• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

Dunkin' Brands Is a 'Hold' at Best

There isn't a lot of wiggle room here. If things start to flatten out, or head south, this stock could show significant downside.
By DAVE BUTLER
Feb 07, 2019 | 11:00 AM EST
Stocks quotes in this article: DNKN

Dunkin' Brands (DNKN) had some okay earnings in the fourth quarter, but weak sales gains combined with some underlying balance sheet issues make the stock price hard to accept. The company's 2019 guidance also inspires little confidence that there are catalysts on the way that can induce large stock price growth.

Total revenue increased 1.5% to $319.6 million in the fourth quarter. With the 4.8% increase in operating income to $96.6 million, DNKN has done a good job of strengthening its margins. Unfortunately, rising interest expenses coupled with a very different tax situation brought Dunkin's net income down 60.5% to $53.2 million. This was largely due to tax benefits experienced last year in the fourth quarter. On an adjusted basis, Dunkin's net income increased 29.8% to $57.3 million. Dunkin' closed out the year with FY revenue growth of 3.6% to $1.32 billion. Operating income increased a strong 5.3% to $411.8 million, while full year net income decreased 15.2%. On an adjusted basis that net income increased 29.2% to $246.3 million.

On an adjusted basis DNKN reported diluted earnings per share of $0.68. That's a 41.7% increase year over year. Adjusted full year earnings were $2.90 per diluted share; a 40.1% increase. I go back and forth on whether or not to accept the "adjusted" profits in relation to the stock's performance. On the one hand, the tax benefit last year does drastically alter the appearance of Dunkin's earnings. At the same time, the company did make less money attributable to shareholders on a GAAP basis. As a whole, I think the company's forward looking guidance provides more in terms of gauging the stock price potential.

DUNKN provided a 2019 full year earnings guidance of $2.74 to $2.83 per GAAP diluted share. That would mean the stock is trading at around 24.3x forward earnings. Does that leave much room for upside? I think not.

Dunkin's underwhelming sales, combined with the disconcerting balance sheet should be too much drag for this stock to run much. DNKN experienced lower traffic in its U.S. stores in the fourth quarter, which was offset by increases in ticket averages. Over the long term increases in pricing can never sustain decreasing traffic. People will only pay so much for coffee. Its Baskin-Robbins stores had comparable U.S. store sales declines of 3.7% in the fourth quarter. Dunkin is running into a situation where it is relying on new store locations to create compensatory growth for weak same store sales. Global sales grew 2.8%, which the company largely attributed to global store development.

Sales guidance for 2019 expects comp store sales growth in the low single digits in the United States. The sales are an area of real concern for me. Dunkin' Brands has spent a lot of money in the past few years to drive its expansion. That financing is really weighing on the balance sheet. Total cash decreased by roughly 50% year over year to $517.59 million, while long term debt remained relatively unchanged at $3.01 billion. In all, the company is running a stockholders' deficit of $712.79 million. The general weakness in equity makes Dunkin' Brands continued growth essential to the health of the stock. There isn't a lot of wiggle room here. If things start to flatten out, or head south, this stock could show significant downside.

Because of the weak balance sheet, I view DNKN as a careful "Hold" or a "Sell". The growth story over the past five years in terms of revenues and earnings has been quite good, but it's marred by an underlying increase in liabilities that have wreaked havoc on the health of the balance sheet. The risk limits the potential for investors to keep driving this one higher.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dave Butler had no position in the securities mentioned.

TAGS: Earnings | Economy | Investing | Stocks | Trading | Food & Drink | Restaurants

More from Investing

Fed Minutes, Rate Hike Odds, Economic Decay, Apple Production, Trading Costco

Stephen Guilfoyle
May 26, 2022 7:16 AM EDT

This is a traders' market until it isn't.

Ralph Lauren: A Suit-able Choice for the Year Ahead

Paul Price
May 26, 2022 7:00 AM EDT

Ralph Lauren shares should wear well -- just like the company's clothes.

When Any News Is Bad News Tune Into the Charts and Indicators Instead

Helene Meisler
May 26, 2022 6:00 AM EDT

How easy it is to follow the market talking heads, but let's be careful of latching onto supposed analysis of 'market participants' and 'market structure' ... whatever those are ...

4 Reasons to Be Cautiously Optimistic About the Tech Sector

Eric Jhonsa
May 25, 2022 5:15 PM EDT

Many tech valuations are now back to 2016 or 2017 levels, and quite a few contrarian indicators point to extreme bearishness.

Forget Hunting for a Bottom, Now Traders Just Want the Pain to Stop

James "Rev Shark" DePorre
May 25, 2022 4:36 PM EDT

No one trusts a bounce to last at this point, and they simply are hoping for some relief from the unpleasant action.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:33 AM EDT PETER TCHIR

    Thoughts Ahead of the Fed Minutes

    Recent economic and earnings issues are convincing...
  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login