Impairment Charges Brought Down Dunkin’ Brands’ 4Q15 EBITDA Margins



DNKN’s EBITDA margins

Dunkin’ Brands’ EBITDA (earnings before interest, tax, depreciation, and amortization) margins fell to 27.4% in 4Q15 from 52.6% in the corresponding quarter of 2014. The sharp decline in EBITDA margins was due to the impairment of investments of $54.3 million on its joint venture in Japan. The impairment is a one-time event, and the adjusted EBITDA margin for 4Q15 was 56.7%.

The company management claimed that the Baskin-Robbins business had been disappointing for a couple of years in Japan. This underperformance along with various other factors forced the company to report its investments in the joint venture as impairments. Also, the increase in G&A (general and administrative) costs and net losses from company-operated restaurants caused the decline of EBITDA margins. The increases in royalty income, franchises, licensing fees from K-cups, and transfer fees offset some of these losses.

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The diluted earnings per share declined by $0.6 to a loss of $0.1 for 4Q15 due to the decrease in net profits, which was offset to a certain extent by a decrease in shares outstanding. However, the adjusted diluted EPS increased from $0.46 in 4Q14 to $0.52. The 13% increase was primarily due to the increase in adjusted net income and the decrease in shares outstanding. During 4Q15, the repurchased approximately 2.5 million shares under the $125 million accelerated share repurchase agreement.

You can gain exposure to Dunkin’ Brands (DNKN) by investing in the Vanguard Consumer Discretionary ETF (VCR), which invests 0.3% of its portfolio in DNKN. VCR also invests 3.9% in McDonald’s (MCD), 2.9% in Starbucks (SBUX), and 1.1% in Yum! Brands (YUM).

2016 outlook

Dunkin’ Brands management has stated that with the implementation of its five-point strategy, it expects the operating margin to increase by 8% to 10%. It also expects the EPS to be between $2.17 to $2.19. Analysts have also estimated EPS to be at $2.19 for fiscal 2016. The EPS of $2.19 represents a growth of 24% from an EPS of $1.8 in 2015.


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