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Dunkin'(DNKN) Up 4.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Dunkin' Brands (DNKN). Shares have added about 4.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dunkin'due for a pullback? 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 Beats Q2 Earnings Estimates, Revenues Lag

Dunkin’ Brands reported mixed results for the second quarter of 2019, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. Notably, the reported quarter marked the seventh straight quarter of an earnings beat.

The company’s adjusted earnings of 86 cents per share surpassed the consensus estimate of 82 cents by 4.9%. The bottom line also improved 11.7% on a year-over-year basis, driven by rise in net income.

Revenues were up 2.5% year over year to $359.3 million but missed the consensus mark of $361 million. The top line improved, primarily owing to rise in royalty income from higher system-wide sales of Dunkin’ U.S., and rental income growth. Revenues were partially offset by a decline in advertising fees and related income.

The company’s global system-wide sales rose 3.8% from the prior-year quarter. Its system-wide sales were favored by global store development, and comps growth at Dunkin’ U.S. and Dunkin’ International.

Segmental Performance

Dunkin' Brands operates through Dunkin’ and Baskin-Robbins brands.

Dunkin' U.S. reported revenues of $166.6 million, which reflect an improvement of 5.8% from the prior-year quarter. This upside can be attributed to higher royalty income, driven by system-wide sales growth and increase in rental income, offset by a decrease in franchise fees. Comps also grew 1.7% in the second quarter of 2019, owing to rise in average ticket, which was partially offset by a decrease in traffic.

Dunkin’ International division reported revenues of $7.5 million, mirroring gain of 42.1% from the prior-year quarter. The improvement was primarily backed by rise in royalty income and franchise fees. Additionally, comps rose 5.6% compared with 4% gain in the year-ago quarter.

Baskin-Robbins U.S. revenues grew 1.3% from the prior-year quarter to $10.3 million, owing to rise in ice cream sales and rental income, offset by a decrease in royalty income, driven by a systemwide sales decline as well as a decrease in other revenues.  Comps fell 1.4% compared with a 0.4% decline recorded in the year-ago quarter.

Baskin-Robbins International division revenues were $32.7 million, marking a year-over-year decrease of 3.9% due to a decline in sales of ice cream and other products, and low royalty income, offset by franchise fees. However, comps grew 3.2% against a fall of 2.5% in the year-ago quarter.

Operating Performance

Adjusted operating income rose 6.2% from the year-ago quarter to $127.3 million, mainly owing to increase in royalty income and other operating income. Adjusted operating income margin expanded 120 basis points to 35.4%.

Balance Sheet

Dunkin' Brands exited the second quarter of 2019 with cash and cash equivalents of $474.3 million compared with $517.6 million at the end of 2018. Restricted cash totaled $88.6 million, up from $79 million as of Dec 29, 2018. Long-term debt was approximately $3 billion.

2019 Guidance

The company expects adjusted earnings of $3.02-$3.05 per share, up from $2.94-$2.99 per share mentioned earlier. The Zacks Consensus Estimate for its earnings in 2019 is pegged at $3, in line with the mid-point of Dunkin' Brands’ guided range.

The company expects low to mid-single-digit revenue growth, with Dunkin’ U.S. and Baskin-Robbins U.S’ comps improving in a low-single digit. It expects to open at the low end of 200-250 net new Dunkin' U.S. units.

How Have Estimates Been Moving Since Then?

Estimates review followed an upward path over the past two months.

VGM Scores

Currently, Dunkin' has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Dunkin'has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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