Krispy Kreme Doughnuts - Shares Are Too 'Kremed' For Me

| About: Krispy Kreme (KKD)

Shares of Krispy Kreme Doughnuts (KKD) rose 10% over the past week. The seller of doughnuts and complementary sweets reported a decent set of second quarter results on Wednesday.

Second Quarter Results

Krispy Kreme Doughnuts reported second quarter revenues of $102.1 million, up 4.3% on the year. Sales growth was driven by a 5.4% increase in comparable same store sales. Revenues came short of analysts expectations of $103.7 million.

Adjusted net income almost doubled for the quarter, coming in at $8.2 million versus $4.2 million last year. Net income fell from $8.8 million last year to $4.9 million, or $0.07 per share. On average, analysts expected the company to earn $0.05 per share. The company suffered from higher tax rates this quarter and the fact that last year's income included a $4.7 million after-tax gain.

The company net opened 19 new stores, bringing the total to 711 stores. The company has 93 company stores and 618 franchise locations.

During the quarter, Krispy Kreme Doughnuts repurchased roughly 2.85 million shares at an average price of $6.35, for a total consideration of $20 million.

CEO James Morgan commented on the results, "We were very pleased with our quarterly performance, as we drove both solid same store sales growth and increased guest traffic. The top-line momentum translated into significant year-over-year increases in both operating income and adjusted earnings per share."

Segmental Information

Company stores revenues rose 5.1% to $69.3 million, driven by same store sales growth of 5.4%. Operating income came in at $0.3 million, compared to a loss of $1.0 million last year.

Domestic franchise revenues rose 3.4% to $2.4 million. Higher royalties were partially offset by lower initial franchise fees. Total sales by domestic franchisees rose by 7.3%. Operating income came in at $1.3 million, compared to $0.2 million last year.

International franchise revenues rose 8.0% to $5.8 million on the back of higher royalty revenues. Sales by international franchisees rose by 7.1%, or 10.0% in local currencies. Operating income rose from $3.4 million to $4.2 million.


For the full year of its fiscal 2013, Krispy Kreme Doughnuts expects operating income between $29 and $33 million. Operating earnings per share are expected to come in between $0.36 and $0.42, compared to $0.31 last year.

Full year GAAP earnings per share are expected to come in between $0.22 and $0.25, given the high anticipated tax rate of 45%. On average, analysts expected Krispy to guide for annual earnings of $0.24 per share.


Krispy Kreme Doughnuts ended its second quarter with $41 million in cash and equivalents. The company operates with $26 million in short and long term debt, for a net cash position of $15 million.

For the first six months of 2012, the company generated revenues of $210.6 million. It net earned $11.0 million, or $0.16 per share.

Currently the market values the firm at roughly $500 million. Based on a full year revenue estimate of $420 million, the company is valued at 1.2 times annual revenues. The company trades at 30 times 2012's estimated annual earnings.

Currently, Krispy Kreme Doughnuts does not pay a dividend.

Investment Thesis

Year to date, shares of Krispy Kreme Doughnuts trade with gains of 15%. Shares rallied to levels over $8.50 per share in February of the year, but fell back to $6 during the summer, after the company lowered the full year outlook. Shares bounced back, rallying 25% from their lows in recent weeks.

Over the past five years shares trade roughly flat. Shares fell to lows of $1 in 2009, but peaked at almost $10 in 2011.

Revenues fell during the recession to $347 million for the full year of 2009. From that point in time, revenues rose each sequential year, on track to come in at $420 million in 2012. At the same time, the company paid down debt and improved profitability.

Investors are pleased with the improvements in profitability and the fact that the company will expand into India. The company is planning to open 80 stores in the country over the next five years.

Lack of sustained profitability, execution risks and a premium valuation on earnings metrics, make me wary to invest in the company. Krispy Kreme has seen a rough ride in its corporate history, and I would not be confident in initiating a long position at these levels. I rather spent my money buying their doughnuts.

Disclosure: I 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.