Dunkin' Serves Up Lower Fiscal Year Guidance On Second Quarter Earnings

Jul.28.14 | About: Dunkin' Brands (DNKN)

Summary

The company reported revenue and earnings which increased from last year.

The company however did lower guidance for the rest of the fiscal year on revenue and earnings.

I believe the stock to be fairly valued on 2015 earnings estimates.

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

"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." Dunkin' didn't really get much playing time between now and the last time I wrote about it as I only purchased one small batch in that span. Since that article was published the stock is down 7.55% while the S&P 500 (NYSPY) is up 5.03% in the same timeframe. 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 24Jul14 and on the surface the results were not that great with the company reporting earnings of $0.47 per share (in-line with estimates) on revenue of $190.9 million (missing estimates by $7.74 million). The stock dropped 4.41% the day it reported earnings and 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)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Franchise fees and royalty income

15%

8%

$122,267

$106,712

$112,794

Rental income

14%

2%

$25,633

$22,447

$25,055

Sales of ice cream products

12%

-2%

$32,044

$28,671

$32,809

Sales at company-owned stores

-25%

-24%

$4,736

$6,316

$6,240

Other revenues

-20%

11%

$6,228

$7,802

$5,590

Total

11%

5%

$190,908

$171,948

$182,488

Click to enlarge

At first glance segment revenues are looking pretty good to me as I look at the bottom row. Revenues increased 5% from last year and a whopping 11% from last quarter. The one problematic item in the segment revenues was the 24% drop in sales at company-owned stores, but this particular segment only accounts for 2.5% of total revenues. I don't think it's a big deal because the decrease was due to the parent company selling off all the company-owned stores in the Atlanta market early in the quarter. There was an 11% increase in other revenues from last year but the company didn't provide any insight as to how the increase happened, but it also doesn't really matter because other revenues only account for 3.3% of total revenues.

Income Statement

Income Statement

Q/Q

Y/Y

2Q14

1Q14

2Q13

Revenues

11%

5%

$190,908

$171,948

$182,488

Occupancy expenses - franchised stores

4%

6%

$13,560

$13,012

$12,820

Cost of ice cream products

16%

-5%

$22,995

$19,748

$24,302

Company-owned store expenses

-23%

-17%

$4,904

$6,363

$5,940

General and administrative expenses

-6%

-10%

$56,381

$59,714

$62,978

Depreciation

0%

-11%

$4,930

$4,913

$5,522

Amortization of other intangible assets

0%

-3%

$6,384

$6,405

$6,565

Long-lived asset impairment charges

325%

389%

$523

$123

$107

Total operating costs and expenses

-1%

-7%

$109,677

$110,278

$118,234

Net income, excluding impairment

31%

-15%

$4,048

$3,100

$4,782

Other operating income, net

-47%

-71%

$2,278

$4,327

$7,769

Operating income

27%

14%

$87,557

$69,097

$76,805

Interest income

0%

-24%

$69

$69

$91

Interest expense

-6%

-15%

$(16,823)

$(17,941)

$(19,886)

Loss on debt extinguishment and refinancing transactions

-100%

N/A

N/A

$(13,735)

N/A

Other gains

-519%

-86%

$(113)

$27

$(813)

Total other expense

-47%

-18%

$(16,867)

$(31,580)

$(20,608)

Income before income taxes

88%

26%

$70,690

$37,517

$56,197

Provision for income taxes

68%

60%

$24,719

$14,689

$15,487

Net income including noncontrolling interests

101%

13%

$45,971

$22,828

$40,710

Net loss attributable to noncontrolling interests

72%

116%

$(220)

$(128)

$(102)

Net income attributable to company

101%

13%

$46,191

$22,956

$40,812

Non-GAAP amortization of other intangible assets

0%

-3%

$6,384

$6,405

$6,565

Non-GAAP long-lived asset impairment charges

325%

389%

$523

$123

$107

Non-GAAP third party product volume guarantee

N/A

-104%

$(300)

N/A

$7,500

Non-GAAP Peterborough plant closure

N/A

-100%

N/A

N/A

$191

Non-GAAP tax impact of adjustments, excluding Bertico litigation

-67%

-54%

$(2,643)

$(8,105)

$(5,745)

