Is There Any Hope Left for Krispy Kreme Doughnuts?

After a disastrous start to the new fiscal year, Krispy Kreme is trying to turn around. But will it succeed?

Jun 13, 2014 at 11:52AM

Fiscal 2015 has started on a disastrous note for Krispy Kreme Doughnuts (NYSE:KKD). After the company released its first-quarter earnings on June 2, its shares plummeted almost 15%, sending the stock close to its 52-week low. The doughnut chain lowered its earnings guidance for the full year, citing the after-effects of unusually cold winter weather in the early part of the year and technology investments.

Considering that Krispy Kreme is already under pressure from peers such as Starbucks (NASDAQ:SBUX) and Dunkin' Brands (NASDAQ:DNKN), reduced guidance doesn't bode well for the company. However, short-term pains are never a worry for long-term investors. Hence, is this the right time to take a position in the stock? 

Aiming for a turnaround
Like many other companies, severe winter storms badly affected Krispy Kreme's store traffic. In the Valentine's week, which is one of its busiest weeks during the year, severe weather conditions hit it hard. However, this is a seasonal issue and the weather tends to balance itself over the long-term.

To come out of its slump, Krispy Kreme is adopting a new marketing strategy and changing its marketing agency. Krispy Kreme is trying to enhance its global presence by making its marks in the digital, social, and interactive media channels, which will help keep the brand at the top of customers' minds. One of the strategies Krispy Kreme has adopted is making its products available in a variety of venues outside its shops. As such, it is partnering with Keurig Green Mountain to sell ready-to-drink bottled coffee, bagged coffee, and bagged ground coffee. 

Krispy Kreme is also focusing on developing its infrastructure. During the previous quarter, it opened 27 stores. Last month, the doughnut chain opened its 600th international store, in Puerto Rico. It plans to expand its systemwide store count by 10% this year.

Execution challenges
There were three main reasons why Krispy Kreme reduced its guidance for the full year, with one of them being the harsh winter weather. Next, its enterprising resource planning, or ERP, software implementation costs this year are about a million dollars higher than expected,  which is a sign of bad execution. However, this being a one-time cost, it will not have a recurring impact. Finally, Krispy Kreme spent more than it had anticipated to fill up senior management posts. Thus, the company is struggling on the execution front. 

However, the new management team is trying hard to improve the present situation. It is committed to delivering value to shareholders, which is why the company purchased shares worth $25 million in the first quarter. Krispy Kreme still has $55 million left in its share repurchase authorization, so investors can expect more buybacks going forward. This will drive earnings-per-share growth due to a reduced number of outstanding shares.

The competition is doing better
Starbucks and Dunkin' Brands also faced the challenge of inclement weather, but they came out with robust results in their recent quarters. Dunkin', for example, posted a 6% jump in revenue versus the prior-year period, with same-store sales in the U.S. increasing 1.2% year-over-year. In addition, Dunkin' is expanding at a more aggressive rate than Krispy Kreme.

In the previous quarter, Dunkin' opened 69 new stores. It also launched a new rewards program in January, which now has around 750,000 members. With such moves, Dunkin' was able to post a decent performance in challenging conditions.

Starbucks, on the other hand, did well due to its geographic diversification. Its sales increased 9% year-over-year during the second quarter to $3.9 billion on the back of a 6% jump in same-store sales. Starbucks' performance was driven by a strong sales jump of 24% in the Asia-Pacific region, with the company reporting the 17th consecutive quarter of same-store sales growth of 5% or higher. Hence, Starbucks' big size and global presence enabled it to ward off the impact of the weather in the U.S.

Final words
Krispy Kreme looks like a risky investment right now. The stock is expensive at 32 times earnings, and the company doesn't pay out a dividend either. In comparison, Dunkin' has a P/E ratio of 34 and also has a dividend yield of 2.10%. Moreover, Krispy Kreme's peers are doing better as far as their businesses are concerned, so it doesn't make sense to shell out a premium for the stock.

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Amal Singh has no position in any stocks mentioned. 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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