Has it finally happened? Has the low-carb trend, which has plagued many a food company, finally hit Krispy Kreme Doughnuts (NYSE:KKD)? For the first time ever, the doughnut purveyor issued a profit warning today, pushing its stock price down nearly 25% in recent trading.
A Motley Fool Stock Advisor pick, Krispy Kreme said it now anticipates fiscal 2005 earnings to be 10% lower than its previous guidance. First-quarter earnings are now seen coming in at $0.23 per share, while fiscal 2005 earnings will be $1.04 to $1.06 per share; including charges, Krispy Kreme forecasts annual earnings of $0.93 to $0.95 per share.
There are a few things to wonder about here, not least of which are sudden changes. After all, historically, Krispy Kreme has delivered steady revenue and earnings growth despite building interest in carb cutting over the last year. Its 35% revenue growth and 45% net income growth last year are part of the reason Rick Munarriz threw it into the ensemble in his Six Stocks for Six Friends feature.
Meanwhile, investors have been worried about the demonization of carbohydrates and how it might impact Krispy Kreme. That's been discussed for some time as at least part of the reason for Krispy Kreme's lackluster stock price. Other stocks with less cultish products and appeal have suffered from low-carb eating, such as Hostess provider Interstate Bakeries (NYSE:IBC).
Off-premises sales -- in other words, those boxed doughnuts you see with the Krispy Kreme packaging at your local grocery store -- have also been adversely effected by the low-carb trend, the company said.
If investors really thought that this was the crux of the problem, though, they might have relaxed today. Krispy Kreme recently said it was working to develop a lower-carb, lower-fat doughnut (a move to which I played devil's advocate, wondering about undermining the almighty, decadent brand). Right now, though, if low-carb diets are indeed plaguing Krispy Kreme, I question why it didn't mention this development effort in its press release today. At the same time, the company did say it was among the initiatives it's pursuing "urgently" in its conference call (transcript courtesy of CCBN StreetEvents).
The other aspect of today's press announcement that might warrant a critical eye, is the company's announcement that it will sell Montana Mills, a bread and pastry concept that Krispy Kreme bought for $40 million only a little over a year ago. While we love companies that focus, it seems like a rather sudden development.
When Krispy Kreme previously seemed insulated against the low-carb trend, was there more going on than met the eye? While some might see Krispy Kreme as an exceptional bargain in the event that the low-carb craze ends up just another passing fad -- which, of course, would give credence to the idea that today's warning is only a temporary speed bump in the company's long-term growth rate -- would-be Krispy Kreme shareholders have a lot of food for thought before gobbling up shares.
Would you like to defend the honor of Krispy Kreme? Do you think this is just temporary sugar shock, or will low-carb diets ruin the outlook for the stock? Take a break on the Krispy Kreme discussion board, where Fools are discussing today's news as we speak.
Alyce Lomax does not own shares of any of the companies mentioned.
