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Krispy Kreme Upped to Strong Buy

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On Jul 2, 2013, Zacks Investment Research upgraded Krispy Kreme Doughnut Inc. to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Krispy Kreme has been witnessing rising estimates after the completion of a strategic alliance and better-than-expected first-quarter results.

On May 30, the company reported first-quarter 2014 adjusted earnings of 20 cents per share, beating the Zacks Consensus Estimate by 4 cents and the year-ago level by 6 cents. Earnings were benefited by margin expansion.

Total revenue grew 11.2% on the back of substantial increases at company-store, and domestic and international franchise revenues. Higher traffic leading to an increase of 11.4% in same-store sales provided the company a shot in the arm.

The strong first-quarter results and management’s increasing faith in the company’s prospects led it to raise the fiscal 2014 earnings per share guidance to a range of 59 cents–63 cents from 53 cents–57 cents. This revised range implies a year-over-year increase of around 26%–34%.

In Jun 2013, Krispy Kreme formed a joint venture with an affiliate of Sun Holdings, LLC for re-franchising three company-owned shops in Dallas, Texas. The deal is targeted to enhance its domestic franchise expansion.

Franchising reduces the capital requirements of the company and thereby, drives earnings per share and return on equity (ROE). Alongside, free cash flow continues to grow, allowing reinvestments for increasing brand recognition and enhancing shareholders’ return.

The Winston-Salem, NC-based company is geared to enter into strategic alliances with several companies. As of Feb 2013, there were nine Krispy Kreme franchise stores in Texas and the company plans to add four more stores to the list in the future.

The Zacks Consensus Estimate for fiscal 2013 increased 8.7% to 62 cents per share as all the three estimates were revised higher over the last 60 days. The current estimate is above the guidance range provided by management. For fiscal 2014, all the estimates were also revised higher over the same time frame, lifting the Zacks Consensus Estimate by 4.4% to 71 cents per share.

Other Stocks to Consider

Others players in the same industry which look attractive currently include Ruth's Hospitality Group Inc. (RUTH - Free Report) with a Zacks Rank #1 (Strong Buy), and The AFC Enterprises Inc and Brinker International Inc. (EAT - Free Report) , both with a Zacks Rank #2 (Buy).

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