Krispy Kreme And The Quest For Oil

| About: Krispy Kreme (KKD)
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Because of the fall in crude oil, there has been a ripple effect on the shares of Krispy Kreme Doughnuts.

This is because Krispy Kreme Doughnuts has been heavily prospecting international expansion.

Despite the fall in crude oil, it is still on pace to add more locations in countries where markets rely on the performance of crude oil.

This has created a great opportunity to buy shares of Krispy Kreme Doughnuts low and hold them with the intention of a long-term investment.

As of recently, it has been very interesting to observe the crude oil market. It has affected so many different niches and economies since tumbling down to almost $30 a barrel at the beginning of 2016. For example, this has had a rippling effect on the Canadian dollar which has been consistently weakening compared to other economic powerhouses. Today, investors can find barrels of crude oil trading at around $39.50. Although the crude oil market seems to be heading towards stability, I would still proceed with caution. After researching how certain economies have been reacting to cheap oil, I started to research how certain publicly traded companies have been reacting to it. Interestingly enough, I came across an article on about Krispy Kreme Doughnuts (KKD). As most of us know, the company is a popular doughnut franchise adored by many, mainly for its stapled glazed doughnut recipe. This article will be an overall analysis of Krispy Kreme Doughnuts, Inc. My analysis will contain components of its income statement and balance sheet, and then I will address my opinion on an investment in shares of Krispy Kreme.

The above graphs display the comparison of crude oil (left) and Krispy Kreme (right). As you can see, both illustrate a positive correlation to one another. We find this trend because Krispy Kreme focused growth around expanding its business abroad. At the start of 2015, the company had establishments in oil-heavy exporting countries like Saudi Arabia, Mexico, the United Arab Emirates, Kuwait, and Russia. Even though shares have taken a hit in accordance with the crude oil market, Krispy Kreme is still stressing on international growth in the near future. The company forecasts that 120-140 Krispy Kreme locations will open abroad in 2016. By 2019, the company has prospected it will open another 30 to 40 locations in Russia. During this expansion, I expect shares to continue to perform just like oil. If Krispy Kreme plans to expand into a market that is weakening due to cheap oil, it only makes sense that its shares of common stock will also fall with that move.

The graph above displays the performance of crude oil for the past 5 years. It is important to identify this fall before observing the financial statements of Krispy Kreme. At first glance, I find it impressive that Krispy Kreme was able to consistently increase sales revenue and gross income on a yearly basis through the fall of oil prices:

I suspect this is because most of Krispy Kreme's business is done in the U.S. However, it is important to note that Krispy Kreme is currently shifting its efforts on to international expansion. A year after this company went public, it sought expansion into foreign markets. Ever since then, it has been prospecting more places to put its restaurants in the world and this number keeps growing yearly. Since Krispy Kreme is focusing on adding more storefronts on an international scale, potential buyers should note that this leads to a higher percentage of revenues being influenced from abroad. We will not see the same consistency in sales revenue and gross income if crude oil continues to go down and international expansion of Krispy Kreme goes up, especially in countries like Russia that depend heavily on the oil market.

When considering the basic accounting formula, potential investors in Krispy Kreme should observe the following on its balance sheet as of last quarter:

  • 89.94 / 337.49 = 27% Debt-Asset Ratio

  • 247.56 / 337.49 = 73% Equity-Asset Ratio

  • 89.94 / 247.56 = 36% Debt-Equity Ratio

The above ratios are very important to consider when researching an investment with this company. I reflect very positively on these numbers and think they show great financial health. The first ratio shows that only 27% of company's assets are financed through debt. When comparing debt to equity, we find that only 36% of company projects are financed through debt. When prospecting companies to invest in, less debt is very favorable to hop on board with because it signifies less risk.

When considering all the above information, I would highly consider picking up shares of Krispy Kreme with the intention of holding it for the long term. The current state of the oil market has share prices very low, which creates a great opportunity to buy in at a low price. Even though the company has been prospecting expansion into markets heavily affected by oil, I would still buy in. The high volatility of crude oil should turn around as the supply is naturally getting lower each day. Once crude oil recovers, I believe that you will also see Krispy Kreme recover, grow, and pay rewarding dividends in the future.

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.