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Krispy Kreme Down on Weak Q1 Earnings, Cuts View

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Shares of Krispy Kreme Doughnuts, Inc. plunged 14.8% on Jun 3 after the company announced dismal fiscal first quarter 2015 results and a weak outlook for the fiscal year. Adjusted earnings of 23 cents per share missed the Zacks Consensus Estimate by a penny due to lower than expected sales. However, earnings increased 15.0% year over year as increase in operating income made up for weak revenues.

Total revenue went up 0.8% year over year to $121.6 million as domestic same store sales (comps) made up for the weak international comps. However, the top-line missed the consensus mark of $127.0 million by 4.3%. The company indicated that extreme winter weather conditions hurt customer visits, thereby affecting sales.

During the reported quarter, systemwide domestic comps went up 2.3% while constant currency international franchise comps declined 2.2%.

Behind the Headline Numbers

The company operates through four segments, namely Company Stores, Domestic Franchise, International Franchise and KK Supply Chain.

Revenues at Company Stores declined 1.8% to $80.4 million due to sluggish comps. Comps declined 1.5%, worse than comps growth of 12.2% in the year-ago quarter and 1.6% in the prior quarter. The sluggish comps reflect a severe winter weather that adversely affected sales throughout the company store base in the Southeast.

The Domestic Franchise segment generated revenues of $3.5 million, up 21.9%, owing to higher royalties, initial franchise fees and ancillary revenues. Comps at Domestic Franchise were up 4.5%, lower than the year-ago comps growth of 12.0% and prior quarter comps growth of 6.2%.

International Franchise revenues went up 2.1% to $6.6 million, driven by higher royalties. Comps at international franchise stores rose 3.9%, lower than the prior quarter comps growth of 10.0%.

Including sales to Company stores, KK Supply Chain revenues were up 0.8% to $60.3 million. External KK Supply Chain revenues rose 5.7% to $31.1 million.

Total general and administrative expenses were $7.0 million, up 16.4% year over year, owing to incremental expenses related to the implementation of the new enterprise resource planning system system.

Operating income went up 6.6% to $16.2 million while operating margins went up 70 basis points due to decline in direct operating expenses.

Fiscal 2015 Outlook Lowered

The company lowered its earnings guidance for the fiscal year and expects it in the range of 69 cents to 74 cents per share, down from prior expectations of 73 cents to 79 cents per share. The guidance takes into account costs related to implementation of new technology systems and higher compensation costs related to management succession, partially offset by lower expectation for current income tax expense.

Our Take

Like other food chains, Krispy Kreme could not remain immune to the inclement weather. Despite posting a year-over-year increase in the top and bottom lines, Krispy Kreme failed to impress investors, as it missed expectations and lowered its guidance for fiscal 2015. However, going forward, the company’s focus on high-growth international markets may somewhat offset the negatives faced during the first quarter.

Other Stocks to Consider

Krispy Kreme presently has a Zacks Rank #4 (Sell). Some better-ranked stocks worth considering in the restaurant industry include Buffalo Wild Wings Inc. , Burger King Worldwide, Inc. and Carrols Restaurant Group, Inc. (TAST - Free Report) . While Buffalo Wild Wings sports a Zacks Rank #1 (Strong Buy), Burger King Worldwide and Carrols Restaurant Group carry a Zacks Rank #2.


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