Krispy Kreme Doughnuts (NYSE:KKD) is a stock that I have been bearish on in recent years. It’s not that I don’t like its morning delights or the company’s concept; I just think it has too many stores with scattered success.
I believe Krispy Kreme needs to start a delivery service. If and when the company starts thinking about becoming the Domino’s Pizza, Inc. (NYSE:DPZ) of doughnuts and offers delivery, I can then see a longer-term investment, which is why I don’t like shorting the stock for long periods of time. A dozen hot-glazed doughnuts delivered at midnight or 8 a.m.? Sign me up!
But, in the meantime, management has been lousy when it comes to meeting Wall Street’s expectations. Over the past four quarters, Krispy Kreme has matched twice and missed estimates by $0.03 and $0.01.
The company’s last quarter matched the $0.17 a share profit that analysts were looking for, but I thought that they might miss on revenue. They did after KKD reported $125.4 million versus the $126.8 million that was penciled in.
Krispy Kreme shares were above $20 in early March, which is when I suggested using put options, as I expected a 5%-10% drop on a possible earnings miss and lowered guidance. The stock traded to a low of $18.50 a couple of days later, and I suggested locking in profits.
I wanted to get out of the trade quickly because I said Wall Street had a love affair with the stock. Sure enough, a few days afterwards, shares were back above $20, which is where they stayed for the much of the rest of March.
The next earnings release is scheduled for early June, and forecasts are calling for $0.22 a share on sales of $1.36 million. For 2015, KKD backed forecasts for $0.69-$0.74 a share versus $0.72 a share. Management also provided guidance for fiscal year 2016 in the last earnings call and said that earnings would come in between $0.79-$0.85 a share.
This sounded good in the conference call, but it doesn’t look as pretty on paper, as the suits-and-ties were looking for $0.84 a share. Krispy Kreme’s forecast provided a penny of upside surprise, but a nickel of downside was also built in. For 2015, there is two cents of upside surprise and three cents of downside factored in.
I always talk about revenue being the better driver of a stock price, and I have a feeling that Krispy Kreme’s current quarter won’t match expectations. The best way to trade it is with short-term puts.
Buy to open the KKD June 17 puts (KKD150619P00017000) at current levels.
I actually recommended this Krispy Kreme trade to my Momentum Options members on Tuesday afternoon, and by Wednesday morning we had clocked in 100% on the first half of our position, but I still like the puts at current levels around 70 cents, as my final exit target is $1.05, which would net an easy 50% if KKD disappoints as I expect.
The best part of going short or buying put options on a move below $18.50 is that I do not have to worry about the earnings announcement until early June. This means that the headline risk is lessened, and shares should trade more on their fundamentals and technicals, which are lousy.
The recent backtest to the 200-day moving average is currently holding. There is additional risk to $17.50-$17 on a close below $18.50. The mid-April low reached $18.47, and resistance is at $19.50-$20.
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