Is Dunkin' About to Fall Short This Quarter?

On Thursday, Feb. 6, Dunkin' Brands Group (NASDAQ: DNKN  ) , the parent company of Baskin-Robbins and Dunkin' Donuts, is due to report earnings for the fourth quarter of its 2013 fiscal year. Heading into earnings, investors are wise to ask what is expected and how strong the company's financials are. This is especially true when considering that the company's shares are trading at a pricey 30 times earnings.

Mr. Market's expectations are quite high
For the quarter, analysts expect Dunkin' to report revenue of $178.5 million. If this forecast turns out to be right, it would mean that revenue has grown 10% compared to the $161.7 million that management reported for the same quarter a year earlier.

In terms of earnings per share, analysts are estimating that Dunkin' should report $0.40 for the quarter. This would represent a 25% increase over the $0.34 the company reported in the fourth quarter of 2012. The disparity between revenue growth and net income growth for the company would be due, in part, to the rise in revenue but might also be chalked up to a decline in its number of shares outstanding.

But has Dunkin' exhibited growth or are these estimates a shot in the dark?
As Foolish investors, our goal should be to invest for the long run, not gamble on a single earnings release. So, to see how sensible an investment like Dunkin' is, it's imperative to see how well it has performed over the past few years.

Over the past four years, Dunkin's revenue growth has been fairly strong. Between 2009 and 2012, revenue rose by 22%, from $538.1 million to $658.2 million. For the most part, management has attributed the rise in revenue these past few years to a jump in royalties derived from its franchised locations. For instance, between 2011 and 2012 alone, the company saw a 5% rise in its royalties, slightly higher than the rise in the company's consolidated revenue.

Looking at net income, Dunkin' has grown at an amazing rate. Between 2009 and 2012, the company's bottom line rose 209%, from $35 million to $108.3 million. In addition to higher sales, Dunkin' benefited from lower interest expense and a slight reduction in its cost of goods sold and selling, general, and administrative expenses as a percentage of sales. Over this time horizon, the company saw its cost of goods sold decline from 18.5% of sales to 17.4%, while its SG&A expenses notched a little lower, from 36.6% of sales to 36.4%.

But how have other coffee companies, like Starbucks (NASDAQ: SBUX  ) and Green Mountain Coffee Roasters (NASDAQ: GMCR  ) , performed over this time frame? In terms of revenue growth, they both significantly outperformed Dunkin'. Starbucks, for instance, saw its top line rise an impressive 36%, from $9.8 billion in 2009 to $13.3 billion in 2012, significantly outpacing Dunkin's performance. Green Mountain did even better. Over the same time frame, the company saw its revenue skyrocket by 391%, from $786.1 million to $3.9 billion. Through their 2013 fiscal year, both Starbucks and Green Mountain continued to grow, with their top lines rising by 12% and 13%, respectively.

From a profitability perspective, the picture for both of these companies looks even better. Over the past four years, Starbucks saw its net income rise by 254%, from $390.8 million to $1.38 billion. As with Dunkin', the disparity was due to a decline in costs relative to sales. Its cost of goods sold, for instance, fell from 44.2% of sales to 43.7%, while its SG&A expenses plummeted from 39.7% of sales to 35.5%.

In its 2013 fiscal year, the company's net income fell 99% to $8.3 million, but this was due to a legal ruling in favor of Kraft involving an alleged breach of contract. As such, this is likely a one-time expense that shouldn't impact the company's performance moving forward.

If you thought Starbucks experienced strong growth, then I suggest you take a seat, because Green Mountain's performance was even more impressive. Over the past four years, net income at Green Mountain grew a jaw-dropping 567%, from $54.4 million to $362.6 million. Just like Starbucks and Dunkin', the company benefited from its rising revenue, but it also saw its cost of goods sold fall from 68.6% of sales to 67.1% while its SG&A expenses fell from 21.2% of sales to 18.2%. This, too, has continued into 2013, with the company's bottom line growing another 33% to $483.2 million.

Foolish takeaway
As we can see, Mr. Market has fairly high expectations for Dunkin', but given its historic performance, it doesn't seem too far out of the question for the company to continue its impressive growth. While this does mean that Dunkin' could be an attractive long-term investment, shareholders should be mindful of the high P/E it sports and of the fact that both Starbucks and Green Mountain have had a stronger track record.

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