News Column

Krispy Kreme Income Takes a Dunking

August 30, 2013
krispy kreme
Krispy Kreme doughnuts on the company's 75th birthday

Krispy Kreme Doughnuts Inc. reported Thursday a 4.3 percent decrease in net income to $4.7 million in its second quarter of fiscal 2014, which ended Aug. 4.

Revenue was up 10.4 percent during the quarter to $112.7 million, while company same-store sales rose 10 percent -- the 19th consecutive quarterly increase.

The profit was down in part because the company took a $1 million charge related to refinancing credit loans during the quarter, as well as retiring the remaining balance on a $22 million term loan.

The company took a non-cash charge of $685,000 to reduce the carrying value of deferred income tax assets. The reduction was a ripple effect from the N.C. General Assembly's recent approval of lower corporate income tax rates. Another factor was a $600,000 increase in its provision for income taxes to nearly $4.6 million.

Most analysts do not include one-time gains and charges in their quarterly earnings estimates.

Those caveats, however, did not seem to ease investor concerns about the overall decline in profit.

The earnings report was released after the stock market closed Thursday. After closing up 99 cents to $23.23, the share price fell 13 percent, or by $3.01, in after-hours trading after the quarterly report was released. Afterhours trading can foreshadow how investors will respond to a company's financial report in early normal trading the next day.

James Morgan, Krispy Kreme's top executive, called the revenue performance "outstanding that exceeded our expectations."

"Our dramatic same-store sales gain was driven primarily through higher traffic counts, as customers found more reasons to treat themselves to our unique products."

Krispy Kreme said company stores' sales of $75.7 million were driven principally by higher traffic volume, with higher pricing a smaller factor. International franchise revenues rose 4.8 percent to $6.1 million.

"Fiscal 2014 is proving to be an exciting year for our business, and we continue to forecast year-over-year growth in adjusted earnings per share approaching or exceeding 30 percent," Morgan said.

The company reaffirmed its adjusted net-income outlook from a range of $37 million to $40 million to a range of $42 million to $45 million, as well as its adjusted earnings forecast from 53 to 57 cents to 59 to 63 cents.

"Attaining the high end of our forecasted earnings guidance appears increasingly achievable," Morgan said.

Morgan said the company ended its second quarter with more than $60 million in cash "and basically no debt, and reduced our interest expense going forward."

Dan Caplinger, an analyst with The Motley Fool, said Krispy Kreme earnings, "though growing, are high enough to make value investors worried about whether the company's shares are getting ahead of its fundamentals."

"Years ago, many investors wrote off Krispy Kreme as a dead fad stock. Yet the company bounced back from its troubles, rediscovering its core offerings and seeking to get itself back on a growth track. Krispy Kreme's gains have come from growth that has consistently outpaced investor expectations."

Caplinger said he questioned the company's decision "in the face of a soaring stock" to launch a $50 million share-repurchase program in July. "With shares fetching almost 30 times forward earnings, some skeptical investors think the company is throwing away good money on an overpriced stock," he said.

However, Caplinger said that if the company can show growth not only in doughnut sales but in other parts of its menu, it "could easily see earnings rise much further in the years ahead."

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Source: Copyright Winston-Salem Journal (NC) 2013

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