Krispy Kreme stock looks tastier than Dunkin'

But doughnut-craving investors should beware of empty calories.

By Jonathan Berr Mar 21, 2012 12:27PM
Krispy Kreme (KKD) posted better-than-expected earnings Tuesday as the company gears up for a fight with rival Dunkin' Brands Group (DNKN). 

For investors, the clear winner in the battle to expand America's waistlines is Krispy Kreme.

Shares of both doughnut chains have surged more than 20% since the start of the year. Wall Street, though, has an average one-year price target of $9.03 on Krispy Kreme, about 12% above where it currently trades. Dunkin' shares are trading at $31.03, near the one-year $31.45 price target. Krispy Kreme is cheaper, too, trading at a price-to-earnings ratio of about 27 versus Dunkin's multiple which tops 80.

Both companies face tough challenges. Rising commodity prices are a threat to margins -- as are growing concerns in the U.S. about eating food with little-to-no nutritional value. That means that discounting will be needed.

Net income at Krispy Kreme in the latest quarter was $143.5 million, or $2.01 a share, as same-store sales surged 8.3%. The Winston-Salem, N.C., company also benefited from a tax benefit of $139.6 million. Its outlook for fiscal 2013 was 35 cents to 41 cents versus expectations of 35 cents. Revenues increased 11.4% to $403.2 million. In Fiscal 2013, Krispy Kreme  plans to open five to 10 company stores, 10 to 15 domestic franchise stores, and about 75 international franchise stores.

Like Krispy Kreme, Dunkin Brands reversed a year-earlier loss. The Canton, Mass., company last month reported a fourth-quarter profit of $11.6 million, or 10 cents per share. Revenue for the quarter rose 12.5% to $168.5 million. Excluding one-time items, the company earned 30 cents a share, beating the 28-cent average estimate of Wall Street analysts. The problem for Dunkin' Donuts is same-store sales, which are expected to grow 3.5% to 4% at Dunkin' Donuts and remain flat or increase up to 2% at Baskin Robbins for 2012. To complicate matters, Dunkin' recently announced a secondary offering of up to 22 million shares, which will further dilute existing shareholders.

Given the issues affecting the two companies, both stocks should be avoided.

Jonathan Berr has gone a few months since eating a doughnut. He does not own shares of the companies listed here.
Mar 21, 2012 8:55PM
WTF!!! If KKD posted better than expected earnings, why did the stock price go down 8.60% today? As a KKD investor, I still don't know KKD's specific plans to go after Dunkin" Donuts. I'm in the Chicago area & the Dunkin" Donut stores near me are swamped with standing-in-line customers every morning, but you can't find a KKD donut store anywhere. I've written to KKD numerous times about this issue, but haven't received an answer to my inquiry.
Mar 21, 2012 3:57PM
Krispy Kreme stores have major service issues.  No go there as their process is way to encumbered.  Scared to invest in such an operation if I don't like to go there...
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