What This Company’s Guidance Means and Why You Should Get In

Krispy Kreme logo

Krispy Kreme logo (Photo credit: Wikipedia)

Last month, Krispy Kreme Doughnuts (NYSE: KKD) announced its Q1, 2013 results, beating analyst estimates on revenue and earnings. The company went ahead and revised its initial guidance on earnings. The company had struggled to mount a sustainable rally since March, falling after every rise, but now seems set for a sustained rise.

Krispy Kreme, together with its subsidiaries, operates as a branded retailer and wholesaler of doughnuts, beverages, and treats and packaged sweets worldwide. It has 97 shops and operates 651 franchises, with only 142 of those based in the U.S., according to data as of Feb. 3, 2013. Regardless of the recent stagnation, the stock is up 52% year to date.

Krispy Kreme faces competition from industry giants such as Starbucks (NASDAQ: SBUX)and Dunkin’ Brands (NASDAQ: DNKN), while Einstein Noah Restaurant (NASDAQ: BAGL)is a relatively smaller rival in terms of market capitalization.

Solid results and solid outlook

Krispy Kreme is definitely getting back to the basics. The company reported $120.6 million in revenue for the most recent quarter, an 11% increase from last year, and beat analysts’ estimate of $117 million. Profits were up 33.3% from $6 million reported in 2012 to $8 million. However, this included provision for deferred income taxes it had taken last year. Without this,Krispy Kreme’s net profits were $0.04 above the analyst estimate of $0.16 per share.

Following this performance, the company added a smile to the investors’ faces by revising its initial guidance for earnings in fiscal 2013 from a range of $0.53-to-$0.57 to $0.59-$0.63 per share.

Krispy Kreme President, CEO, Director, and Chairman James H. Morgan commented, “as stated in our earnings release this afternoon, revenues for the quarter increased over 11% as we experienced top line growth across all 4 segments. Most notably, we delivered our 18th consecutive quarter of increased same-store sales at Company Stores, which rose an astounding 11.4%. This performance, which we believe significantly outpaces the industry, was driven primarily by higher customer counts, with only approximately 3% resulting from pricing.”

Krispy Kreme’s biggest direct competitor, Starbucks, also reported a solid quarter, as it grew earnings 26%. Dunkin’ Brands, and Einstein Noah, on the other hand, reported declines in earnings for their respective quarters. Starbucks’ most recent quarterly revenue grew 11.3%, just about the same rate reported by Krispy Kreme, while Dunkin’ Brands and Einstein Noah’s revenues grew 6.2% and 1.2%, respectively.

Krispy

The new guidance means that the company has increased its earnings guidance by at least $0.06. This translates to a solid 10.9% increase in guidance for EPS. According to Morgan’s statement, the resounding results were hugely supported by growth in the number of customers, but not price revisions. In fact, pricing contributed only 3%, which means 97% of the results were due to the company’s continuous growth in same-store sales.

Krispy Kreme’s 18-quarter streak of increasing same-store sales will play a major part in maintaining prospective earnings. This means that if same-store sales continue to grow, then there is a chance of trumping the new guidance at the end of this fiscal year. If the guidance was based on growth reported due to pricing, the potential for sustaining it, or even beating it would be over-ambitious. However, the denominator in this case (customer numbers) is quite reliable for a better performance.

Additionally, analysts’ old estimate of earnings, that is $0.55 per share, brings the company’s P/E ratio down to just 25x. If we factor in the revised guidance of about $0.60 per share, then we are looking at a forward P/E ratio of about 23.75x, not too far from the industry average of 21.68x.

This would also make the stock one of the cheapest in the industry compared to Starbucks’ P/E of 32.25x. Additionally, the company’s PEG ratio for the next five years is also very well positioned at under 1, compared to the industry average of 1.25. Starbuck’s PEG stands at 1.57, while Einstein Noah’s is pegged at 1.04. Dunkin’ Brands’ PEG is the highest at 1.70, with a P/E ratio of 42.64x.

The bottom line

Krispy Kreme may not be the biggest company in its industry, but it is showing grit and guts to take on the giants. Starbucks certainly is the dominant force, while Dunkin’ Brands, despite its huge market cap, could be rated below Krispy Kreme in terms of revenue potential going forward. Einstein Noah is the underdog in this case, and poses no major threat to Krispy Kreme’s prospects.

The simple fact is that when you are experiencing growth in same store sales for 18 quarters running, that means you are doing something good. So now, let us factor that good into the company’s price and see what happens. This is the main reason why I believe that the stock is set for a continuous rally going forward. That is why you should get in before it is too late to catch the tide.

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