Will Krispy Kreme Doughnuts Start Off Fiscal 2015 With an Earnings Beat?

Krispy Kreme Doughnuts (NYSE: KKD  ) , the world-famous retailer of doughnuts and coffee, has scheduled its first-quarter earnings for release on June 2 and strong results could send the stock back to its previous highs. Let's take a look at the most recent earnings release, the expectations for the upcoming report, and check in on one of its largest competitors, Dunkin' Brands (NASDAQ: DNKN  ) , to determine if we should be initiating long-term positions right now or if we should wait to see what the report holds.

Source: Krispy Kreme

The March earnings miss
On March 12, Krispy Kreme released its fourth-quarter report to cap off fiscal 2014 and the results fell short of analysts' expectations; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.12 $0.13
Revenue $112.75 million $119.59 million

Source: Benzinga

On a 13-week comparative basis, earnings per share increased 33.3% and revenue increased 3.3% year-over-year, as same-store sales rose 1.6% at company-owned locations; this marked an impressive 21st consecutive quarter of positive comparable-store sales growth.

Operating income increased 26.7% to $9.07 million and the operating margin showed strength, expanding 150 basis points to 8.05%; this expansion in the margin was helped by an 8.7% decrease in general and administrative expenses.

Source: Krispy Kreme's Facebook

This strong performance led Krispy Kreme to raise its outlook on fiscal 2015, as it now calls for earnings per share in the range of $0.73-$0.79 compared to its previous expectations of $0.71-$0.76; the new outlook would result in growth of 19.7%-29.5% from fiscal 2014.

Also, as a result of Krispy Kreme's strong balance sheet and ample free cash flow generated during the quarter, the Board of Directors raised its share repurchase authorization to $80 million from $50 million. The company has repurchased roughly 1.6 million shares for approximately $30 million so far, so $50 million now remains in the authorization. The $55.7 million in cash on the balance sheet at the end of the quarter will come in handy to accelerate repurchases going forward.

Overall, it was a very weak quarter for Krispy Kreme and management cited "harsh winter weather" as a primary reason; however, the market responded positively, probably due to the raised guidance, and sent shares 1.16% higher in the trading session that followed. The stock has since been hit with a wave of negativity and now sits more than 5% lower, but a strong first quarter could alleviate all of these losses and then some.

Expectations & what to watch for
The first-quarter report is due out after the market closes on June 2 and analysts' current expectations call for growth on both the top and bottom lines; here's an overview:

Metric Expected Year Ago
Earnings Per Share $0.24 $0.20
Revenue $126.50 million $120.63 million

Source: Estimize

These expectations call for earnings per share to increase 20% and revenue to increase 4.9% compared to the first quarter of fiscal 2014; these estimates seem attainable, but key metrics aside, there will be four other statistics and updates to watch for:

Source: Krispy Kreme's Facebook

  1. It will be very important for Krispy Kreme to provide guidance for the second quarter that is within or above analysts' expectations; currently, the consensus estimates call for earnings per share of $0.17 and revenue of $120.72 million, representing year-over-year growth of 21.4% and 7.1%, respectively.
  2. While providing satisfactory second-quarter guidance, it will also be crucial for Krispy Kreme to reaffirm its full-year outlook on fiscal 2015; this outlook calls for earnings per share in the range of $0.73-$0.79, an increase of 19.7%-29.5% from fiscal 2014.
  3. Watch for the amount of shares repurchased during the quarter. As we discussed before, approximately $50 million remains in the share repurchase authorization and the company has over $55 million in cash on hand, so it would be a very bullish move by Krispy Kreme to repurchase over $5 million worth of its shares in the first quarter; this would show that the company believes its shares are undervalued at current levels and would help boost earnings per share going forward.
  4. Make sure Krispy Kreme is on track to achieve its expansion goals for the full year. In the fourth-quarter report, the company said it expects to open 10-15 new small factory shops, 20-25 domestic franchises, and 85 international franchises, so it would be ideal for 25-35 total new locations to be opened in the first quarter.

If Krispy Kreme can meet or exceed analysts' expectations and satisfy the four elements above, and I think it will, the stock could easily be propelled back toward its 52-week high, which it sits nearly 30% below today; for these reasons, I would be a long-term buyer of the stock going into the report and would add to the position on any weakness following its release.

How did Dunkin' Brands perform in the first quarter?

Dunkin' Brands, the parent company of Dunkin' Donuts and Baskin-Robbins, released first-quarter earnings of its own on April 24 and its stock was hit hard as a result; here's what the company accomplished:

Metric Reported Expected
Earnings Per Share $0.33 $0.36
Revenue $171.90 million $172.66 million

Source: Benzinga

Dunkin's earnings per share increased 13.8% and revenue increased 6.2% year-over-year, driven by comparable-store sales rising 1.2% at company-owned Dunkin' Donuts locations in the United States; however, all three of these statistics fell below the expectations of both the company and analysts.

Source: Dunkin' Donuts' Facebook

Operating income increased 7% to $75.6 million and the operating margin showed fight, expanding 30 basis points to an impressive 44%. This performance led to ample free cash flow generation that allowed the company to repurchase approximately $22 million of its common stock and announce that it will be maintaining its quarterly dividend of $0.23, which gives it a yield of about 2.05% at current levels.

Also, 96 new locations were opened during the quarter, including 69 Dunkin' Donuts locations in the United States, which brought its total store count to 18,254 worldwide. The company went on to reiterate its plan to have over 15,000 Dunkin' Donuts locations in the United States, so one weak quarter will not affect this plan. 

In summary, it was a fairly disappointing quarter and Nigel Travis, Dunkin's Chief Executive Officer, stated, "We had a difficult first-quarter with our comparable-store sales growth in the U.S. significantly affected by severe weather in the regions of the country where most of our Dunkin' Donuts restaurants are located;" the region he is speaking of is the Northeast, but Krispy Kreme's stores are much more spread out across the country, so this should not affect its earnings nearly as much as what Dunkin' Brands experienced; therefore, Dunkin's weak results should not deter investors from considering Krispy Kreme today.

The Foolish bottom line
Krispy Kreme Doughnuts' stock has been creamed over the last few months, but I think strong first-quarter results will help put it back on an upward track. Today, its stock sits more than 25% below the highs reached in November of 2013, and I believe this represents a picturesque buying opportunity. Foolish investors should look to initiate positions immediately and add to them on any weakness provided by the market to let price appreciation provide significant returns over the next several years.

Not interested in KKD? Well Warren Buffett just bought nearly 9 million shares of this company...
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2971625, ~/Articles/ArticleHandler.aspx, 7/31/2014 5:09:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement