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.
