Why Krispy Kreme Doughnuts' Earnings Results Were Better Than You Think

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After Dunkin' Brands Group reported that bad weather kept its same-store sales underneath a heap, it should have been no surprise when Krispy Kreme Doughnuts reported similar results. Both doughnut and coffee chains deserve a free pass this round, and it seems like there were a number of items that many overlooked with Krispy Kreme Doughnuts' release in particular.

The glazed-over results
Krispy Kreme Doughnuts reported fiscal first-quarter results on June 2. Revenue rose a hair higher by 0.8% to $121.6 million though it would have been 2.1% if you excluded the effects of refranchising. Systemwide same-store sales lifted 2.3% while they slipped 2.2% internationally. Adjusted net income popped 12.2% to $15.8 million or $0.23 per share.

James H. Morgan, Executive Chairman of Krispy Kreme Doughnuts, stated that the company posted its highest quarterly pre-tax earnings for any single quarter in over 10 years. That makes it hard to call it a bad quarter in and of itself despite the Street, perhaps, hoping for more. He noted that "severe winter weather" caused disruptions that weighed negatively on sales.

The weather outside was frightful
Nigel Travis, Chairman and CEO of Dunkin' Brands Group, had a similar note for the Dunkin' Brands Group. He stated, "We had a difficult first quarter with our comparable store sales growth in the U.S. significantly affected by severe weather in the regions of the country where most of our Dunkin' Donuts restaurants are located."

In an interview with CNBC, Travis gave a more detailed explanation for why the weather hurt Dunkin' Brands Group. He explained that Dunkin' Donuts is the type of place you go to on the way to work and school as a ritual. At other restaurants, if you have, say, bad weather on a Friday night -- no big deal -- you go out to eat to celebrate your wedding anniversary on Saturday night instead. For Dunkin' Brands Group, sales are lost on bad weather days and won't be made up.

It's hard to imagine that Krispy Kreme Doughnuts is much different in that regard.

Source:  Wikimedia Commons

More warming details
Morgan also pointed out that Krispy Kreme Doughnuts had a first-quarter comparison to an extremely tough quarter to beat last year. In that quarter, company-owned shops saw a staggering 12.2% gain while domestic franchisees saw a gain of 11.8%.

In light of the slightly disappointing first quarter, Krispy Kreme Doughnuts lowered its full-year outlook but its forecast still calls for a sizable earnings-per-share leap of between 13%-21% over 2013, which itself was up 30% over 2012.

The company expects double-digit percentage gains in earnings per share even after the impacts of several large, temporary costs such as a technology upgrade and senior management succession plan charges.

During the conference call, Morgan pointed out that the company-owned stores saw their second highest level of profitability in many years aside from the first quarter of last year. In the meantime, the store count itself is set for continued acceleration. Krispy Kreme Doughnuts plans to add 10% more stores this year alone and recently opened its 600th international location.

Foolish final thoughts
Krispy Kreme Doughnuts guided for earnings per share for this fiscal year of between $0.69-$0.74. Analysts have it at $0.72 this year and $0.88 next year. Based on the current share price, that puts the P/E at around 20 this year and 18 next year. Compare that to Dunkin' Brand Group, which trades with P/E ratios of 24 and 20 based on this year's and next year's analyst EPS estimates.

Also, if you look at Krispy Kreme Doughnuts' P/E over the last decade, it's usually at much higher levels than current even though also at times its business seemed more uncertain.  For instance, most of 2013 the P/E was over 50.  Based on the knee-jerk dip lately that seems to have the stock priced cheap for the long term, now could prove to be a good time to grab a box of shares.

Krispy Kreme Doughnuts had similar problems last quarter to Dunkin' Donuts, is expected to grow at around the same pace, has a very similar business model and products, and has similar opportunities going forward. Krispy Kreme Doughnuts deserves a closer look by Fools.

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The article Why Krispy Kreme Doughnuts' Earnings Results Were Better Than You Think originally appeared on Fool.com.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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