Dunkin’ and Krispy Kreme: Not So Tempting

by Marc Bastow | August 24, 2012 7:30 am

OK, first things first: No, I’m not eating a doughnut while I contemplate comparing Dunkin’ Brands (NASDAQ:DNKN[1]) and Krispy Kreme (NYSE:KKD[2]). Let’s get that out of the way. Do I love doughnuts? Sure, who doesn’t? Do I love either company? Eh, not so much.

Based on most recent quarterly results, neither of these guys knocked it out of the park, and I have concerns over each company’s results and forecasts. I’m not so sure either one can deliver the goods. Let’s take a closer look:

For many, Dunkin’ Donuts is a staple of morning life as they head out to the nearest of the company’s 17,000 mostly franchisee-owned stores. Here’s a little bit of a surprise to most people: Dunkin only just went public[3] for the first time in 2011

So what do I like about Dunkin’ besides the lemon-filled doughnuts? Quite a bit:

Dunkin is expanding the franchise outside the U.S., with an outside goal of 400 to 450 new locations around the world, and as InvestorPlace’s Tom Taulli[4] recently pointed out, the potential to expand into China and perhaps India[5] is enormous.

Dunkin is also looking for ways to get people to order more than just that unbelievably delicious (yes, I am biased on that score) cup of coffee. Stores offer a robust breakfast menu, and even the limited lunch offerings are enough to tempt people who come in for coffee. And if you can’t get enough of the coffee in the store, bring it home. Dunkin’ now offers Green Mountain (NASDAQ:GMCR[6]) K-Cup servings of its own Dunkin brand coffees.

Innovation is another attraction to Dunkin. The company recently unveiled a mobile app that lets you pay for doughnuts with your iPhone, iPod touch or Android smartphone. Users can download the app from Google (NASDAQ:GOOG[7]) Play or Apple‘s (NASDAQ:AAPL[8]) App Store, add money through an American Express (NYSE:AXP[9]) or Visa (NYSE:V[10]) card, or your PayPal (NASDAQ:EBAY[11]) account and let the cashier scan your device for payment.

Want to be a nice guy or gal? Send a virtual Dunkin’ Doughnut card to a friend through Facebook (NASDAQ:FB[12]) Connect. Genius marketing, no?

What’s not to like?

Financial performance.

Most recent quarterly earnings and revenues were either right on analyst expectations or just above, but the important same-store sales measure was more than 1% lower than anticipated. Dunkin’ acknowledged  it expects revenue growth between 6% and 8%, with operating income growth of between 10% and 12%, both below analysts’ lower-end estimates. Competition is fierce, and in particular as the company expands to the West Coast (seven new stores added), it will run head-first into Starbucks (NASDAQ:SBUX[13]) territory.

Dunkin’ doesn’t have as much financial wiggle room as one would hope given the possible squeeze. It was nice for early investors to get out in the IPO, but it came at a cost because the company operates with a debt/equity level that could easily tilt to 200%. Free cash flow is around $75 million, but between interest loads, a newly increased quarterly dividend of 15 cents and a just-announced $500 million share buyback program, where on earth is it coming from?

All this with a P/E of over 50x trailing earnings is a bit much. A forward P/E of just over 18 is somewhat better, but it just seems a little rich to me. The stock is up just over 12% for the year, so for now I would pass, even with the 2.19% dividend yield.

But that doesn’t mean I would jump into Krispy Kreme for my fix. Like Dunkin’, it’s a relatively new player on the publicly held scene, though it did go public in 2000. How has it gone for investors who got into the stock at inception? Badly — to the tune of an 80% loss. Of course, a lot of that had to do with some accounting problems in 2007 which in truth were under an entirely different management team. So perhaps KKD gets a pass on that one.

Krispy Kreme is actually much more international than Dunkin’ with 417 foreign-based franchises compared to 230 in the U.S. According to an analysis by InvestorPlace contributor Lawrence Meyers[14], Krispy Kreme makes its money[15] on a loyal fan base that just swears by its doughnuts. However, other than opening up new stores, the company doesn’t show any particular ability to innovate for expansion and sales growth.

Taking a look at the numbers. Thursday’s earnings release showed a net income decline of 44% from the first quarter, while revenue increased by 4%, missing analyst estimates [16]on both the top and bottom lines. Net income actually declined nearly 80% year over year, dropping from $8.9  million to $4.9 million due to higher taxes.

Revenues rose over the last four quarters, but have fallen short of estimates in the last two quarters. Indeed, analysts are revising estimates downward, and according to[17] wallstcheatsheet.com, the average earnings estimate has moved down from 35 cents to 25 cents just over the last 60 days, despite word from KKD that they forecast an increase in earnings by 1 cent per share, or between 22 to 25 cents per share according to Marketwatch[18].  I am not sure who I can count on for this one.

Not good, and a trailing P/E of just over 3x suggests investors notice. Plus, there’s no dividend now or on the horizon.

The good news? KKD’s balance sheet is rock-solid. Cash flow more than covers capital expenditures and is sufficient to weather slower earnings growth. End of good news story.

So, I’m not a big fan of either stock. Here is perhaps the kicker: Year-to-date, the stocks are showing virtually the same 12% return to shareholders. Nothing to choose from, that’s how I view the kings of doughnuts.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.

  1. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  2. KKD: http://studio-5.financialcontent.com/investplace/quote?Symbol=KKD
  3. only just went public: https://investorplace.com/2011/05/dunkin-donuts-to-sell-stock-in-400m-ipo/
  4. Tom Taulli: https://investorplace.com/author/tom-taulli/
  5. expand into China and perhaps India: https://investorplace.com/2012/07/should-i-buy-dunkin-brands-3-pros-3-cons/
  6. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  9. AXP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AXP
  10. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  11. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  12. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  13. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  14. Lawrence Meyers: https://investorplace.com/author/lawrence-meyers/
  15. Krispy Kreme makes its money: https://investorplace.com/2012/02/doughnut-wars-krispy-kreme-kkd-dunkin-brands-dnkn/
  16. missing analyst estimates : https://investorplace.com/2012/08/krispy-kreme-tops-profit-estimates-shares-rise/
  17. according to: http://wallstcheatsheet.com/stocks/krispy-kreme-doughnuts-earnings-sugar-high-wears-off.html/
  18. according to Marketwatch: http://www.marketwatch.com/story/krispy-kreme-profit-falls-following-equity-sale-2012-08-22

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