Comment
0
Tweet
0
Print
RSS Feeds

Investors Find a Hole in This Doughnut

Friday - 8/30/2013, 4:00am  ET

Over the past two years, earnings season has meant only one thing for Krispy Kreme Doughnuts shareholders -- a chance to see their stock advance by double digits. Last night, the market reasserted that the only thing that's certain is that there are no certainties when it comes to investing.

Source: Mark Lee, Flickr.

Krispy Kreme shares dove after the company announced second-quarter results that showed a comparable-store sales increase of 10% as adjusted income jumped 17% to $9.6 million, or $0.14 per share. Unfortunately for current shareholders, while revenue of $112.7 million was enough to skirt by estimates, Krispy Kreme's EPS fell $0.02 shy of expectations, even with the company sticking to its full-year EPS forecast of $0.59 to $0.63.

But are things really as bad as the dip implies? Let's have a look...

Same-store sales growth is phenomenal
The first thing that stands out to me is that foot traffic was the primary driver of same-store sales growth. There is nothing more an investor in Krispy Kreme loves to see than increasing foot traffic. Customer loyalty and the ability to pass along price hikes all starts with increasing foot traffic and not the other way around, so this would signal to me that Krispy Kreme's push into new markets and in expanding its menu is paying off.

Source: Samantha Celera, Flickr.

If you recall, one of the primary products I've homed in on for restaurants in terms of driving recurring customer traffic is branded coffee. It seems so simple, but exclusive coffee lines draw in customers with relatively little cost and keep them hooked. Panera Bread has been incredibly successful at this thanks to a partnership with Gavina Gourmet Coffee, which, amazingly enough, also has an exclusive blend partnership with McDonald's. By offering right-sized portions complete with branded coffee blends, Panera is able to deliver unique products to its customer base.

Another factor that Krispy Kreme didn't really get into all that much but I suspect has to be working well is its push toward healthier food options. Starbucks recently revamped its in-case snacks and sandwich options to come from relative local suppliers that use only natural and organic ingredients. While these are more expensive, the perception among consumers is that they're getting a product that's more nutritious for them.

Krispy Kreme has been doing something similar with the introduction of yogurt, oatmeal, and fruit juice to its menu. Don't worry, you'll always be able to get your favorite jelly-filled doughnut covered in a chocolate glaze at Krispy Kreme, but with public awareness of obesity increasing, Krispy Kreme has been masterful in its understanding that it needs to (and is smart to) cater to a wider audience.

Geographic diversity is helping
It's an often overlooked fact, but with Dunkin' Brands' Dunkin' Donuts primarily on the East Coast and Krispy Kreme on the West Coast, the two have been left to their own devices. That could be changing, with Dunkin' Donuts planning to make another push into California, but it shouldn't represent too much of a concern for Krispy Kreme shareholders.

What stands out among Krispy Kreme's report with regard to geographic diversity is that international revenue growth is good, not great, and that costs to open new stores are running a bit higher than anyone expected.

We all know it costs money to expand into new markets, so investors shouldn't be all that concerned that direct operating expenses jumped to $93.8 million from $85.7 million. What might be a very minor yellow flag is that Krispy Kreme still doesn't fully understand the nuances of different cultures' buying habits yet. The company noted, for example, how a change in holiday observance affected its revenue results and how warmer weather hampered sales in the U.K. I don't feel this is particularly bad news so much as it represents the typical growing pains a predominantly domestic company will encounter when pushing overseas.

So what's the problem?
"If domestic growth is strong and international growth is OK, then what's the problem?" you might be asking. The answer is simply that investors' emotions have gotten out of hand.

Investors are notorious for pushing share prices far too low when times are bad and overestimating a company's market value when times are good. This appears to be another case in which shareholders took a few of the carrots that Krispy Kreme dangled and ran too far with them.

   1 2  -  Next page  >>