.

In the most recent quarter, Dunkin continued to outperform Starbucks even as the latter chain opened more locations—Dunkin’s same-store sales rose 0.9% versus a 9% decline for Starbucks.

To be sure, Starbucks is quickly on its way toward a recovery. Its same-store sales improved to negative 4% in September. And the company expects a full sales recovery by the end of March.

For Dunkin’, however, Starbucks’ closures represented an opportunity. The Canton, Mass.-based chain has largely been a Northeastern-focused chain. It has been pushing westward for years, hoping to become a truly national concept.

The company has taken some aggressive steps to reach that goal, including dropping the “Donuts” from its name. Consumers in many markets out west do not realize Dunkin’ is primarily a coffee concept and dropping the name could theoretically help that.

But the pandemic surely did. When consumers were not going to Starbucks, they were going to Dunkin’s in those western markets.

Dunkin’s same-store sales in the West and the Southwest were in the double digits in the third quarter. Customers in those markets have also been adopting to the company’s loyalty program and mobile app more quickly.

“With other concepts closed, new guests discovered our innovative everyday value-priced specialty beverages and our low-contact service options,” Scott Murphy, president of Dunkin’ Americas, said last week. “We’ve never been more excited about the performance in our newest markets.”

For Dunkin’, the result is a sale price 41% higher than it was at the beginning of the year, and 20% higher than it was last week. It also gets a sky-high valuation: Dunkin’ Brands is getting sold at an estimated enterprise value multiple of nearly 25 times 2020 estimated earnings before interest, taxes, depreciation and amortization, or EBITDA. That’s based on valuation data from the financial services site Sentieo.

That’s likely higher than normal, given weaker Dunkin’ earnings due to the pandemic—the valuation is only about 18 times 2019 EBITDA.

Still, it’s a strong takeout multiple and demonstrates that Inspire believes in Dunkin’s ability to continue growing. And that growth received a boost during the pandemic.

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