Krispy Kreme (KKD) — how lusciously melt-in-your-mouth glorious they are … said everyone except me, as I had yet to taste a Krispy Kreme at that point in my life. Then my friends took me to one of the stores in Virginia where I tried my first hot-off-the-rack Krispy Kreme doughnut. And I understood.
I gave some serious thought to investing in KKD stock, but something held me back. I just couldn’t get past the fact that at the end of the day, I was investing in doughnuts.
While they tasted great, they were still just doughnuts. There was no barrier to entry. And I remembered how poorly bagel company stocks had fared, so I begged off. I’m glad I did.
Then came the U.S. Securities and Exchange Commission accounting investigation. Followed by the low-carb diet craze in the midst of KKD’s too-rapid expansion and subsequent cannibalism of stores. Franchisees complained about having to purchase equipment from KKD-owned manufacturers. Then came even more SEC problems, with channel stuffing and buying back its own stores to inflate earnings.
That was years ago. But today, I’m still stale on KKD stock, as you should be.
Krispy Kreme Earnings: A Little Glaze, But No Lasting Flavor
Krispy Kreme’s second-quarter earnings tell you all you need to know about KKD:
Revenues increased 5.7% to $127.3 million, on a 5.5% increase in domestic same-store sales, but a 2.7% international same store sales decline in constant currency. Operating income was up 11.6% to $10.7 million, while KKD posted earnings of 9 cents a share, up a penny year-over-year.
Through the first half of the year, KKD improved revenues by 7.3%, clocking in at $259.8 million on a similar domestic same-store sales gain of 5.4% (and a 2.2% international decline). Operating income for the first six months of this year is up nearly 9%, at $28 million, while the year-to-date earnings came in at 24 cents, up two pennies from the year-ago period.
There are some important notes to these decent revenue increases. Franchise revenues for the U.S. popped 19.4%, because KKD boosted its development, franchise and royalty fees.
It’s also worth noting that franchises are killing company-owned stores. Same-store sales at franchises increased 7.3% vs. 2.3% at company-owned stores. What does it say when franchises care more about their traffic then the parent company?
KKD also repurchased 1.9 million shares of stock for $34 million during the year thus far. I generally don’t care for repurchases unless the stock is trading below fair value or below its growth rate, which KKD stock isn’t.
Management expects earnings between 76 and 80 cents per share, up about 10% over last year without factoring in share repurchases. Still, let’s assume 10% earnings growth. The stock is trading at $14.96 in early morning trading Thursday, meaning it trades at about 20 times fiscal year 2016 estimates while growing EPS at 10%.
No way am I touching KKD stock after this report, and no way am I touching KKD stock when it is trading at twice fair value.
Why is management spending money on its own stock when it is trading well above fair value? Because some things never change.
If you own KKD stock, I suggest you sell it and move on to something else with less fat in its valuation.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.