Krispy Kreme (NYSE: KKD ) , the international retailer of doughnuts and coffee, has just released earnings for the first quarter of fiscal 2015 and the stock has reacted by making a sharp move lower. Let's break down the quarter and the company's outlook on the rest of the year and then compare Krispy Kreme to competitor Dunkin' Brands (NASDAQ: DNKN ) to determine if this decline is our opportunity to buy or if this is a warning sign to stay away.
A first quarter to forget
Krispy Kreme released its first-quarter report after the market closed on June 2 and the results were mixed compared to analysts' expectations; here's a breakdown:
|Earnings Per Share||$0.23||$0.23|
|Revenue||$121.58 million||$126.68 million|
Krispy Kreme's earnings per share increased 15% and revenue increased just 0.8% year-over-year, as same-store sales declined 1.5% at company-owned locations; the company added that same-store sales increased 4.5% at domestic franchise locations, but declined 2.2% at international franchise locations.
Operating profit increased 6.6% to $16.2 million and the operating margin showed strength, expanding 70 basis points to 13.3%; this expansion was helped by direct operating expenses declining 1.4% to $95.2 million, which represented just 78.3% of revenue versus 80% of revenue in the year ago period.
With these results and $55.75 million in cash on hand to begin the quarter, Krispy Kreme was able to repurchase approximately $25.48 million worth of its common stock during the quarter, which was over half of the $50 million remaining on its $80 million share repurchase authorization; this was by far the highlight of the quarter and to put it into perspective, Krispy Kreme repurchased approximately $20.5 million worth of its common stock in all of fiscal 2014.
Also, 27 new stores were opened during the quarter, bringing the company's total store count to 855 and putting it on track to achieve its plan of opening 115-125 new stores during fiscal 2015; of the current 855 locations, 97 are company-owned stores, 163 are domestic franchise stores, and 595 are international franchise stores.
In summary, it was a disappointing quarterly performance for Krispy Kreme, even with the accelerated repurchase activity, and the sentiment worsened when the company went on to provide updated guidance for the full year...
What will the remainder of the year hold?
As a result of the weak first-quarter performance, Krispy Kreme went on to lower its full-year earnings per share forecast; the company now expects earnings per share in the range of $0.69-$0.74. This would result in growth of 13.1%-21.3% from the $0.61 per share earned in fiscal 2014, down from its previous estimated range of $0.73-$0.79. It is also worth noting that the new forecast fell short of the consensus analyst estimate of $0.78 in earnings per share.
Overall, it was an absolutely horrible quarter for Krispy Kreme and its stock reacted by falling 14.8% in the trading session that followed. The shares may remain weak over the next several weeks, so I would urge investors to avoid placing new investments in Krispy Kreme today.
Dunkin' Brands stumbled too
Dunkin' Brands, the company behind the Dunkin' Donuts and Baskin-Robbins brands, recently released first-quarter results of its own and it too disappointed analysts; here's a summary of the report released on April 24:
|Earnings Per Share||$0.33||$0.36|
|Revenue||$171.90 million||$172.66 million|
Earnings per share increased 13.8% and revenue increased 6.2% year-over-year, as comparable-store sales increased 1.2% at Dunkin' Donuts locations in the United States; however, all three of these statistics came in below expectations.
Operating profit increased 7% to $75.6 million and the operating margin was strong, expanding 30 basis points to 44%; this expansion was helped by increased royalty income and a higher margin on sales of ice cream products.
In terms of expansion, 96 new locations were opened during the quarter, including 69 Dunkin' Donuts locations in the U.S.. However, this puts the company well off of the pace it needs to be on to achieve its goal of opening 680-810 new stores during the fiscal year; with this said, the company now operates 18,254 stores worldwide.
Lastly, with the free cash flow Dunkin' generated and the $256.9 million in cash on hand it had at the beginning of the quarter, the company was able to repurchase approximately $22 million worth of its common stock and pay out approximately $24.5 million in dividends during the quarter. The company also announced that it would maintain its quarterly dividend of $0.23, which it paid out on June 4 to stockholders of record at the close of business on May 27.
All in all, it was a poor quarter for Dunkin' Brands and its stock responded by falling 1.89% in the next trading session. The shares have fallen another 1.5% in the weeks since. However, unlike the situation of Krispy Kreme, I think the earnings miss is priced in at this point and the 2%+ dividend is enticing, so investors should dig deeper and consider initiating positions in Dunkin' Brands today.
The Foolish bottom line
Krispy Kreme Doughnuts has just announced a very disappointing set of first-quarter results and this caused the company to cut its full-year outlook. The stock responded to the news by plummeting 14.79% in the next trading session and I believe it could fall even further from here. Foolish investors should avoid Krispy Kreme and instead look to Dunkin' Brands for an investment opportunity today.
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