Can Krispy Kreme Cook Up An Earnings Beat?

Krispy Kreme Doughnuts (KKD +0.00%), the worldwide doughnut and coffee retailer, was one of the best-performing stocks in 2013. However, it has widely underperformed the market over the last three months. It is scheduled to release fourth-quarter results in just a few days and a strong report could easily get its shares back on track. Let's take a look at Krispy Kreme's most recent release and the expectations for the upcoming report to determine if we should buy shares right now or if we should wait to see what the company has to say.

Source: Krispy Kreme

The last time out
On Dec. 2, Krispy Kreme released its third-quarter report for fiscal 2014. Here's an overview of the results and a year-over-year comparison:

Krispy Kreme's earnings per share increased by 33.3% and revenue increased by 6.7% year-over-year, driven by a 3.7% increase in company-owned comparable-store sales; this marked the 20th consecutive quarter of positive comparable-store sales. Operating income was a bright spot for the company with a rise of 27.2% to $11.72 million, and the operating margin expanded an impressive 166 basis points to 10.26%.

Source: Krispy Kreme

Overall, the quarter was strong even though revenue came in lighter than analysts had expected. However, things took a turn for the worse when the company provided a weak earnings forecast for fiscal 2015. Its initial outlook calls for earnings of $0.71-$0.76 per share when analysts had expected to hear $0.77; a very narrow miss, but a miss nonetheless.

The company added that it expects to open 115-125 new locations worldwide and it expects further same-store sales growth at domestic company-owned locations. The stock reacted to the report by falling 20.2% in the next trading session and it has yet to recover, with the stock sitting over 25% below its 52-week high today.

Expectations & what to watch for
Krispy Kreme's fourth-quarter results are due out after the market closes on March 12 and the current estimates call for growth on both the top and bottom lines; here's an overview of those estimates:

These expectations call for earnings per share to increase by 18.2% and revenue to rise by 1.6% year-over-year. I believe that Krispy Kreme could easily attain these estimates, but I would also like to see three other things: margin expansion, an update on the release date for its K-cups, and a reaffirmed or raised outlook on fiscal 2015.

1. In the fourth quarter of fiscal 2013, Krispy Kreme's operating margin was just 7.15% while it was 10.26% in the most recent release. I would like to see this margin above 10% and pushing toward 12% by the end of fiscal 2015.
2. On Feb. 10, Krispy Kreme announced that it had reached a multi-year deal with Green Mountain Coffee Roasters to bring Krispy Kreme signature coffee K-Cup packs to the marketplace. In the press release, the company said that its cups would be released by the end of 2014, but I would like to see a more specific date because of the significant revenue stream that the cups could generate.
3. Most importantly, Krispy Kreme needs to, at the very least, reaffirm the guidance for fiscal 2015 that it provided in the third-quarter report. With this being said, I would much rather see the company raise its projected earnings per share range to $0.72-$0.77, which would include and satisfy analysts' previous estimates. If this happens, the stock would likely soar back to its previous highs. 

Source: Krispy Kreme

A strong indicator for Krispy
Starbucks (SBUX +0.32%) and Dunkin' Brands (DNKN +0.00%) are two of Krispy Kreme's largest competitors and both of them have recently released their quarterly results. These two companies show us the overall condition of the industry, so we must use the information provided by them to our full advantage. Here's a breakdown of their reports along with year-over-year comparisons:

Source: Starbucks and Dunkin' Brands Investor Relations

Starbucks' quarter was mixed in comparison with expectations, but it was still very strong year-over-year; in fact, it was the best first quarter in the company's history. Global comparable-store sales increased by 4%, which included 8% growth in the China and Asian Pacific region. Operating income rose by 29% and the operating margin expanded a very impressive 260 basis points to 19.2%. Also, Starbucks surpassed the milestone of 20,000 locations during the quarter and the company now operates 20,184 locations worldwide.

Source: Dunkin' Donuts Corporate

Dunkin reported in-line earnings and revenue that surpassed estimates, driven by a 3.5% increase in Dunkin' Donuts' U.S. comparable-store sales. Operating income increased by 11.8% and the operating margin expanded a strong 110 basis points to 48.7%. The highlight of the report came when Dunkin' raised its dividend by 21% and then announced the authorization of $125 million in share repurchases. Overall, both Starbucks and Dunkin' Brands had great quarters and this showed that the industry is still on the path of growth, which is a positive indicator for Krispy Kreme.

The Foolish bottom line
Krispy Kreme is looking to get its stock back on an upward track and a strong earnings report could make this happen. Analysts' estimates seem well within reach for Krispy Kreme and I believe it will also maintain its outlook on fiscal 2015. Furthermore, Starbucks and Dunkin' Brands reported great results of their own and this is a positive indicator for the strength of the industry. For these reasons, Krispy Kreme is worth considering by Foolish investors heading into earnings. If you have room for a quick-serve restaurant in your portfolio, take a deeper look into Krispy Kreme and decide for yourself if it could fulfill your needs, because I believe it is headed much higher.