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Dunkin' Brands Missing the Mark

By Nate Matherson of Circa Alpha

NEW YORK (TheStreet) -- Dunkin' Brands Group (DNKN - Get Report), the parent company of Dunkin' Donuts and Baskin-Robins, has performed very well since its public offering in late 2011. Shares have returned 118% over this period and currently sit at around $41 per share. This year alone, shares have risen more than 25%.

Dunkin has plenty of positives, but it is missing an entire revenue stream by not offering a frozen food line in supermarkets; it's the same fare you buy at its "restaurants". The stock closed Tuesday up 7 cents, or 0.17%, at $40.57.

Over the last few years, Dunkin' has done a spectacular job in shaping its brand into an all-day quick-service restaurant. If you listen in to the conference calls, you may have noticed the company executives always refer to the company as being in the "restaurant" business.

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Executives realized a differentiation has occurred between their company and rival Starbucks (SBUX - Get Report), which labels itself as a "coffee shop". This differentiation is key, as both companies are actively targeting the same areas for American expansions. Dunkin' serves a different consumer than Starbucks.

According to Civic Science, these consumers tend to have more children, be older, less health conscious and more conservative. Whereas Starbucks tends to pull the younger, health conscious and liberal crowd.

Fitting with this demographic, Dunkin' has focused its innovation on its distinct menu offerings. Stan Frankenthaler, executive chef and vice president of Innovation, along with his team of talented chefs, have created a deep portfolio of consumer favorites such as the Big N' Toasted, Angus Steak & Egg "Wake Up" wrap and a delicious personal favorite: The new Glazed Donut breakfast sandwich.

The company released more than 70 new products to market last year and is currently testing more than 40 new breakfast offerings here in the U.S. Stan and his team announced at the investor day earlier this month that they have more than 100 products in the pipeline that are set to be rolled out over the next two years. Many of these new products fall into the quick-serve breakfast and lunch category.

The new menu offerings that have hit the market have been received very well so far and over the last few quarters have contributed to rising margins and higher ticket sales. The company has worked hard to pair its coffee products with the offerings to push consumers to explore the menu. The company see's great margins of more than 75% on these products, second behind its coffee category. I expect the company to maintain these margins, even with rising input costs, as the company is making progress logistically.

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