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Summary

  • The stock is fairly valued on 2015 earnings estimates.
  • The company had increased revenue but profit decreased on a GAAP basis.
  • The company blamed severe weather conditions in the North East as the culprit for disrupting traffic into stores.

The last time I wrote about Dunkin' Brands Group Inc. (NASDAQ:DNKN), I stated:

"Due to the bearish momentum, expensive pricing based on earnings growth, and the low dividend yield, I'm not going to be buying a position at this price." Since that article was published the stock is down 12.8% while the S&P 500 (NYSEARCA:SPY) is up 0.92%. Dunkin' 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 24Apr14 and on the surface the results were horrible with the company reporting earnings of $0.33 per share (missing estimates by $0.02) on revenue of $171.9 million (missing estimates by $0.29 million). The stock dropped a whopping 1.89% on the back of earnings against an S&P500 that gained 0.17% that same day. 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)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Franchise fees and royalty income

$ 106,712

$ 119,931

$ 103,765

-11%

3%

Rental income

$ 22,447

$ 23,158

$ 22,432

-3%

0%

Sales of ice cream products

$ 28,671

$ 25,458

$ 23,580

13%

22%

Sales at company-owned stores

$ 6,316

$ 6,715

$ 5,771

-6%

9%

Other revenues

$ 7,802

$ 7,915

$ 6,310

-1%

24%

Total

$ 171,948

$ 183,177

$ 161,858

-6%

6%

At first glance segment revenues are mixed to me as I look at the bottom row. On one side revenues increased 6% from last year, but on the down side revenues decreased 6% from last quarter. Sales of ice cream products increased a whopping 22% from last year due primarily to increased sales in the Middle East and an increase in distribution costs billed to customers. Sales of ice cream products account for 17% of total revenues. Another bright spot is that Other Revenues have increased 24% from last year. To me the segment revenue section of the report was okay.

Income Statement

Income Statement

1Q14

4Q13

1Q13

Q/Q

Y/Y

Revenues

$ 171,948

$ 183,177

$ 161,858

-6%

6%

Occupancy expenses - franchised stores

$ 13,012

$ 13,056

$ 12,776

0%

2%

Cost of ice cream products

$ 19,748

$ 18,091

$ 15,986

9%

24%

Company-owned store expenses

$ 6,363

$ 6,663

$ 5,655

-5%

13%

General and administrative expenses

$ 59,714

$ 53,723

$ 55,577

11%

7%

Depreciation

$ 4,913

$ 5,462

$ 5,848

-10%

-16%

Amortization of other intangible assets

$ 6,405

$ 6,858

$ 6,582

-7%

-3%

Long-lived asset impairment charges

$ 123

$ 116

$ 248

6%

-50%

Total operating costs and expenses

$ 110,278

$ 103,969

$ 102,672

6%

7%

Net income, excluding impairment

$ 3,100

$ 3,173

$ 3,087

-2%

0%

Other operating income, net

$ 4,327

$ (146)

$ 1,186

-3064%

265%

Operating income

$ 69,097

$ 82,235

$ 63,459

-16%

9%

Interest income

$ 69

$ 94

$ 114

-27%

-39%

Interest expense

$ (17,941)

$ (19,712)

$ (20,832)

-9%

-14%

Loss on debt extinguishment and refinancing transactions

$ (13,735)

$ (5,018)

174%

Other gains

$ 27

$ (608)

$ (390)

-104%

-107%

Total other expense

$ (31,580)

$ (20,226)

$ (26,126)

56%

21%

Income before income taxes

$ 37,517

$ 62,009

$ 37,333

-39%

0%

Provision for income taxes

$ 14,689

$ 20,120

$ 13,672

-27%

7%

Net income including non-controlling interests

$ 22,828

$ 41,889

$ 23,661

-46%

-4%

Net loss attributable to non-controlling interests

$ (128)

$ (183)

$ (137)

-30%

-7%

Net income attributable to company

$ 22,956

$ 42,072

$ 23,798

-45%

-4%

Non-GAAP amortization of other intangible assets

$ 6,405

$ 6,858

$ 6,582

-7%

-3%

Non-GAAP long-lived asset impairment charges

$ 123

$ 116

$ 248

6%

-50%

Non-GAAP secondary offering costs

$ -

Non-GAAP Peterborough plant closure

$ -

$ -

$ 397

Non-GAAP tax impact of adjustments, excluding Bertico litigation

$ (8,105)

