Krispy Kreme (NYSE: KKD) hit $20 on Friday, after it took a huge hit (from a recent high of $25) when its third-quarter results came in less than expected. In the third quarter of fiscal year 2014, which ended on November 3rd, Krispy Kreme announced its revenues increased by 6.7% to $114.2 million compared to the same period last year.
Same store sales at its flagship company stores rose by 3.7%, which marked the 20th consecutive quarterly increase, which is quite an impressive track record. This revenue increase was mainly caused by retail price increases.
Mark Kalinowski, of Janney Capital Markets, kept a “buy” rating for Krispy Kreme, partly because of its momentum in sales at stores open at least a year. Kalinowski said the company's third-quarter sales at United States franchised stores open at least a year rose 10.7%, beating his estimate for a 9.5% rise. Internationally, the metric declined 3.1%, but this was better than the 7% decline Kalinowski had forecasted.
Sales at stores open a minimum of one year is a key metric of a retailer's health because it doesn’t include results from locations recently opened or closed.
The reported earnings, while good and generally positive, were below expectations because of one-time charges. Those charges, a $1.7 million sale of leases and a $1.5 million lease termination agreement, involve a dispute with the former landlord at its commissary in Lorton, VA. But the charges went straight to the bottom line, turning an adjusted net income of $11.2 million, or 16 cents per share, into reported net income of $6.8 million, or 9 cents per share.
Krispy Kreme is No Stranger to Volatility
In 2000, Krispy Kreme capitalized on the stock market bubble by going public just three weeks after the NASDAQ peaked. The stock shot up 76% on its first day of trading. Three years later shares hit their all-time high of $49.75. Less than a year after that, the company found itself in trouble with the SEC over some questionable accounting, and soon thereafter reported its first quarterly loss, blaming its troubles on the low-carb/low-fat craze that was sweeping the nation.
Although the “low-carb” excuse was one that was not taken seriously by analysts, since other doughnut companies, such as Dunkin' Donuts (NASDAQ: DNKN), didn't suffer the way Krispy Kreme did. Five and a half years after hitting those highs, shares of the company had fallen to an all-time low of $1.15. By 2009, Krispy Kreme was on the brink of collapse. It’s Australian division went bankrupt and the continuing accounting scandal derailed any turnaround efforts in the United States.
Americans Love Their Donuts
Krispy Kreme is back, and seemingly better than ever. The biggest cause may be that doughnuts came back into fashion as a food. According to the American Institute of Baking, the top 10 brands of doughnuts brought in $508.7 million in sales in 2009. Two years later that number was up to $563.4 million. Donuts are now even considered gourmet food with the advent of the cronut — a half donut, half croissant concoction that is sweeping NYC by storm.
What this proves is that Krispy Kreme is a momentum stock. Even at its current price, you're talking about a price-to-earnings ratio of 61. During the last bubble in 2000, there was an assumption that Krispy Kreme could take its doughnuts global, and that Japan in particular might love a hot, fried, yeasty dough treat as much as folks in America do.
Now we are seeing a shift back to the domestic market, with a franchise that remains weak in some of the mid-Atlantic states. Expect to see growth in the packaged goods business that brings both its doughnuts and coffee into many grocery stores, gas stations, and convenience stores. Krispy Kreme's main doughnut competitor, Dunkin' Brands, has also done well for investors over the last five years, but its gains are only about 10% of Krispy Kreme. Dunkin Brands' market cap is also four times larger, at $5.17 billion.
Krispy Kreme also just signed a deal with Dulce Restaurants, LLC, to develop 10 new Krispy Kreme shops in Houston over the next five years. Dulce Restaurants, LLC, a subsidiary of Dallas-based Sun Holdings, LLC, currently operates three Krispy Kreme locations in Dallas, and has plans to open an additional 15 Dallas shops through 2018.
With this further expansion of both flagship stores and the increase of stores that carry Krispy Kreme products, KKD doesn’t look likes it’s slowing down anytime soon.
What are your thoughts on the future of Krispy Kreme?