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Krispy Kreme a Penny Short, Net Ups

Zacks Equity Research

Krispy Kreme Doughnuts Inc. (KKD) posted fourth quarter 2012 adjusted earnings of 6 cents per share, lagging the Zacks Consensus Estimate by a penny. Quarterly earnings came in the positive territory from the year-ago level of 2 cents loss per share. On a reported basis, Krispy Kreme earned quarterly earnings of $2.01 per share.

Total revenue climbed 11.2% year over year to $102.0 million in the quarter. Within segments, company store revenues grew 11.0% year over year to $68.6 million, Domestic franchise revenue grew 9.3% to $2.4 million and International franchise revenue escalated 22.2% to $6.3 million, driven by higher royalty revenues.

Total KK Supply Chain revenues increased 13.4% to $52.0 million buoyed by a selling price hike in major product categories. KK Supply Chain raised selling prices to counter higher input costs, mainly agricultural commodity.  

Same-store sales at company stores rose 8.3%, reflecting the thirteenth consecutive quarter of comps growth. Domestic franchise same-store sales grew 7.9%, but International franchise same-store sales fell 8.8%. Operating income in the quarter increased to $5.3 million from $0.9 million.

In full-fiscal 2012, adjusted earnings per share were 31 cents as against 11 cents recorded in the prior-year quarter. Total revenue went up 11.4% to $403.2 million.  

Store Update

During the quarter, Krispy Kreme opened 26 franchise stores and 3 company-owned stores and closed 13 franchised stores. At the end of the quarter, the company had 92 company stores and 602 franchise stores.

Financial Position

Krispy Kreme ended fourth quarter 2012 with cash and cash equivalents of $44.3 million and shareholders’ equity of $249.3 million. Long-term debt less current maturities was $25.4 million versus $32.9 million as of January 30, 2011.


For 2013, operating income has been guided to a range of $29 million to $33 million inclusive of impairment and lease termination costs.  Earnings are estimated to remain between 21 cents and 24 cents.  On an adjusted basis, management expects 35-41 cents in earnings per share, which includes only income tax. The big difference in both guidance resulted from an increase in the estimated tax rate to 45% from management's earlier estimate of 6-7%. The higher tax rate arises out of the reversal of valuation allowances on deferred tax assets in the fourth quarter of fiscal 2012.

In 2013, the company anticipates opening 5 to 10 company stores, 10 to 15 domestic franchise stores and more than 75 international franchise stores.

Our Take

We heard a clear optimistic tone from Krispy Kreme earnings release regarding its expansion plan, menu planning and an enthusiasm to brew up its beverage line.  Last year, Krispy Kreme introduced Coffee Blends in cups, brew boxes and  fresh retail bags for home brewing. Buoyed by the strong results in coffee transaction, the company now looks steadfast to triple coffee sales by the end of fiscal 2015. At the current level, on-premises coffee sales, account for about 4% of in-store mix. Here is not the end; Krispy Kreme puts concerted efforts in menu improvement to drive traffic in order to excel in its under-penetrated day parts along with crowded morning and afternoon hours.

The company also remains committed to expanding its business in both international and domestic markets. According to management, its target is to have 900 stores in operation by the end of fiscal 2017.

On the flip side, the company's effective income tax rate for the years after fiscal 2012 will rise substantially.

Furthermore, the company stated that prices of agricultural and other commodities will remain unstable. Krispy Kreme is resorting to all possible measures like reduction in consumption of certain key ingredients to weather this pressure.

Krispy Kreme, which competes with the likes of Red Robin Gourmet Burgers Inc. (RRGB) and Papa John's International Inc. (PZZA), currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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