Dunkin'(DNKN) Down 10.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Dunkin' Brands (DNKN). Shares have lost about 10.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Dunkin'due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Dunkin' Brands Q4 Earnings & Revenues Beat Estimates

Dunkin' Brands Group, Inc. reported fourth-quarter fiscal 2019 results, with earnings and revenues surpassing the Zacks Consensus Estimate. The top and the bottom line also grew year over year, buoyed by solid segmental growth and decline in G&A expenses.

However, the company provided weak fiscal 2020 guidance. Dunkin’ Brands’ projects $60-million high-volume brewer investment that will reflect in the operating income growth, which is anticipated at the low end of the guidance.

Its adjusted earnings of 73 cents per share surpassed the consensus mark of 70 cents by 4.3%. The bottom line also improved 7.4% on a year-over-year basis, driven by increase in royalty income and reduced expense, partially offset by lower franchise fees.

Revenues were up 5.1% year over year to $335.9 million, which beat the consensus mark of $335 million by 0.3%. The top-line improvement can be attributed to a rise in system-wide sales at Dunkin’ U.S. and rental income growth. The revenue growth was partially offset by a decline in franchise fees as well as sales of ice cream and other products.

Segmental Performance

Dunkin' U.S. reported revenues of $163.4 million, up 7.3% from the prior-year quarter’s figures. Comps also grew 2.8% in the quarter, marking it the highest quarterly comps growth in past six years. The upside backed by espresso and cold brew sales coupled with the successful launch of the Beyond Sausage Sandwich and sustained performance of its national value platforms.

Dunkin’ International division reported revenues of $5.7 million, up 4% from the prior-year quarter’s level. Additionally, comps rose 6.9% compared with 1.1% gain in the year-ago quarter.

Baskin-Robbins U.S. revenues inched up 1.3% from the prior-year quarter’s figure to $9.2 million. Comps also rose 4.1% against 3.7% loss reported in the year-ago quarter.

Baskin-Robbins International division revenues amounted to $23.1 million, down 4.9% year over year. However, comps rose 3.2% compared with 1.5% growth in the year-ago quarter.

Operating Performance

Adjusted operating income rose 8.1% from the year-ago quarter’s level to $110.5 million, mainly owing to rise in royalty as well as decline in general and administrative expenses. This was offset by decline in franchise fees. Adjusted operating income margin expanded 90 basis points (bps) to 32.9%.

Balance Sheet

Dunkin' Brands ended fourth-quarter fiscal 2019 with cash and cash equivalents of $621.2 million compared with $517.6 million at the end of 2018. Restricted cash totaled $85.6 million, up from $79 million as of Dec 29, 2018. Long-term debt was approximately $3 billion.

In fiscal fourth quarter, the company returned $36 million to shareholders, of which $31.1 million was returned through dividends and $4.9 million through repurchases of approximately 65,000 shares. As of Dec 28, 2019, it had 82,834,830 shares outstanding. Moreover, its board of directors announced a 7.3% increase in quarterly cash dividend of 40.25 cents per share, payable on Mar 18, to shareholders of record as of Mar 9, 2020. Also, it approved a new share repurchase program of up to $250 million of common stock.

2019 Highlights

In 2019, total revenues amounted to $1,370.2 million, up 3.7% year over year. Adjusted earnings per share for the year ended Dec 28, 2019 was reported at $3.17, 9.3% up from $2.90 as on Dec 29, 2018. Adjusted operating income margin improved 140 bps to 34.3% compared with 32.9% as on Dec 29, 2018.

2020 Guidance

Dunkin' Brands’ expects to open 200-250 net new Dunkin' U.S. units, which will contribute more than $140 million to its system-wide sales. The company expects low-single digit comps growth for Dunkin' U.S. as well as for Baskin-Robbins U.S. The company expects to close approximately 25 net units of Baskin-Robbins U.S. franchisees, owing to the strategic initiative to optimize its store base. It expects low to mid-single-digit revenue growth.

Fiscal 2020 operating and adjusted operating income growth is expected at mid-single digit. General and administrative expenses are likely to grow low-single digit. Full year effective tax rate is estimated at approximately 27% and net interest expense of nearly $121 million. Also, it projects capital expenditures of roughly $40 million. Adjusted earnings per share are expected in the range of $3.16-$3.21. Meanwhile, the company reiterates its previously announced long-term targets (through fiscal 2021).

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

Currently, Dunkin' has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Dunkin'has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.