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Krispy Kreme Doughnuts Inc.’s (KKD - Snapshot Report) second-quarter fiscal 2014 adjusted earnings of 14 cents per share missed the Zacks Consensus Estimate of 15 cents by a penny. Earnings per share, however, beat the year-ago quarter’s earnings of 12 cents by 16.7% on the back of solid top-line growth.

Quarterly revenues increased 10.4% year over year to $112.7 million. Higher same-store sales at company-owned units, increased traffic and strong franchise revenues backed the year-over-year rise in top line. Revenues also surpassed the Zacks Consensus Estimate of $110 million by 2.5%.

Operating income in the quarter was $10.6 million, up 14.8% year over year, driven by higher top line.

Behind the Headline Numbers

Krispy Kreme earns revenues from its Company Stores, Franchise (International and Domestic) segment and KK Supply Chain segment.

Company Store revenues were up 9.2% year over year to $75.7 million on the back of solid comps growth at company stores and higher sales gain from the refranchised stores. With the rise in traffic, the segment’s comps grew 10% during the quarter, marking the nineteenth consecutive quarter of positive comps growth.

Domestic Franchise revenues stood at $2.8 million, up 15.2% from the year-ago quarter, thanks to increased royalties and an 11.5% rise in domestic franchise comps. 

International Franchise revenues escalated 4.8% to $6.1 million with the rise in royalty revenues. However, comps at international franchise stores were down 8.6% (impact of currency translation excluded) mainly due to a prolonged honeymoon effect at new stores, which is cannibalizing sales at older stores in the market. Comps in the quarter were also adversely affected by the shift in holiday timings in the company’s several international locations and warm weather in the U.K.

KK Supply Chain revenues rose 11.1% year over year to $57.2 million, fueled by positive doughnut mix and increased selling prices.

Share Repurchase

During the quarter, the company approved a new stock repurchase program, thereby maintaining the trend of returning wealth to its shareholders from time to time. Under this program, the company is authorized to repurchase up to $50.0 million worth of its common stock with immediate effect. As of Aug 4, 2013, Krispy Kreme had approximately 71 million shares outstanding.

Store Update

During the quarter, Krispy Kreme opened two company-owned and 20 franchise stores. In addition, Krispy Kreme closed five international franchised stores and one company stores. At the end of the quarter, the company operated 93 company stores and 696 franchise stores.

Krispy Kreme is focusing on building new, smaller factory stores in order to increase its presence in smaller markets. The company intends to open 4–5 smaller prototype units in fiscal 2014. Krispy Kreme also plans to operate 900 international stores by early 2017.

Outlook

Krispy Kreme reaffirmed its outlook for fiscal 2014. Adjusted earnings are expected to be between 59 cents and 63 cents per share, up 26%–34% from the year-ago quarter.

Our Take

Krispy Kreme is gradually moving in a positive direction. Double-digit earnings growth, higher top line, various strategic alliances, expansion of its franchising business and effective utilization of cash provided the company a shot in the arm.

Krispy Kreme’s increasing focus on expansion efforts and menu innovation is continuously boosting its comps. Moreover, the company’s newly launched smaller factory stores are also contributing to its business.

Others players in the same industry, which look attractive at current levels, include AFC Enterprises Inc. , Domino's Pizza, Inc. (DPZ - Analyst Report) and CEC Entertainment Inc. . All these stocks carry a Zacks Rank #2 (Buy).

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