The arrival of Krispy Kreme Doughnuts’ new chief executive coincided this week with it entering the latest in a series of pivotal transitions as a publicly traded company.
Tony Thompson took the helm of the Winston-Salem company Monday, the same day the company issued its quarterly earnings report for the first quarter of its fiscal 2015.
Thompson was so new to the post that Jim Morgan, his predecessor who now serves as executive chairman, gave him a pass on speaking with analysts as Krispy Kreme issued disappointing news in its after-market report for the third time in four quarters.
The latest crossroads looms large not just because Krispy Kreme lowered its fiscal 2015 earnings on Monday from a range of 73 cents to 79 cents to a range of 69 cents to 74 cents. That’s even though revenue during the quarter was up less than 1 percent to $121.6 million, and net income rose 20.7 percent to $9.6 million.
Investors reacted to the reduced projection by dropping the share price 14.8 percent to close Tuesday at $16.19. Although the share price has since not broken through its 52-week low of $15.70, it hasn’t rallied either.
The bigger challenge is that Krispy Kreme’s financial uncertainties may be on the verge of becoming too predictable to analysts and investors in a way that overshadows its remarkable return to sustainable profitability since 2008 under Morgan’s well-praised leadership.
Jonathan Heller, an analyst with TheStreet.com, led off his report Friday with “another quarterly earnings report, another bad day for Krispy Kreme. Seems as though the doughnut maker is always coming up a bit short of expectations.”
Heller reflected on what is the one dark spot on Krispy Kreme’s bright overall performance — the haunting worry that a fool-me-once, shame-on-you, fool-me-twice, shame-on-me scenario could unfold.
After debuting as a publicly traded company in April 2000, the company was a Wall Street darling for more than four years until July 2004 when it disclosed it was facing a U.S. Securities and Exchange investigation into its accounting and business practices under former chief executive Scott Livengood.
Krispy Kreme struggled for five years to overcome a series of legal, logistical, financial and franchisee challenges. Its share price dropped as low as $1.12 in March 2009.
“Krispy Kreme has a fabled past — it was one of the great cult stocks after going public in 2000, 63 years after opening its first store,” Heller said. “It was also a hot stock in its early years, rising to nearly $50 a share before the trouble started.
“The trouble, in this case, was overexpansion, bad management and poor accounting. The gravy train stopped swiftly. The company fell off investor’s radar.”
The main concern expressed by analysts since 2010 is whether Krispy Kreme can avoid expanding this time beyond its ability to handle growth.
In Monday’s report, Krispy Kreme said it opened 27 shops during the quarter, giving it a total of 855 domestic and international shops. Its goal is more than 900 global and 400 domestic shops by the end of fiscal 2017.
“We continue to view acceleration in domestic franchised unit growth as the most important hurdle in the brand’s long-term growth trajectory,” Wedbush Securities analyst Nick Setyan said.
Morgan has acknowledged publicly the potential Achilles heel to analysts and shareholders.
“We are no longer a turnaround story, but in the early stages of a growth story,” Morgan said at the 2013 shareholder meeting. “Our potential is so much greater than what we have accomplished so far. It is no longer about where we have been, but where we are going.”
Heller said he remains a believer in the Krispy Kreme turnaround because of “resurging sales, a growing international presence, along with a healthy amount of owned real estate.”
“When a company turns around as remarkably as Krispy Kreme has, renewed attention can bring high expectations. When those expectations are not met, the stock will suffer.
“I never expected a straight-up, uninterrupted rise in Krispy Kreme stock,” Heller said. “In fact, at times over the past four years the stock has gotten ahead of itself.”
The latest example cited by Heller and other analysts was the share price reaching a 52-week high of $26.63 on Nov. 21. Krispy Kreme hit that height 2 ½ months following the first of the latest earnings disappointments on Aug. 29, which led to a 15 percent share price drop to $19.72.
“I’ve occasionally exited or reduced the position when it became too frothy,” Heller said.
“It’s not frothy now. Not trading at 18 times next year’s consensus estimates. Not for a company that has a lot of room to expand around the globe. Not for a company that is an iconic brand, yet has a market cap and enterprise value of just $1 billion.”
Other analysts expect Krispy Kreme’s share price will reach a bottom at $15 a share and likely stay there until management raises earnings projections.
Setyan said he believes the lower fiscal 2015 earnings guidance “is realistic based on continued share repurchases ahead of expectations.”
The board of directors recently increased the current share repurchase authorization from $50 million to $80 million. Morgan said the company spent more than $25 million during the quarter on share repurchases for a total of $55 million in the current program.
“But we also believe upside from margin expansion could prove capped given the possibility of a lower comparison trajectory and a number of investments across segments,” Setyan said.
Sean Williams, a contributing analyst to The Motley Fool, has hit upon a similar theme in that possibly “the biggest competitor that Krispy Kreme is facing is the lofty expectations of its shareholders.”
“While the company may be on the right track on paper, its share price could languish if the reality of more tempered growth sets in with investors.”
Heller ended his report with a comforting bigger-picture message for Krispy Kreme and its investors.
“Sure, the quarter may have disappointed some investors, but it’s just one quarter,” Heller said. “The Krispy Kreme story is still intact.”
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