Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)  

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 Revenue

Segment Revenues (thousands)

4Q13

4Q12

Y/Y

Franchise fees and royalty income

$ 119,931

$ 109,121

10%

Rental income

$ 23,158

$ 22,957

1%

Sales of ice cream products

$ 25,458

$ 16,376

55%

Sales at company-owned stores

$ 6,715

$ 6,216

8%

Other revenues

$ 7,915

$ 7,033

13%

Total

$ 183,177

$ 161,703

13%

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.

Income Statement

Income Statement

4Q13

4Q12

Y/Y

Revenues

$ 183,177

$ 161,703

13%

Occupancy expenses - franchised stores

$ 13,056

$ 13,275

-2%

Cost of ice cream products

$ 18,091

$ 13,019

39%

Company-owned store expenses

$ 6,663

$ 6,166

8%

General and administrative expenses

$ 53,723

$ 53,024

1%

Depreciation

$ 5,462

$ 6,551

-17%

Amortization of other intangible assets

$ 6,858

$ 6,626

4%

Long-lived asset impairment charges

$ 116

$ 328

-65%

Total operating costs and expenses

$ 103,969

$ 98,989

5%

Net income, excluding impairment

$ 3,173

$ 5,037

-37%

Other operating income, net

$ (146)

$ -

#DIV/0!

Operating income

$ 82,235

$ 67,751

21%

Interest income

$ 94

$ 160

-41%

Interest expense

$ (19,712)

$ (21,725)

-9%

Other gains

$ (608)

$ 495

-223%

Total other expense

$ (20,226)

$ (21,070)

-4%

Income before income taxes

$ 62,009

$ 46,681

33%

Provision for income taxes

$ 20,120

$ 12,491

61%

Net income including noncontrolling interests

$ 41,889

$ 34,190

23%

Net loss attributable to noncontrolling interests

$ (183)

$ (145)

26%

Net income attributable to company

$ 42,072

$ 34,335

23%

Non-GAAP amortization of other intangible assets

$ 6,858

$ 6,626

4%

Non-GAAP long-lived asset impairment charges

$ 116

$ 328

-65%

Non-GAAP secondary offering costs

$ -

$ 9

-100%

Non-GAAP Peterborough plant closure

$ -

$ 5,095

-100%

Non-GAAP tax impact of adjustments, excluding Bertico litigation

$ (2,790)

$ (4,823)

-42%

Non-GAAP tax impact of Bertico adjustment

$ -

$ 979

-100%

Non-GAAP income tax audit settlements

$ -

$ (10,514)

-100%

Non-GAAP state tax apportionment

$ -

$ 4,599

-100%

Adjusted net income

$ 46,256

$ 36,634

26%

Less adjusted net income allocated to participating securities

$ -

$ (1)

-100%

Adjusted net income available to common shareholders

$ 46,256

$ 36,633

26%

Avg. diluted shares outstanding

108,332.0

107,916.0

0%

Earnings per diluted share

$ 0.43

$ 0.34

26%

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.

Balance Sheet

Balance Sheet

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 256,933

$ 252,618

2%

Accounts, notes, and other receivables, net

$ 79,765

$ 53,056

50%

Other current assets

$ 125,062

$ 114,106

10%

Total current assets

$ 461,760

$ 419,780

10%

Property and equipment, net

$ 182,858

$ 181,172

1%

Equity method investments

$ 170,644

$ 174,823

-2%

Goodwill and other intangible assets, net

$ 2,343,803

$ 2,371,684

-1%

Other assets

$ 75,625

$ 70,054

8%

Total assets

$ 3,234,690

$ 3,217,513

1%

Current portion of long-term debt

$ 5,000

$ 26,680

-81%

Accounts payable

$ 12,445

$ 16,256

-23%

Other current liabilities

$ 326,853

$ 310,579

5%

Total current liabilities

$ 344,298

$ 353,515

-3%

Long-term debt, net

$ 1,818,609

$ 1,823,278

0%

Deferred income taxes, net

$ 561,714

$ 569,126

-1%

Other long-term liabilities

$ 97,781

$ 121,619

-20%

Total long-term liabilities

$ 2,478,104

$ 2,514,023

-1%

Redeemable noncontrolling interests

$ 4,930

$ -

#DIV/0!

Total stockholders' equity

$ 407,358

$ 349,975

16%

Total liabilities, redeemable noncontrolling interests, and stockholders equity

$ 3,234,690

$ 3,217,513

1%

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%.

Conclusion

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!

Source: Dunkin' Brands' Earnings Increase 26% Year Over Year, But Is It A Buy?