When your stock is up 148% since the start of 2013 and 216% in the past year, you can't afford missteps, even minor ones, and still expect forgiveness.
That was clear with Krispy Kreme Doughnuts (KKD), whose shares were slumping Friday after its quarterly earnings weren't up to the target set by analysts. In early trading, the stock was down 13.3% to $20.15 on heavy volume, giving it for the moment its 12th-worst single-session drop dating back to its public debut in 2000, according to FactSet data.
It's easy to make the argument that Krispy Kreme has gotten expensive after its giant run over the past year. The S&P 500 has climbed 17% in the past 12 months, less than 1/10th the advance in the doughnut shop. As of Thursday, Krispy Kreme had a forward price-to-earnings ratio right at 33, higher than its five-year average of 28.7 and exceeding similar operators such as Dunkin' Brands (DNKN), Einstein Noah (BAGL) and Starbucks (SBUX), which, for comparison, has a 27.1 multiple. The current ratios for Krispy Kreme, highlighted below in green, all surpass the average of the most recent half-decade.
With its other valuation measures on the high side relative to their regular levels, Krispy Kreme couldn't afford any bumps, and earnings turned out to be a big one. Though the company stayed with its most recent full-year projection for a profit of 59 cents to 63 cents a share, the second-quarter result was carrying the day. The Winston-Salem, N.C., company said it had adjusted earnings of 14 cents a share for the quarter, whereas analysts were looking for 16 cents.
In its earnings press release, and again on the conference call, the topic of an additional deduction of 3 cents a share for derivative-related losses and one-time items that weren't reflected in the adjusted figure arose, but Wall Street was sticking with 14 cents as the number, therefore making it a 2-cent miss.
But it wasn't entirely bad, and sales measures continued to be more positive. Krispy Kreme had $112.7 million on the top line, up 10.4% from the year-ago quarter and slightly better than the $111.9 million consensus estimate. Same-store sales for company-owned locations rose 10%, topping the 6.3% forecast and giving it a seventh beat for comparables in the past nine quarters. The biggest component of the increase was a 6.8% increase in traffic.
Again, though, the sales part of the equation didn't matter for the day. If you're sitting on a stock that's tripled in the course of a year, in particular one that's easily argued as pricey by several metrics, judgment for any shortcoming can be both fast and severe. And Krispy Kreme and its investors were on the receiving end of it.