Dunkin' Brands Group (NASDAQ:DNKN) is a franchiser of quick service restaurants serving hot and cold coffee and baked goods, as well as hard serve ice cream in the form of Dunkin' Donuts and Baskin-Robbins, respectively. The company reported earnings before the market opened on 06Feb14 and on the surface everything looked great with the company reporting earnings of $0.43 per share (beating estimates by $0.03) on revenue of $183.17 million (beating estimates by $4.67 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.
Segment Revenues (thousands)
Franchise fees and royalty income
Sales of ice cream products
Sales at company-owned stores
Compared to last year total revenue has increased by 13%. Things of interest to me are the 55% increase in sales of ice cream products (which accounts for 14% of total revenues) and 13% increase in other revenues (which accounts for 4% of total revenues). The increase in sales of ice cream products was due to a one-time delay in revenue recognition related to the shift in manufacturing at Dean Foods (NYSE:DF) that negatively impacted fourth quarter sales of ice cream products in 2012. I would look for this value to decrease as time progresses. Other revenue gains were a result of re-franchising gains and transfer fees. Even if we took down the sale of ice cream products from last quarter to $17,000 we'd still get a respectable 8% increase in revenues from the prior year; this would be due to the outstanding gains in franchise fees and royalty income which account for 65% of revenues.
Occupancy expenses - franchised stores
Cost of ice cream products
Company-owned store expenses
General and administrative expenses
Amortization of other intangible assets
Long-lived asset impairment charges
Total operating costs and expenses
Net income, excluding impairment
Other operating income, net
Total other expense
Income before income taxes
Provision for income taxes
Net income including noncontrolling interests
Net loss attributable to noncontrolling interests
Net income attributable to company
Non-GAAP amortization of other intangible assets
Non-GAAP long-lived asset impairment charges
Non-GAAP secondary offering costs
Non-GAAP Peterborough plant closure
Non-GAAP tax impact of adjustments, excluding Bertico litigation
Non-GAAP tax impact of Bertico adjustment
Non-GAAP income tax audit settlements
Non-GAAP state tax apportionment
Adjusted net income
Less adjusted net income allocated to participating securities
Adjusted net income available to common shareholders
Avg. diluted shares outstanding
Earnings per diluted share
Looking at the income statement at first glance is very appealing as you look at the bottom line and notice that earnings increased by 26% from last year; I'd like to sift through the income statement to see why that was the case. The first thing I notice is the 39% increase in the cost of ice cream products. Next we see a 17% decrease in depreciation (which was due to accelerated depreciation costs in the fiscal year ending 29Dec12) and a 65% decrease in long-lived asset impairment charges which brought total operating costs and expenses to a 5% increase over the prior year. Next I see a 37% decrease in net income excluding impairments which helped increase operating income a whopping 21%. Interest income then decreased by 41% while other gains decreased by 223% bringing Income before income taxes to an astounding increase of 33% from last year. Provision for income taxes increased 61% for obvious reasons of income increasing by as much as 33% bringing net income including noncontrolling interests to a 23% gain. Noncontrolling interests increased 26% and brought net income attributable to the company to a gain of 23%. Once you take into consideration the non-GAAP measures adjusted net income comes to a 26% increase, helping overall earnings per diluted share increase an astounding 26% from the prior year.
Cash and cash equivalents
Accounts, notes, and other receivables, net
Other current assets
Total current assets
Property and equipment, net
Equity method investments
Goodwill and other intangible assets, net
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, net
Deferred income taxes, net
Other long-term liabilities
Total long-term liabilities
Redeemable noncontrolling interests
Total stockholders' equity
Total liabilities, redeemable noncontrolling interests, and stockholders equity
On the current asset side of things receivables increased 50% bringing total current assets up a whole 10%. On the whole, total assets only increased 1%. On the debt side of things, the current portion of long-term debt decreased 81% while accounts payable decreased 23% bringing total current liabilities down 3%. Other long-term liabilities decreased 20% bringing total long-term liabilities down 1%. Stockholders' equity increased an astounding 16% in order for the equation to balance out and bring total liabilities plus shareholders equity up 1%.
The company reported earnings which were 26% higher than a year before on 13% more revenue while the share price was up 32.33% in the past year excluding dividends. The large increase in earnings was due primarily to the large increase in revenue. The share count actually increased negligibly and didn't drive earnings at all. I love the quality of the earnings really because the increase in revenue. On a fundamental basis I believe this company is fairly valued with respect to 2014 earnings. The stock was up 3.36% after reporting earnings in the face of an S&P500 which gained 1.24%. Although the company barely beat the analyst estimates the earnings per share were much more than last year. In my last article I stated that I felt I could get a pull back and that if I did that I would be all over the stock like sprinkles on a chocolate donut. Sure enough, I got a pull back and I pulled the trigger and am now reaping the rewards. I believe this is an excellent name to be in and will continue buying shares on any dip. The company also did give us a 21.1% increase in the dividend!
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: I am long DNKN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.