Mixed Results and a Reduced Outlook Sent Dunkin's Shares Tumbling; Is This a Buying Opportunity?

Dunkin' Brands (NASDAQ: DNKN  ) , the global quick-serve restaurant company behind the Dunkin' Donuts and Baskin-Robbins brands, announced its second-quarter earnings on July 24. The results sent its shares plummeting more than 4.4% in the trading session, and they reached new 52-week lows in the process. Let's break down the company's quarterly results and outlook on the rest of 2014 to determine whether this decline is our opportunity to buy or if it's a warning sign to stay far away from the stock.

Source: Dunkin' Donuts

The lackluster quarterly results
Dunkin' Donuts released its second-quarter report before the market opened on July 24 and the results came in mixed in comparison with analyst expectations; here's an overview of the key financial statistics: 

Metric Reported Expected Year Ago
Earnings Per Share $0.47 $0.47 $0.41
Revenue $190.91 million $198.70 million $182.49 million

Source: Estimize

Earnings per share increased 14.6% and revenue increased 4.6% year-over-year, as comparable-store sales increased just 1.8% at Dunkin' Donuts locations in the United States and decreased 3.1% internationally. Baskin-Robbins showed strong growth in the United States, with comparable-store sales increasing 4.2%, but it too saw a decline internationally with comparable-store sales decreasing 1.6%.

Dunkin's operating income increased 14% to $87.56 million and its operating margin showed fight, expanding a very impressive 380 basis points to 45.9%; this expansion resulted from general and administrative expenses decreasing 10.5%, depreciation and amortization expense decreasing 6%, and company-owned restaurant expenses decreasing 17.4% as its revenue for the quarter grew 4.6%. 

Source: Baskin-Robbins

For the quarter, Dunkin's net cash provided by operations totaled $58.06 million and it reported $6.12 million in capital expenditures, which resulted in $51.94 million in free cash flow. The company used this free cash and the $202.42 million in cash and cash equivalents it had on hand to begin the quarter to repurchase 1.26 million shares of its common stock for approximately $59.01 million and pay out approximately $24.24 million in dividends.

Dunkin' reported $176.38 million in cash and cash equivalents at the end of the quarter, so it will likely continue to repurchase shares in the second half, maybe even at an accelerated pace following the decline in its shares. It already announced that it will maintain its quarterly dividend of $0.23 and pay it out on September 3.

Lastly, in terms of expansion, Dunkin' added 151 net new restaurants during the quarter, which included 75 Dunkin' Donuts locations in the United States, 47 international Baskin-Robbins locations, 17 international Dunkin' Donuts locations, and 12 Baskin-Robbins locations in the United States. The company now has 18,405 restaurants worldwide, which is a 4.4% increase from the 17,627 it had at the end of the same period a year ago.

Overall, it was a very disappointing quarter for Dunkin' Brands. Nigel Travis, its Chairman and CEO, stated that the company believed the weak performance resulted from "macroeconomic challenges facing consumers" and "an unseasonably cold, rainy start to the spring season." This was the second consecutive quarter in which the company has missed expectations and blamed the weather, so needless to say, it was a very bad first half.

Source: Dunkin' Brands

What will the remainder of the year hold?
In the report, Dunkin' piled onto the negativity of its revenue miss by reducing its full-year outlook on fiscal 2014. Here's a breakdown of the company's new outlook versus its previous one:

Metric New Outlook Previous Outlook
Earnings Per Share $1.73-$1.79 $1.79-$1.83
Earnings Per Share Growth 13.1%-17% 17%-19.6%
Revenue Growth 5%-7% 6%-8%
Dunkin' Donuts U.S. Comp.-Store Sales Growth 2%-3% 3%-4%
Operating Income Growth 7%-9% 10%-12%

Source: Dunkin' Brands

Dunkin' added that it continues to anticipate the following:

  • Comparable-store sales growth of 1%-3% at Baskin-Robbins locations in the United States
  • 380-410 net new Dunkin' Donuts restaurants in the United States
  • Five-10 net new Baskin-Robbins restaurants in the United States
  • 300-400 net new restaurants internationally between both brands
  • 685-800 net new restaurants globally

Even though an outlook reduction is one of the most negative moves a company can make, investors must realize that this revised outlook still calls for significant growth from fiscal 2013 and the company's expansion plans will set it up for continued growth going forward. 

Source: Dunkin' Donuts

The Foolish Takeaway
With both the quarterly results and outlook in hand,it seems that the sell-off in Dunkin' Brands' stock was warranted; however, I also believe that this weakness is a buying opportunity for long-term investors because after the sharp 4.42% decline, the stock trades at just 20 times forward earnings and sports a bountiful 2.2% dividend. Also, it's a great sign that the company's weak performance in the first half did not deter its expansion plans, so it will remain one of the fastest-growing companies in the quick-serve restaurant industry.

With all of this being said, Foolish investors would be wise to take a closer look at Dunkin' Brands as its long term potential far outweighs any short-term negativity. 

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