Dunkin' Brands (DNKN), the company behind the global brands Dunkin' Donuts and Baskin-Robbins, has just released its first-quarter earnings and the stock has reacted by moving lower. Let's break down the report and the company's outlook on the rest of the year to determine if we should be buying on the dip or if we should avoid it and go with a competitor instead, like Krispy Kreme Doughnuts (KKD).
Source: Dunkin' Brands
The quarterly results are out
On April 24, Dunkin' released its first-quarter report for fiscal 2014 and the results disappointed analysts; here's a summary:
| Metric | Reported | Expected |
|---|---|---|
| Earnings Per Share | $0.33 | $0.36 |
| Revenue | $171.90 million | $172.66 million |
Source: Estimize
Dunkin's earnings per share increased 13.8% and revenue increased 6.2% year-over-year, which missed analysts' expectations on both lines; comparable-store sales were a key factor in this weak performance, so here's how the sales broke down by segment:
| Segment | Comparable-Store Sales |
|---|---|
| Dunkin' Donuts U.S. | 1.2% |
| Dunkin' Donuts International | (2.4%) |
| Baskin-Robbins U.S. | 0.5% |
| Baskin-Robbins International | 1.4% |
Source: Dunkin' Brands
Even with Dunkin's weak revenue results, profitability was a bright spot as operating income increased 7% to $75.6 million and the operating margin showed fight, expanding 30 basis points to 44%; this led to ample free cash flow generation, which allowed Dunkin' to repurchase approximately $22 million worth of its common stock during the quarter and announce that it will maintain its quarterly dividend of $0.23, which gives it a yield of about 1.95% at current levels.
Source: Dunkin' Donuts' Twitter
In terms of expansion, Dunkin' opened 96 new locations during the quarter, which included 69 new Dunkin' Donuts locations in the United States. There are now 7,746 Dunkin' Donuts stores in the U.S. and the company reiterated its long-term goal of bringing this number to over 15,000, so it does not appear that this disappointing quarter will derail any of its plans.
Overall, it was a fairly weak quarter for Dunkin' Brands and its Chief Executive Officer, Nigel Travis, responded to the results by stating, "We had a difficult first quarter with our comparable store sales growth in the U.S. significantly affected by severe weather in the regions of the country where most of our Dunkin' Donuts restaurants are located." Hopefully the company is able to right the ship and get back on the high-growth path in the second quarter. With this said, let's see what it expects going forward...
Source: Dunkin' Donuts
What will the rest of 2014 hold?
In the report, Dunkin' Brands reaffirmed its full-year earnings outlook, easing the stomachs of investors after the misses on earnings and revenue; here's what the company expects the year to hold:
- Earnings per share in the range of $1.79-$1.83, an increase of 17%-20% from fiscal 2013
- Revenue growth of 6%-8%
- Dunkin' Donuts U.S. comparable-store sales growth of 3%-4% and Baskin-Robbins U.S. comparable-store sales growth of 1%-3%
- Operating income growth of 10%-12%
- The opening of 380-410 new Dunkin' Donuts locations in the U.S.
- The opening of 300-400 new international locations between its two brands
A warning sign or an opportunity for Krispy Kreme?
Krispy Kreme, one of Dunkin' Brands' largest competitors in the coffee, doughnut, and quick-serve restaurant industry, will release first-quarter results of its own in the coming weeks. Dunkin's report may be a negative indicator or an opportunity for Krispy Kreme to capitalize on, so let's take a look at analysts' expectations and decide which situation is more likely:
| Metric | Expected | Year Ago |
|---|---|---|
| Earnings Per Share | $0.23 | $0.20 |
| Revenue | $126.50 million | $120.63 million |
Source: Estimize
Source: Krispy Kreme's Facebook
These expectations call for Krispy Kreme's earnings per share to increase 15% and revenue to increase 4.9% from the year-ago period. These estimates seem attainable, but with Dunkin' citing bad weather in the United States as a key issue, I believe Krispy Kreme will be affected by this as well; this, paired with the weak comparable-store sales we saw at Dunkin' Donuts' international locations, leads me to believe that Krispy Kreme will miss analysts' expectations on both the top and bottom lines.
In summary, Dunkin's weak earnings report is a negative indicator for Krispy Kreme Doughnuts and investors should steer clear of a new investment in it today. Dunkin' Brands represents a much better long-term opportunity, even with the short-term weakness we may see, so you should not even consider settling with Krispy Kreme.
The Foolish bottom line
Dunkin' Brands has just disappointed analysts and investors with its earnings miss, but I think the decline in its shares will only be a short-term issue. Foolish investors should monitor the stock going forward and consider buying if it falls more than 5%, where it would represent a great value, high-growth, and dividend opportunity.
