I hold a neutral stance on the company, as the weak balance sheet makes the stock incredibly dependent on continued sales growth. Guidance tells a good story on an adjusted basis, but forecasts for earnings based on generally accepted accounting principles imply relative stagnation.
Dunkin's revenue increased by 2.5% to $359.3 million, while operating income on that revenue increased 7.7% to $122.7 million. That brought the company's operating margins to 34.1% vs. 32.5% a year ago.
Overall system-wide sales increased 3.8%. The main areas of strength remain within the Dunkin' segment of the business, as Baskin-Robins is having some problems. Domestically, Baskin-Robins saw comp sales for the U.S. declined 1.4%; a worsening trend from last year's 0.4% decrease.
U.S. Dunkin' comp store sales, meanwhile, increased 1.7% compared to 1.4% in the second quarter of last year.
In terms of growth rates, international expansion is where it's at: Dunkin' International reported comp sales growth of 5.6% compared to 4% in the second quarter of last year. Internationally, Baskin-Robins also marked a return to comp growth, with a 3.2% increase vs. a 2.5% decrease the same time last year.
Earnings actually experienced a decline on a GAAP basis, with 71 cents per diluted share. That's a 1.4% fall year-over-year. On an adjusted basis, earnings increased 11.7% to 86 cents per diluted share. The disparity stemmed from a $13.1 million "extinguishment" of debt that offset the gains in operating income. Net income was $59.6 million vs. $60.5 million the year prior.
Moving forward, Dunkin' Brands issued some new guidance for the fiscal year 2019. While still expecting single-digit comp store sales growth for Dunkin' stores in the United States, the company iterated guidance of flat- to negative-comp store sales for Baskin Robin's stores domestically.
The other area of change, relative to prior guidance is earnings. Dunkin' is forecasting GAAP earnings of $2.71 to $2.78 per diluted share. That's a slight increase from the previous range of $2.63 to $2.72 per share. On an adjusted basis, the company anticipates earnings of $3.02 to $3.05 per share.
Over the past few years, Dunkin' has struggled to break the $3.00 earning-per-share mark on a GAAP basis. Considering the big premiums asked for the stock, I see a problem there.
Opening at $79.10 this morning, the stock was trading at 25.9-times the high end of adjusted earnings guidance for the full year. I don't see the appeal of paying that kind of forward premium on a company with a deficit on the balance sheet.
Though total equity (or lack thereof) has been improving, Dunkin' Brands still has a total stockholder's deficit of $656.8 million, while the stocks total market capital is an ironic $6.47 billion. It's a lot of money, plain and simple. When you invest in DNKN stock, you're not buying assets at all. You're simply buying ownership in an income statement. Because of this, that income statement has to remain healthy. Dunkin' Brands has no choice but to keep driving growth or this stock could face some serious downside.
It's a stock that has paid off well over the last five years, handily outperforming the broader market., and moving forward, that story could continue. But investors should understand the risk. The lack of a strong balance sheet leaves less of a buffer for the company in the advent of harder times. Subsequently, the stock doesn't have as much protection against tougher times, either. In the competitive industry that Dunkin' operates, that could be a problem someday. Enjoy the returns, but use caution and do your homework on this one.