UPDATE: Krispy Kreme Seen Hurt By Rapid Expansion
By FRANK BYRT
May 7, 2004 3:06 p.m.
Of DOW JONES NEWSWIRES
BOSTON -- Carbohydrate-conscious consumers cutting back on doughnuts and disappointing new store sales are seen as factors contributing to Krispy Kreme Doughnuts Inc. (KKD) cutting back its fiscal 2005 outlook Friday.
The company may be a victim of its own success as it has expanded the number of its own and franchisee-owned stores and continues to add sites that offer its packaged doughnuts, say some analysts.
Andrew Wolf, an analyst for BB&T Capital Markets, said recent industry and company data suggest that the rise in doughnut sales is stagnating and Krispy Kreme's new store sales are showing signs of slowing even as it adds more stores.
"They're sort of victims of their own success," he said.
Krispy Kreme's management hosted a conference call for analysts Friday following a press release outlining the company's fiscal first-quarter expectations and revised fiscal 2005 estimates.
The company, which is scheduled to report first-quarter results on May 25, expects earnings from continuing operations of 23 cents a share. The estimate doesn't include asset impairment charges. Wall Street expects the company to earn 27 cents a share for the period.
The Winston-Salem, N.C., doughnut maker said fiscal 2005 earnings will be between $1.04 and $1.06 a share, excluding asset-impairment and other charges, compared with previous estimates of $1.16 to $1.18 a share.
Analysts had expected, on average, 2005 earnings of $1.17 a share, according to Thomson First Call.
The company attributed the lowered estimate to increasing consumer interest in low-carbohydrate diets, which hurt its off-premises sales.
Shares of the doughnut maker hit a 52-week low Friday, but later rebounded slightly. They were down $8.04, or 25%, to $23.76, on volume on volume of 16.2 million, compared with average daily volume of 806,000.
The low for the day was $23.49, well below the previous 52-week low of $30.20 on May 12, 2003.
Year-to-date through Thursday, shares had lost 13.1%.
J.P. Morgan analysts said in a research note addressing Friday's conference call that "in our opinion, the company did not properly address the issues of the rapid new unit development rate affecting same store on/off premise sales.
"Management stated that franchisee health is very strong - a statement not supported by the broad decline in new unit average weekly sales and 'same door' off-premise productivity declines in older markets," the investment firm said.
J.P. Morgan reiterated its underweight rating and said that even with the sharp stock price decline, "we do not recommend investors buy the stock," because the company's strategy of high new unit growth could cause a significant risk to earnings.
J.P. Morgan said its analysts' compensation isn't directly or indirectly related to their recommendations, and that Krispy Kreme "is or was" a client of J.P. Morgan in the past 12 months.
Legg Mason Wood Walker Inc. analyst Glenn Guard is more optimistic about Krispy Kreme, saying that the "long-term investment thesis is intact."
He is maintaining his buy rating based on the company's brand strength, market leadership, growth potential in the grocery/foodservice sector, significant international opportunities, quality franchisees and attractive valuation.
"People are not going to stop eating doughnuts, and Krispy Kreme continues to take market share away from competitors," Guard said in a research note, although he expects fiscal 2005 will have to go down "as a turnaround year." Guard said that no part of his compensation is related to his recommendations on Krispy Kreme. Legg Mason says that it regularly seeks investment banking assignments and compensation for its other services.
Wolf, who has had Krispy Kreme rated hold since November, said he doesn't own Krispy Kreme shares, but his firm's parent, BB&T Corp. lends to the company.
-By Frank Byrt, Dow Jones Newswires; 617-654-6742; frank.byrt@dowjones.com
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