Will Krispy Kreme Doughnuts Take a Bite Out of Dunkin' Brands and Starbucks This Quarter?

When Krispy Kreme Doughnuts reports earnings on March 12, three key metrics will tell you if it's beating Dunkin' Brands and Starbucks.

Mar 12, 2014 at 10:00AM

Krispy Kreme Doughnuts (NYSE:KKD) opened its first store in 1937 in Salem, NC. Its wonderfully addictive donuts are beloved by many, but are they enough to put some dough in your pocket? While Krispy Kreme has been performing well lately, it operates in a hyper competitive field and needs to contend with giants like Dunkin' Brands Group (NASDAQ:DNKN) and Starbucks (NASDAQ:SBUX)

As the company is fast approaching another critical earnings report, investors should be looking at three critical factors to help determine if Krispy Kreme can best the big boys moving forward.


The first Krispy Kreme, image courtesy of Krispy Kreme Doughnuts

Same-store sales and outlook
In its most recent quarter Krispy Kreme reported its twentieth straight quarter of same-store sales growth. That's outstanding. Yet the stock sold-off for two reasons: a so-so outlook, and the fact that same-store sales only grew 3.7%. 

Krispy Kreme's growth came largely from its external supply chain segment, which grew 15.5%, rather than the stores. I don't know how long this can last; at some point the stores will need to lead the day.

Krispy Kreme's stores are less saturated than Dunkin' or Starbucks, and it really should be growing comps faster. This is a pretty simple concept to understand. If there's only one store in my county, it should pull in sales from many towns, and sales per-store should do well. Additional stores tend to cannibalize same-store sales. 

It's difficult (for me) to look at Dunkin' Brands with 3.5% comparable sales growth, and Starbucks at 6%, and choose Krispy Kreme (at 3.7%) out of this richly valued group of stocks. So if there's one thing I'll be looking for on this earnings report, and the next couple, it'll be for Krispy Kreme to outpace its peers on same-store sales growth. 

Top-line growth via new stores
Krispy Kreme is an interesting business. On the surface it isn't that different than Dunkin' Donuts: it sells donuts and coffee out of its stores, and has a loyal customer following. Yet, the law of large numbers tells us that Krispy Kreme's top-line should grow faster than its peers. With only 810 stores, compared to Starbucks and Dunkin' which each have at least ten times that figure, one potential advantage for Krispy Kreme is that it has a lower ceiling in-terms of store count. 

So why isn't Krispy Kreme growing faster than Starbucks and Dunkin'? In its last quarter Krispy Kreme saw sales growth of 6.7% while Dunkin' and Starbucks grew revenues at rates of 13.3%, and 11%, respectively. 

Those figures don't add up for me. Not only is Krispy Kreme growing slower than its current earnings multiple of 50, it's also growing slower than more established businesses.

At some point, the stores need to grow at a faster clip than 3%. 

The best path to growth for Krispy Kreme is store expansion; for this quarter, let's look for double digit top-line growth, and for strong guidance on new stores. 


Coffee brand vs. Doughnut brand
In my opinion, Krispy Kreme is not a business that you invest in at any price. My view is that it needs to grow substantially faster than Dunkin' Brands and Starbucks to warrant an investment at its current price. Here's why.

I think it sells an unhealthy product and, long-term, I personally believe U.S. consumers seem to be headed in a different direction. Some people say that Dunkin' offers the same thing; I disagree. In my opinion both Dunkin' Donuts and Starbucks are both "coffee first" businesses. It's a subtle difference but, in retail, consumer psychology goes a long way. I've never heard someone rave about Dunkin' Donuts doughnuts, it's always about the coffee; in my estimation, the opposite is true for Krispy Kreme.
I applaud Krispy Kreme's  efforts to sell coffee via K-Cups, and offer other products like bagels, but I question whether it can make in-roads here, because the brand is so synonymous with junk food.
The bottom line: store growth or bust
 I have to admit, I'm a sucker for a good Krispy Kreme doughnut. I also think its a good business, but in order to justify its current price, we need better growth.
If Krispy Kreme can ratchet up same-store sales, and top-line growth in its stores, it may look attractive at these levels. If not, you should put it on the shelf until a better price comes around. 

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Adem Tahiri owns shares of Starbucks. 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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