Should You Take a Bite Out of Krispy Kreme?

Krispy Kreme was one of the best performing stocks in 2013, but saw a steep decline at the end of the year. It sits more than 30% below its 52-week high, so let's see if this is the time to buy.

Feb 2, 2014 at 9:00AM

As the coffee and quick-serve restaurant industry rallied in 2013, Krispy Kreme (NYSE:KKD) outperformed almost everyone by rising an incredible 105.65%. It was up over 161% at one point before seeing a steep sell-off in December, however. It now sits at over 30% below its 52-week high, so let's take a deep look into the cause of the decline and decide if now is the time to buy.

The multi-national doughnut giant
Krispy Kreme is a global leader in the specialty retail and wholesale of premium-quality sweet treats and coffee. The company is most known for its Original Glazed doughnut, which it has sold since the company was founded in 1937. As of the Dec. 2, Krispy Kreme operates 812 locations in 23 countries.

Kkd Twitter Page

The cause of the decline
The sharp decline in Krispy Kreme's stock began after it released third-quarter results for fiscal 2014 on Dec. 2. The report was mixed compared to analyst estimates and contained the following statistics:

Metric Reported Expected
Earnings Per Share $0.16 $0.16
Revenue $114.2 million $117.67 million

Earnings per share increased 33.3% and revenue rose 6.7% year-over-year, as comparable-store sales grew 3.7% at domestic company-owned stores and 10.7% at domestic franchise stores. This marked the 20th consecutive quarter of comparable-store sales increases at company-owned locations. Operating income increased 27.2% to $11.72 million, driven by the operating margin expanding 166 basis points to 10.26%. These results were solid, but then the company provided its guidance for the rest of the fiscal 2014 and expectations for fiscal 2015.

In the updated guidance, Krispy Kreme raised the low end of its fiscal 2014 earnings forecast by $0.01 and maintained the expectation for the high end. The company now expects full-year earnings to be in the range of $0.60-$0.63, which would be an increase of 27.7%-34% year-over-year. For 2015, earnings are expected to be between $0.71-$0.76 per share, missing analyst expectations of $0.77 by just one penny; this tiny miss caused Krispy Kreme's stock to plunge over 20% in the next trading session. Since then, the stock has moved even lower and now sits at more than 24% below the level it was at before the earnings report and over 30% below its 52-week high of $26.63.

Screen Shot

How inexpensive is it?
At current levels, Krispy Kreme trades at 54.3 times its trailing-twelve-month earnings of $0.34, but just 24.9 times 2015's earnings estimate of $0.74. According to YCharts, the company's stock has a five-year average price-to-earnings multiple of 45.7, which means that it is expensive right now but is very inexpensive based on next year's estimates. Due to its high valuation today, I would not be a buyer and would want to wait until its fourth-quarter earnings are released before considering it for an investment. By waiting, we can see what full-year earnings for 2014 look like and whether 2015's outlook will be affirmed, lowered, or increased. With this said, I would be a buyer if the outlook is maintained or raised, so long as the stock doesn't trade too erratically following the release.

How has the competition fared?
As Krispy Kreme declined sharply, Starbucks (NASDAQ:SBUX) and Dunkin' Brands (NASDAQ:DNKN) also fell. Their falls were not nearly as much, however. Starbucks is home to the world's largest chain of coffee shops, with more than 20,000 locations in over 50 countries. Dunkin' Brands is the parent company behind the global powerhouse brands Dunkin' Donuts and Baskin-Robbins, with nearly 18,000 locations in 60 countries combined. Take a look at how each has performed over several periods of time:

Company Krispy Kreme Starbucks Dunkin' Brands
2013 Performance 105.65% 46.17% 45.27%
Performance Since Dec. 2 (24.85%) (8.86%) (3.45%)
Performance YTD (4.3%) (4.25%) (1.66%)

Starbucks recently reported the best first-quarter in its history, with earnings rising 24.6% and revenue growing 11.8% year-over-year; this should support a continued rally higher, but more importantly, it shows that there is still strong demand in the industry. Dunkin' will be reporting earnings on Feb. 6 and the current estimates call for earnings growth of 17.6% and revenue growth of 10.4%. After Dunkin's results are released, investors will have an even greater sense of what to expect from Krispy Kreme and could make a more educated decision on whether or not to invest.

The Foolish bottom line
Krispy Kreme is a global giant who has faced weakness following a very narrow miss on guidance for 2015. I do not believe the plunge of over 30% was warranted, but I do want to wait until its next earnings release before considering it for an investment. If you are not sold on Krispy Kreme's potential, take a look at Starbucks or Dunkin' Brands as I believe these are the top two options in the industry.

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Joseph Solitro owns shares of Dunkin' Brands Group. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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