Is the Sugar Rush Over for Krispy Kreme?
Despite the recent slide in Krispy Kreme's shares, the stock has still appreciated 113.2% over the past year. It has outperformed Dunkin' Brands and Starbucks over the same time frame, as these companies have seen stock appreciations of 48.77% and 52.19%, respectively.
The irony is that while Krispy Kreme has shown improvement, it's not as strong of an operation as Dunkin' Brands or Starbucks. The stock has performed well because investors love growth and turnaround stories. You could argue that Krispy Kreme falls into both categories. The problem now is that the company's growth might have been a bit too ambitious in regards to expansion.
Prior to getting to future expectations for Krispy Kreme and comparing them to expectations for Dunkin' Brands and Starbucks, let's first take a look at the recent results for Krispy Kreme, which will give you a good base for the story and what's taking place.
If you only glanced at Krispy Kreme's third-quarter results without reading between the lines, then you might be impressed. For instance, revenue increased 6.7% to $114.2 million year over year, versus an analysts' consensus of $144.1 million. Price increases played a big role. Profit improved 34% to $6.8 million thanks to higher sales numbers and lower interest expense ($131,000 from $384,000). Furthermore, company-owned comps jumped 3.7%. That's not all. There are more impressive numbers to ponder. Domestic franchise revenue increased 0.5%, primarily because of royalties. Comps at domestic franchise stores skyrocketed 10.7%. It's clear that the domestic picture is at least relatively healthy. The problem is on the international side of the business, for the present and possibly the future.
International franchise revenue increased 3% to $6.2 million thanks to royalties. That's the good news. The bad news is that international franchise comps slid 3.1% on a constant-currency basis. If you follow this column, then you might recall that I have been bearish on Krispy Kreme for a long time. For a while there, I looked like an (fill in the blank). However, my primary long-term concern was cannibalization.
In my opinion, the company is too ambitious with its growth plans. Put simply, it's growing too fast. While the store sizes are smaller than they were during the last go-round when the company failed, Krispy Kreme's following a similar pattern now, and it's once again assuming that the economy will continue to grow without any significant future pullbacks. Don't take my word for it; listen to Krispy Kreme. It has already stated that while it expects positive domestic comps going forward, negative international comps are likely.
I'm having a difficult time trying to figure out how international comps will improve in the future if more stores keep opening and stealing share from one another. On the other hand, if you're looking at this strictly from a revenue standpoint, then all is well.
As far as those ambitious goals, Krispy Kreme plans on opening 85 international franchise stores next year. Domestically, it plans on opening 10 company stores and 20-25 franchise locations. Dunkin' Brands and Starbucks are likely to offer more potential, which will be covered below.
If you're looking for a little more optimism about Krispy Kreme, it does have the capital to fulfill its current ambitions. For instance, Krispy Kreme has a positive balance sheet (rarely seen in today's environment), with $60.32 million in cash vs. $1.33 million in long-term debt. It has also generated $63.78 million in operating cash flow over the past year.
While Krispy Kreme is trading at a premium compared to Dunkin' Brands, 32 times forward earnings vs. 27 times forward earnings, Dunkin' Brands hasn't been growing as fast on the top line:
On the other hand, Starbucks steals the show, which is commonplace. Like Krispy Kreme, Starbucks is impressive fiscally. It sports a positive balance sheet, with $3.23 billion in cash vs. $1.30 billion in long-term debt. Starbucks has also generated $2.91 billion in operating cash flow over the past year. Therefore, Starbucks has plenty of capital to put back into its business and return to shareholders. Its 1.30% yield is very safe. For the record, Dunkin' Brands yields 1.60% and Krispy Kreme doesn't offer any yield. Starbucks, by the way, offers a better value than its peers, showing the most growth and trading at 25 times forward earnings.
Krispy Kreme is likely to see growth thanks to new store openings and increased retail price increases. However, international comps are likely to be negative. Dunkin' Brands is seeing a similar pattern with domestic comps up 4.2% in the third quarter thanks to increased traffic and average ticket size, and international comps down 1.4%. That said, Dunkin' Brands is a stronger brand that has shown sustainable growth over a longer period of time. Its Baskin-Robbins brand showed a third-quarter domestic comps improvement of 3.2%, as well as an international comps improvement of 0.7%
As far as Starbucks is concerned, its fourth-quarter revenue jumped 13% to $3.8 billion, with comps increasing 8% in the Americas and 7% globally. It attributes its success to innovation, deepened customer engagement, and fiscal responsibility.
The bottom line
The largest portion of Krispy Kreme's recent growth-run appears to be over. However, nobody can predict the future with pinpoint accuracy. All we know is that when it comes to coffee and sweets, Starbucks appears to be the best-run company of the three, with Dunkin' Brands a close second. The coffee behemoth from Seattle continues to show growth, and its strong comps indicate sustainable demand going forward.
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The article Is the Sugar Rush Over for Krispy Kreme? originally appeared on Fool.com.Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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