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Summary

  • Shares of Krispy Kreme lose 15% as the company reports a drop in comparable store sales.
  • After just one quarter, the company is forced to lower the full-year outlook already.
  • Shares are not an obvious buy, still trading at over 30 times GAAP earnings.

Krispy Kreme Doughnuts (NYSE:KKD) released a disappointing set of first-quarter results, in which it reported a fall in comparable sales, prompting the company to already lower the full-year outlook.

Despite the correction, I remain cautious and stay on the sidelines.

First-Quarter Highlights

Krispy Kreme reported first-quarter revenues of $121.6 million, which were up merely 0.8% on the year before.

The company posted a $9.7 million GAAP profit, which is up slightly from reported earnings of $8.0 million last year. On a per share basis, earnings improved by three cents to $0.14 per share.

Looking Into The Developments

Reported revenues inched up by just 0.8%, as the total store count rose by 3.3% to 855 global franchise and company-owned shops. This is as domestic same-store sales fell by 2.3%, while foreign same-store sales fell by 2.2% in constant currencies.

Despite the pressure on topline revenue developments, Krispy managed to increase operating earnings by 6.6% to $16.2 million. Direct operating expenses fell by 170 basis points to 78.3% of total sales, partially offset by general and administrative expenses, which rose by 80 basis points to 5.8% of sales.

Adjusted earnings, which are a non-GAAP earnings metric, rose from $14.1 million to $15.8 million, in line with GAAP earnings developments.

Outlook For The Year

Based on the current circumstances, Krispy Kreme has lowered its adjusted net earnings target from $0.73 to $0.79 per share towards $0.69 to $0.74 per share.

Higher-than-expected costs related to new technology and higher management compensation succession costs, as well as unfavorable first-quarter earnings are the reasons behind the expected shortfall in earnings. The company stresses that if it manages to achieve the forecast, adjusted earnings will still be up 13% to 21% on the year before.

Valuing Krispy Kreme Doughnuts

The company ended the quarter with $43.6 million in cash and equivalents. The company operates with $1.9 million in debt and capital lease obligations, resulting in a solid net cash position of around $42 million.

Trading around $16 per share, equity in the firm is valued at $1.05 billion, which values operating assets at a billion. With adjusted earnings foreseen around seventy cents per share, GAAP earnings could come in actually quite a bit lower, with the discrepancy already being nine cents in the first quarter.

Based on $0.50 per share in GAAP earnings, which seems ambitious, earnings could come in at just $32 million, which values the business at over 30 times GAAP earnings.

Given the modest earnings and growth ambitions, Krispy Kreme does not pay a dividend at the moment.

Implications For Investors

Shareholders have been hoping for better news, with Anthony Thompson being appointed as incoming CEO last month.

Clearly, first-quarter revenues fell short on estimates, which the company blames on the weather. Yet, investors appear to think that general weakness hit sales as well, with revenues falling more than $5 million short to consensus estimates. Notably, poor weather in February and March prevented customers from reaching stores and prevented the company from delivering orders to wholesale customers.

The company's comeback has already been celebrated after very difficult times in the wake of the big recession, when shares were trading at just a dollar. Operational improvements and a re-ignition of growth have been awarded by the market, with shares rising to levels as high as $26 last year. Even at $16 per share, Krispy Kreme is valued at over 30 times earnings, as revenues have stabilized at the moment.

Back in September of last year, when shares were still trading around $20 per share, I was wondering if shares might already started to see the start of a big correction. Even after the latest sell-off, shares don't automatically translate into a buying opportunity, despite the 15% correction.

I remain on the sidelines.

Source: Krispy Kreme Doughnuts - No Obvious Buying Opportunity After The Latest Sell-Off