Krispy Kreme’s Frosting Melts Off

by Alyssa Oursler | August 30, 2013 7:26 am

Krispy Kreme Doughnuts (KKD[1]) stock tacked on a 4% gain Thursday — a small boost that pushed its year-to-date climb just shy of 150%.

And then earnings happened.

Sure, the doughnut-maker’s revenue increased roughly 10%, same-store sales rose 10%, operating income rose 15% and adjusted net income rose 17% in the second quarter. But those numbers weren’t enough for investors in the rapid-growth stock that has posted sizzling gains.

Heading into the earnings report, KKD was already looking plenty frothy. The run-up in Krispy Kreme stock put its forward P/E north of 30 before the selloff — a bit expensive compared to its projected five-year annual growth of 25%.

Plus, investors set a high bar, expecting earnings growth of 25%. As I wrote a few weeks back[2]:

“That’s not unreasonable considering KKD earnings rose 43% year-over-year in Q1 and beat analyst estimates by three pennies, while sales and same-store sales both climbed around 11%. But the slightest sign of a slowdown could also send investors straight for the door.”

And to the door they went. KKD looks set to open Friday down 10% or more.

Even then, Krispy Kreme still will be sitting on a doubler for 2013, and the selloff would put the stock much closer to fair value at roughly 26 times next year’s earnings.

Plus, management did note that Krispy Kreme has enjoyed higher traffic counts “as customers found more reasons to treat themselves to our unique products” — which I’m assuming is in reference to the company’s expanding product line. While you probably associate Krispy Kreme with its famous “hot now” glazed donuts, the company has been expanding heavily into specialty beverages a la Dunkin Donuts (DNKN[3]) and Starbucks (SBUX[4]).

Still, lemonades and mochas weren’t enough to help a stock that has run too far, too fast.

The lesson from KKD’s post-report move is clear: When you bet on big growth, you better meet the inevitable high expectations that will come with it. While Krispy Kreme’s run in 2013 has been impressive, it will have to really blow the socks off analysts and investors for KKD to keep cooking up massive outperformance.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. KKD: http://studio-5.financialcontent.com/investplace/quote?Symbol=KKD
  2. As I wrote a few weeks back: http://investorplace.com/2013/08/krispy-kreme-stock-is-sizzling/
  3. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  4. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX

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