Krispy Kreme Doughnuts - Has It Found A Bottom, Or Is This A Bounce?

| About: Krispy Kreme (KKD)

Summary

Krispy Kreme Doughnuts, Inc: A buck above its 52-week low, but turnaround could be in the works. Win or lose, company should be here to stay.

Busted Growth? Down, but not out. Don't forget: This company should continue to be in business for years to come, but that's just my opinion.

Attractively Valued based on Cash Flows and Sales.

Exciting Marketing Plans, and Coffee, too!

Doughnuts that cannot be Duplicated. A cultural phenomenon in the Southeastern US. The only way to research this stock is to try these unique, yet ubiquitous Doughnuts.

Krispy Kreme Doughnuts, Inc. (NYSE:KKD)

If you're looking for a familiar name with regional appeal, Krispy Kreme Doughnuts, Inc. is headquartered in Winston-Salem, North Carolina, was founded in 1937, and has about 1000 stores worldwide. As a native of Southwestern Virginia, I have always looked forward to my next purchase of Krispy Kreme Doughnuts.

Krispy Kreme Doughnuts could be considered a cultural phenomenon, and they are excellent to consume with coffee. Think of the countless Doughnuts served at Monday morning sales meetings at businesses located throughout the Southeast, as well as construction site snacks, over most of the Twentieth Century and into the current Millennium.

Krispy Kreme Doughnuts has achieved some recent success with its experiment to enter the US coffee market. Doughnuts are wonderful to those who prefer them, but coffee with doughnuts would be even better. Why not consider the coffee market to be a growth avenue?

At a recent Earnings conference call, Q3 Fiscal 2016, December 9, 2015, at Winston-Salem, North Carolina, Tony Thompson, Krispy Kreme Doughnuts, Inc. - President and CEO, said the following:

Separately, we also announced that our fresh great tasting doughnuts and treats are now available to US troops and their families at military bases throughout Europe through a licensing agreement with the Army and Air Force exchange service. We are proud to be able to provide a little taste of home with the same Krispy Kreme products that are available in our shops around the world.

Now let me offer a quick update on coffee. More recently, we have discussed how growing coffee sales is as much about the overall guest experience within our shops as it is the product itself. During the quarter, we took a huge step with the opening of a newly designed test shop that is allowing us to experiment with a new in-store guest experience with the intent of driving higher beverage attachment. The guest experience in this new store includes a new ordering process and customer flow. The shop has a more contemporary, warmer and inviting dining area with WiFi, and a much more pronounced coffee presentation as well as exterior improvements.

This is still a test, but we are pleased with what we are seeing. Our next step will be to retrofit a few existing shops with a similar ordering and customer flow design. This will occur in the beginning of the calendar year. We are optimistic that some version of these changes will help improve guest experience, drive incremental beverage sales, and thus, deliver greater returns.

On the technology front, Krispy Kreme's loyalty program has rolled out to the majority of the country, with the full nationwide rollout to be complete by the end of January. Last week, we conducted a media event in Atlanta celebrating the rollout and demonstrating the loyalty app and it's unique features. During FY17, we will begin to gather and analyze guest information, and use that information as an additional tool to drive sales performance.

Finally, ... I wanted to mention two other items. First, this fall, we began selling Krispy Kreme gift cards in third-party retail locations. Until recently, gift card purchases could only be found in our retail shops, but now, Krispy Kreme gift cards are available in over 8,500 locations. Second, we continued to return excess capital to shareholders through ongoing share repurchases, which we view as an additional means to grow shareholder value.

As I indicated above, the preceding quote was from Tony Thompson, Krispy Kreme Doughnuts, Inc. - President and CEO.

In summary, I have picked out the following highlights in the company's marketing strategy:

Some of the company's promotions are: "Talk Like a Pirate Day", "National Coffee Day", and "Carolina Panthers Day".

Pumpkin Spiced Cake Doughnuts as well as other specialty doughnuts are also advertised to stimulate sales.

In addition, the company plans to open 130 net new stores worldwide, in fiscal 2016.

In other new developments, Krispy Kreme Doughnuts are now available at military bases in Europe.

In keeping with current high tech trends: The company will be offering WiFi in its stores.

As regards the use of smart phones to purchase coffee at its competitors, Krispy Kreme Doughnuts plans to provide high tech loyalty apps for its customers.

Analysis:

Net free cash flow, or operating cash flow less capital spending, for the four quarters ending November 1, 2015, I estimated at about $0.69E per share, on about 63 million shares.

(Estimates are denoted by an "E" following the number.)

I am projecting that the risk premium for owning this stock is about equal to my estimate of its growth rate for the next five years, or about 18%E; given that Finance.Yahoo.com estimates its Beta at about 1.8E. The 1.8 Beta is then applied to the historical return on the Standard and Poors 500 Index, estimated at about 10%E.

If the risk premium were about equal to the projected growth rate, you could apply an estimated multiple of about 50X (about fifty), or the reciprocal of a risk-free interest rate. A risk-free interest rate, I would guess to be about 2%E, or roughly the current rate on 10-year US Treasury Notes.

My target price for Krispy Kreme Doughnuts, therefore, would be about $34.50 per share, or estimated cash flow per share of about $0.69 times my projected multiple of about 50X.

Further, Krispy Kreme Doughnuts shares look relatively attractive with its stock price to sales ratio of about 1.69X, versus about 4.57X for Starbucks (NASDAQ:SBUX) and about 4.41X for Dunkin Doughnuts (NASDAQ:DNKN). (Price/Sales ratios from Yahoo Finance.)

Last, Krispy Kreme Doughnuts, Inc. has a share repurchase program that should tend to exert a positive influence on these shares.

I might proffer a closing anecdote: For years, Roanoke, Virginia was the location of a widely known and very popular Krispy Kreme Doughnuts store that finally closed. However, due to the public outcry and by popular demand, brand loyalty won out, and another new Krispy Kreme Doughnuts store was opened in an alternative Roanoke, VA location.

Krispy Kreme Doughnuts should be viewed as part of the cultural landscape in the Southeastern US, as well as internationally. The company has a creative marketing strategy for its doughnuts, and also has exciting growth prospects in its coffee business and also in its plans to continue to increase its number of stores throughout the US.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.