Krispy Kreme Doughnuts Cools Off After Disappointing Earnings Guidance

Is the recent sell-off in Krispy Kreme Doughnuts overdone, and what should current shareholders make of the company cutting its earnings guidance?

Jun 4, 2014 at 10:00AM

Shares of Krispy Kreme Doughnuts (NYSE:KKD) took a tumble after the company cut its earnings forecast for the year. It cited the extreme winter weather as having a big impact on first-quarter numbers. This news certainly wasn't what new CEO Tony Thompson hoped for after taking over for chairman James Morgan.

For us Fools, what does this mean for the rest of the year, and how does Krispy Kreme stack up against rivals Dunkin' Brands (NASDAQ:DNKN) and Tim Hortons (NYSE:THI)?

Free Krispy Kreme Donuts

Source: Krispy Kreme Doughnuts

A closer look at Krispy Kreme's first quarter
Domestic same-store sales rose 2.3%; while still positive, they were a far cry from the stellar numbers posted in last year's first quarter. U.S. same-store sales rose more than 12% last year. The weak spot for Krispy Kreme was its international same-store sales, which fell 2.2% in constant currency terms. (Constant currency refers to the elimination of currency fluctuations for a better assessment when comparing sales numbers.) The slowdown in international sales is one concern that I have. While the company can blame the winter weather for a slowdown in U.S. sales, it cannot blame the weather for weak international sales. Overall, total revenue increased only 0.8% from $120.6 million to $121.6 million.


Source: Wikimedia Commons

Earnings per share came in at $0.23 for the quarter, which was in line with expectations. The results were also more than 12% higher compared to last year's first quarter and marked the company's highest quarterly profit in more than 10 years. However, Krispy Kreme did cut its earnings guidance for the full year. Instead of earning $0.73 to $0.79 per share, the company now forecasts earnings to be in the neighborhood of $0.69 to $0.74 per share. This is what the market is focused on the most and why shares dropped by more than 10%.

Why the cut in guidance?
In the earnings release, Chairman James Morgan stated the reasons for the cut in guidance: 

Notwithstanding the increase in first quarter earnings, we are revising our full-year outlook but still projecting a double-digit increase in adjusted earnings per share. The change reflects, among other things, our first quarter performance, higher than anticipated investment in a new enterprise resource planning system[,] and higher costs than we had planned associated with executive management succession. Taking all these factors into account, we felt it was prudent to revise our expectations for the balance of the year.

The areas with the biggest impact on earnings appear to be enterprise resource planning implementation and costs related to executive compensation. I view these as one-time items and not indicative of any material weakness in the company's core business. These costs will only affect results for this year and not next year's numbers.

How did the competition fare in the same quarter?
The first quarter of this year was challenging for most restaurant operators. In the first quarter, Dunkin' saw same-store sales rise 1.2% in the U.S. and drop 2.4% internationally. Tim Hortons saw same-store sales rise 1.9% in the U.S. and 1.6% in Canada. Both Dunkin' and Tim Hortons posted results that were pretty much in line with Krispy Kreme's.

Tim Hortons

Source: Tim Hortons

Tim Hortons reported a much better quarter in this year's period versus last year. Last year, same-store sales fell 0.5% in the U.S and 0.3% in Canada. Earnings per share jumped almost 17%. This came as same-store sales greatly improved, and Tim Hortons repurchased $1 billion in shares within the past year.


Source: Dunkin' Brands

Dunkin' Brands posted earnings per share of $0.33 in the first quarter, which missed expectations by $0.02. Revenue rose slightly more than 6% year over year to $171.9 million. The winter weather was difficult for Dunkin' since the majority of its locations are in the Northeastern U.S. Matter of fact, Dunkin' Donuts has the most locations in New York of any chain, even more than Subway, Duane Reade, or Walgreen.

How do shares compare?


Krispy Kreme

Dunkin' Brands

Tim Hortons

Market Cap




Forward P/E




PEG Ratio




Operating Margin




1 Year Return




Source: Yahoo! Finance

Foolish final thoughts
I still think the long-term picture is intact for Krispy Kreme Doughnuts. As many of you know from my other article on Krispy Kreme, I'm a big fan of Tony Thompson and what he did as COO of Papa John's International. Shares of Krispy Kreme are now trading at just 18 times next year's earnings and have a P/E-to-growth ratio of less than 1. While shares may remain weak in the short term, the current sell-off could be an opportunity for those investors looking to initiate a long-term position in Krispy Kreme Doughnuts.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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