Dunkin' Brands Group Inc. (DNKN) and Planet Fitness Inc. (PLNT) reported strong earnings on Thursday. The two names share the same strange dynamic. They're growing sales and earnings at excellent rates, but their debt levels are through the roof. The weakness of the balance sheets leads me to question whether the share prices warrant the premiums they carry.
Dunkin' Brands reported first-quarter results that beat estimates. Revenues increased 5.9% year over year to $319.1 million. The company has done very well in allocating those revenues in a meaningful way. Operating income increased 12.8% to $101.4 million. Adjusted operating income rose 11.1%. Net income increased 4.3% to $52.3 million, while adjusted net income was up 2.8% to $55.9 million. Net income breaks down to $0.63 per share on a diluted basis. That's a 10.5% increase year over year.
Same-store sales were strong in the quarter. U.S. sales for Dunkin' stores and Baskin Robbins stores increased 2.4% and 2.8%, respectively. Global systemwide sales growth was 4.1%.
Dunkin' Brands provided 2019 guidance that seems to imply stagnant earnings year over year on a GAAP basis. Full-year 2019 GAAP earnings per share in the range of $2.63 to $2.72 would mark a weak performance relative to 2018's $2.71 per share. On an adjusted basis, the company expects earnings of $2.94 to $2.99 per share. When gauging a valuation, the stock is currently trading at around 28x forward earnings on a GAAP basis using the conservative low end of guidance.
To me the valuation is a problem. When you look at DNKN's balance sheet, the company is running an equity deficit of $691.2 million. That is a slight decrease from the $712.8 million deficit reported in December, but it still puts a sour note on the financial successes Dunkin' is achieving on the income statement.
How is one to pay a price-to-earnings (P/E) multiple of 28x earnings for a company with so much debt that it creates a deficit? Dunkin's long-term debt of $3 billion is vast relative to its cash position of $458 million. I think DNKN must maintain a consistent growth story or the amount of debt will begin to weigh on investors' minds.
DNKN shares are perched at all-time highs, and I'm not sure I'd call it a "Buy" off of these results. Sales were weak back in the fourth quarter, and Dunkin' relied on higher ticket per transaction to derive revenue growth. Overall, I just don't like the premium asked for a company running a deficit on the balance sheet when there has been some signs of slowing growth.
I've said it many times. It's difficult to find a stock with more consistent and impressive sales and earnings numbers in the past five years than Planet Fitness.
Consequently, the stock has performed exceptionally well, outpacing the S&P 500 by a wide margin. Thursday's first-quarter results were strong in terms of revenue and earnings growth, though earnings were a bit unexciting compared to expectations. Now with PLNT shares sitting near all-time highs, investing in Planet Fitness is a tougher contemplation. The king of gyms -- or the franchising and marketing of them -- has the same ugly picture on its balance sheet.
Revenues increased by 22.7% year over year to $148.8 million. That's a pretty darn good growth rate. Franchise revenue continues to be the main source of cash for Planet Fitness. Revenue from franchises increased 20.4% to $65.8 million. Same-store sales within the segment increased 10.3%. Within the Corporate gym locations, revenues increased 16.3% to $38 million year over year. Equipment sales are doing exceptionally well. New sales, as well as replacement equipment sales, increased 32.3% to $45 million.
It's tough not to like a company that increased net income by 34.7% to $31.6 million. Net income attributable to Planet Fitness broke down to $0.32 per diluted share vs. $0.23 per share last year. On an adjusted basis, the company reported diluted earnings of $0.35 per share.
By all accounts, those are some great numbers. Ironically, the stock fell nearly 10% in after-hours trading and was off more than 5% before Friday's opening bell. Estimates on Morningstar listed expected earnings per share of $0.34. I think the unadjusted earnings beat of $0.01 and the earnings miss on a GAAP basis are disappointing when you consider the premium for the shares as well as the poor balance sheet.
There was a decent decrease in the deficit in total stockholders' equity, but Planet Fitness is still running a total stockholders' deficit of $354 million. Planet Fitness has long-term debt of $1.15 billion. I reiterate the same argument here that I made on Dunkin' Brands. Planet Fitness is an expensive stock with poor equity. For PLNT to keep momentum, there must continual earnings growth, which explains the post-earnings pullback.
This far into a market cycle and at all-time highs on the exchanges, I think it wise to start being a little more cognizant of stocks with weak balance sheets. If something bad were to occur, they're not as prepared. Furthermore, the stocks seem more open to downswings if bad news happens.