What: Shares of Krispy Kreme Doughnuts (NYSE: KKD) fell as much as 17.5% on Thursday morning, before climbing back to a milder 12% overnight drop around 11:30 a.m.. The doughnut chain reported second-quarter results on Wednesday night, falling short of analyst projections across the board.
So what: In the second quarter, Krispy Kreme saw sales rise 5.6% year over year, landing at $127.3 million. Adjusted earnings rose 9.7% to $0.15 per share. Analysts were looking for earnings near $0.19 per share on $131 million in total sales.
Krispy Kreme's management also reduced earnings guidance for the full fiscal year. The new full-year adjusted earnings range centers on $0.78 per share, up from $0.70 per share in 2014 but down from $0.83 per share in the first-quarter report's guidance. The Street currently expects full-year earnings of roughly $0.85 per share.
Now what: To explain the weak results and soft guidance, management pointed out two main culprits.
First, Krispy Kreme recorded $532 million of non-cash losses on its portfolio of financial derivatives.
Second, sales of packaged consumer goods -- intended for sale in grocery stores and other third-party outlets -- were flat year over year. That division saw 3.2% annual growth in the first quarter, and management was expecting another round of modest growth here. Keep in mind that this business accounts for some 47% of Krispy Kreme's company store sales and 31% of the company's total revenues. Small percentage changes can result in large revenue and profit surprises.
Krispy Kreme reported strong same-store sales growth in both its franchised and company-owned markets -- domestically. International franchises, on the other hand, saw their same-store sales drop 12.6% year over year. Even after backing out currency exchange rate effects, overseas stores still saw 2.7% lower revenues per comparable location.
The company is in the process of opening more than 450 new stores, including locations in eight new international markets.
On the home front, Krispy Kreme hopes to have a customer loyalty program in place by the end of the year, which should provide a modest revenue boost along with more predictable results. Moreover, the company launched a new line of bottled coffee drinks near the end of the second quarter, hoping to kick-start the stalled growth in packaged goods.
The stock set fresh 52-week lows on the news, and now trades at the lowest price-to-free-cash-flow ratios seen in two years. If Krispy Kreme can overcome its stalled international growth and find new ways to promote packaged goods domestically, this could be a great entry point for long-term investors. Mind you, these are two big caveats, even if management does appear to have workable plans up their sleeves.