$ (2,790)

$ (4,898)

191%

65%

Non-GAAP tax impact of Bertico adjustment

$ -

Non-GAAP loss on debt extinguishment and refinancing transactions

$ 13,735

$ 5,018

Non-GAAP income tax audit settlements

$ -

Non-GAAP state tax apportionment

$ 514

$ -

$ -

Adjusted net income

$ 35,628

$ 46,256

$ 31,145

-23%

14%

Less adjusted net income allocated to participating securities

$ -

Adjusted net income available to common shareholders

$ 35,628

$ 46,256

$ 31,145

-23%

14%

Avg. diluted shares outstanding

107,980

108,332

108,158

0%

0%

Earnings per diluted share

$ 0.33

$ 0.43

$ 0.29

-23%

15%

So after seeing an increase in the top line from last year we'd expect to see an increase on the bottom line and we see just that, a 15% increase to be exact. The first expense item which catches my attention is the 24% increase to cost of ice cream products, followed by a 13% increase to company-owned store expenses. After accounting for a 16% drop in depreciation and 50% drop in long-lived asset impairment charges we got a 7% increase in total operating costs. Next we have a 265% increase in other operating income which brings operating income up 9%. Total other expenses increased 21% while provision for income taxes increased 7% as is to be expected when you make that much more money. But all that brought net income attributable to the company to a 4% drop from last year. Then after you factor in some non-GAAP line items we get an adjusted net income value which was 14% higher than last year and helped contribute to the 15% gain in earnings per share.

Balance Sheet

Balance Sheet

1Q14

4Q13

Q/Q

Cash and cash equivalents

$ 202,420

$ 256,933

-21%

Accounts, notes, and other receivables, net

$ 56,552

$ 79,765

-29%

Other current assets

$ 125,752

$ 125,062

1%

Total current assets

$ 384,724

$ 461,760

-17%

Property and equipment, net

$ 177,090

$ 182,858

-3%

Equity method investments

$ 169,307

$ 170,644

-1%

Goodwill and other intangible assets, net

$ 2,335,908

$ 2,343,803

0%

Other assets

$ 69,291

$ 75,625

-8%

Total assets

$ 3,136,320

$ 3,234,690

-3%

Current portion of long-term debt

$ -

$ 5,000

-100%

Accounts payable

$ 11,633

$ 12,445

-7%

Other current liabilities

$ 256,264

$ 326,853

-22%

Total current liabilities

$ 267,897

$ 344,298

-22%

Long-term debt, net

$ 1,813,245

$ 1,818,609

0%

Deferred income taxes, net

$ 557,769

$ 561,714

-1%

Other long-term liabilities

$ 99,306

$ 97,781

2%

Total long-term liabilities

$ 2,470,320

$ 2,478,104

0%

Redeemable non-controlling interests

$ 4,802

$ 4,930

-3%

Total stockholders' equity

$ 393,301

$ 407,358

-3%

Total liabilities, redeemable non-controlling interests, and stockholders equity

$ 3,136,320

$ 3,234,690

-3%

The balance sheet looked liked it was hemorrhaging from last quarter to this. Cash decreased by 21% while accounts receivables decreased 29% bringing total current assets down 17%. Luckily current assets are a small portion of the balance sheet and total assets only decreased 3%. On the other side of the equation we have current liabilities which decreased 22% but total long-term liabilities remained flat.

Conclusion

The company reported earnings which were 15% higher than a year ago on 6% more revenue while the share price was up 0.39% since the last earnings call excluding dividends. These were pretty good results to me and make me want to buy on the dip. The company did say that store traffic was rattled by the severe weather conditions in the Northeast, seeing that this company is concentrated in that region makes me give the company a pass. The results were good to me but investors seem to think they were bad as the stock dropped after reporting. That being said, I think the stock is fairly valued and may be worth a look. With these results the stock is on my team and may get some playing time.

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 Serves Up Mixed Earnings Results