Non-GAAP loss on debt extinguishment and refinancing transactions

-100%

N/A

N/A

$13,735

N/A

Non-GAAP income tax audit settlements

N/A

-100%

N/A

N/A

$(8,417)

Non-GAAP state tax apportionment

-100%

-100%

N/A

$514

$2,868

Adjusted net income

41%

14%

$50,155

$35,628

$43,881

Adjusted net income available to common shareholders

41%

14%

$50,155

$35,628

$43,881

Avg. diluted shares outstanding

-1%

-1%

107,186

107,980

108,211

Earnings per diluted share

42%

15%

$0.47

$0.33

$0.41

Click to enlarge

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 17% decrease to company-owned store expenses, followed by a 10% decrease to general and administrative expenses. After accounting for an 11% drop in depreciation and 389% increase in long-lived asset impairment charges we got a 7% decrease in total operating costs. Next we have a 15% decrease in net income and 71% decrease in other operating income which brings operating income up 14%. Interest income however decreased 24%, but interest expenses decreased 15%, and other gains decreased 86%, helping drop total other expenses by 18%. Provisions for income taxes increased 60% as one would expect an increase because of increased revenues, and because of that we saw net income attributable to the company have a 13% increase when compared to last year. After taking into account all the non-GAAP items, adjusted income increased 14%, and the 1% share reduction helped keep earnings per share up 15% from last year.

Balance Sheet

Balance Sheet

Q/Q

2Q14

1Q14

Cash and cash equivalents

-13%

$176,381

$202,420

Accounts, notes, and other receivables, net

21%

$68,558

$56,552

Other current assets

-12%

$111,256

$125,752

Total current assets

-7%

$356,195

$384,724

Property and equipment, net

1%

$178,361

$177,090

Equity method investments

4%

$175,677

$169,307

Goodwill and other intangible assets, net

0%

$2,329,463

$2,335,908

Other assets

-6%

$64,795

$69,291

Total assets

-1%

$3,104,491

$3,136,320

Accounts payable

8%

$12,535

$11,633

Other current liabilities

1%

$259,345

$256,264

Total current liabilities

1%

$271,880

$267,897

Long-term debt, net

0%

$1,808,679

$1,813,245

Deferred income taxes, net

-1%

$550,541

$557,769

Other long-term liabilities

4%

$103,166

$99,306

Total long-term liabilities

0%

$2,462,386

$2,470,320

Click to enlarge

The balance sheet looked liked it was hemorrhaging from last quarter to this. Cash decreased by 13% while accounts receivables increased 21% bringing total current assets down 7% from last quarter. Luckily current assets are a small portion of the balance sheet and total assets only decreased 1%. On the other side of the equation we have current liabilities which increased 1% but total long-term liabilities remained flat.

Conclusion

The company boosted the earnings per share by 15% thanks in part to the 1% reduction in outstanding shares. But I don't believe that the share reduction was necessary because they already had earnings beat, and because I believe the value of the stock to be fairly valued on 2015 earnings estimates.

The company reported earnings which were 15% higher than a year before on 5% more revenue while the share price was down 10.01% between earnings calls. I definitely love that both revenue and earnings were up on a yearly basis. The results were great to me, but investors seem to think the results were horrible as the stock dropped 4.41% after reporting while the S&P500 increased in value by 0.05%.

The company showed that it can generate great earnings and decrease costs simultaneously. This is a quarter where I believe investors had much higher expectations for revenue totals and hence the drop in the stock. I'm starting to get concerned about the consumer though, not just in this stock, but in the entire economy as a whole. Same store sales increased 1.8% stateside at the namesake stores, while traffic increased 4.2% at Baskin-Robbins stores. Off our shores is where the problems were, with same store sales falling 3.1% at the namesake shops and dropping 1.6% at Baskin-Robbins. The company did state that the weather was unusually cruel at the early part of the quarter but as the weather related issues started to ease, the traffic through the stores started to increase. On the downside the company did cut its fiscal year targets, with EPS projected at $1.73 to $1.77 from the prior $1.73 to $1.83. Revenue growth is projected to be 5% to 7% versus prior estimates of 6% to 8%. I believe this to be the only downside for the quarter, but since I believe in paying for forward earnings, I don't like the projections either. This earnings report earns a C, but the stock is getting interesting at these levels.

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: The author is long DNKN, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.