Krispy Kreme(NYSE:KKD) reported a growth in same-store sales and an increase in overall revenue last quarter, but a stumble with its consumer packaged goods -- the branded items it sells in grocery stores -- sent its stock tumbling.
Shares lost nearly 15% in September, according to S&P Capital IQ data, beginning their decline on Sept. 10, the day after the company reported its fiscal second quarter earnings. It was a case of investors latching onto bad news amid a sea of otherwise positive results. The company did draw attention to its packaged goods stumble in the earnings release, CEO Tony Thompson remarked:
We were pleased with our retail sales performance; however, Company Stores segment profitability was negatively affected by lower than anticipated results within our consumer packaged goods category. This, combined with some charges associated with our derivative instruments, resulted in us adjusting our financial outlook for fiscal 2016.
The problem was not overall earnings. Krispy Kreme revenue increased 7.3% to $259.8 million from $242.1 million in the year-ago quarter, and system-wide domestic same-store sales rose 5.4%, including a 3.3% gain at company-owned stores.
Why did the stock fall?
If Krispy Kreme could establish a major foothold in consumer packaged goods, it could grow much faster. Adding stores and franchisees is a slow process that involves a lot of risk. The company learned the hard way that despite strong early results, it was not going to be easy to compete in the Northeast where Dunkin' Donuts dominates.
In Connecticut, for example, the company launched a handful of stores, some of which needed police officers on traffic duty during their first days. Once the hype died, however, the stores struggled to keep an audience in the face of such a well-entrenched competitor. Now, all of the stores in the state have been closed except for a location inside the Mohegan Sun Casino.
Building a successful packaged goods business would have allowed the company to grow without needing to rapidly expand with new locations. Its struggles in that area likely lessen the immediate upside of its share price.
All is not lost
While Krispy Kreme's immediate growth prospects might be constrained by its packaged goods struggles, the rest of its financials were pointing in a positive direction. That gives the company time to rethink its strategy and eventually build its brand outside of its own stores.