Dunkin' Brands (DNKN) was one of the best-performing stocks in 2013 and earnings played a primary role in its run higher. It has just released its first earnings report of 2014, which was for the fourth-quarter of 2013, and it has caused shares to rally more than 7%. Let's take a look at the results and find out if we should buy Dunkin' right now or if we should wait for the stock to come down a bit.
The brand family
Dunkin' Brands owns, operates, and franchises quick-service restaurants under the Dunkin' Donuts and Baskin-Robbins brands. Dunkin' Donuts is one of the world's largest coffee and baked-goods restaurants and Baskin-Robbins is the world's largest specialty ice cream chain. The company is nearly 100% franchised, which gives it the competitive advantage of being asset-light.
The earnings report
Dunkin' released its fourth-quarter report for fiscal 2013 on Feb. 6, and the results either met or exceeded analyst expectations. Here's a breakdown of the report:
|Earnings per share||$0.43||$0.43|
|Revenue||$183.20 million||$183.13 million|
Earnings per share increased 26.5% and revenue rose 13.3%; this was all driven by the Dunkin' Donuts brand, which saw comparable-store sales growth of 3.5% in the United States. Operating income increased 11.8% to $89.2 million, as the company expanded its operating margin 110 basis points to 48.7%. During the quarter, 309 new restaurants were opened worldwide, which included 149 net new Dunkin' Donuts locations in the United States. All of these statistics are fantastic, but the highlight came when the board of directors announced a few things...
In the report, Dunkin's board announced a dividend increase and a share repurchase authorization, effective immediately. The quarterly dividend increased by 21.1% from $0.19 to $0.23, which gives Dunkin' a yield of roughly 1.9% on an annualized basis. The company also approved a $125 million share repurchase program; this will reduce the amount of shares outstanding, which will increase earnings per share and make the remaining shares more valuable. These are two of the most bullish moves a management team can make, and I believe they prove that the company is fully dedicated to maximizing shareholder value.
The year ahead
In the report, Dunkin' also gave updated guidance for fiscal 2014. Here are the key targets:
- Earnings per share of $1.79-$1.83, an increase of 17%-20% from fiscal 2013
- Revenue growth of 6%-8%
- Operating income growth of 10%-12%
- The opening of 380-410 new Dunkin' Donuts locations in the U.S.
- 300-400 new international locations between the two brands
This would represent yet another record-setting year for the company and I am fully confident that its brand strength will allow it to perform accordingly. This growth will support the price appreciation of the stock and allow it to rise to fresh all-time highs. I believe this guidance was one of the primary reasons shares rose over 7% following the report.
An industry on the rise
Starbucks (SBUX -0.21%), Dunkin's most popular competitor in the coffee and quick-serve restaurant industry, released an earnings report of its own just weeks ago. The results made for the best first quarter in the company's history:
|Earnings per share||$0.71||$0.69|
|Revenue||$4.24 billion||$4.29 billion|
Starbucks' earnings per share increased 24.6% and revenue increased 11.8% year over year, driven by global comparable-store sales growing by 5%. Starbucks also improved its operating margin while opening more than 400 locations as it surpassed the milestone of 20,000 stores worldwide. This record-setting performance, paired with Dunkin's strong quarter, shows that the industry as a whole is growing and the companies have momentum on their side. I believe this strongly indicates a buying opportunity and both stocks are very inexpensive based on forward estimates, so investors can take their pick here.
The Foolish bottom line
Dunkin' Brands is a global powerhouse that has just reported a great quarter. Its earnings were in line and its revenue was above expectations, and the company added to the bullish sentiment by increasing its dividend and announcing a share repurchase program. I believe Dunkin' Brands is well-positioned to outperform the overall market in 2014, and that investors should strongly consider initiating positions in the stock right now.