April 24, 2014

Krispy Kreme Doughnuts, Inc.

NYSE: KKD - Restaurants
Overview
Company Scores Poor Fundamental Grades
MarketGrader currently has a SELL rating on Krispy
Kreme Doughnuts, Inc. (KKD), based on a final overall
grade of 45.3 scored by the company's fundamental
analysis. Krispy Kreme Doughnuts, Inc. scores at the
56th percentile among all 5942 North American equities
currently followed by MarketGrader. Our present rating
dates to September 25, 2013, when it was downgraded
from a HOLD. Relative to the Restaurants sub-industry,
which is comprised of 63 companies, Krispy Kreme
Doughnuts, Inc.'s grade of 45.3 ranks 37th. The industry
grade leader is McDonald's Corporation (MCD) with an
overall grade of 76.6. The stock has performed poorly
in the last six months in relative terms, down 28.73%
compared with the Restaurants sub-industry, down
0.02% and the S&P 500 Index, up 6.44%. Please go to
pages two and three of this report for a complete
breakdown of KKD's fundamental analysis.
Grade
45.3
Rated 'SELL' since Sep 25th, 2013, when it
was downgraded from 'HOLD'
Earnings
Last Earnings Release 03/13/2014
Last Qtr. Actual vs. Est. $0.12 / $0.13
Next Release 06/05/2014 $0.23
Year Ending 01/31/2014 $0.63
Year Ending 01/31/2015 $0.76
Quick Facts
Dividend Yield N/A
52 Wk High $26.51
52 Wk Low $12.52
Short Interest 9% of float
Market Cap $1.2B
$18.03
04/23/2014
Price, Rating and Sentiment History - 2 Years
1 MarketGrader.com 2010. MarketGrader.com Corp. All Rights Reserved.
April 24, 2014
Krispy Kreme Doughnuts, Inc.
NYSE: KKD - Restaurants
Growth
B-
Value
B
Market Growth LT B
Market Growth ST D
EPS Growth F
Growth Potential F
Earnings Momentum B-
Earnings Surprise B+
Capital Structure A
P/E Analysis F
Price/Book Ratio A
Price/Cash Flow Ratio B
Price/Sales Ratio B-
Market Value B-
45.3
While Not Entirely Negative, Growth Indicators Show Several Signs of
Weakness
Krispy Kreme Doughnuts, has been struggling with anemic sales growth
for some time and now, based on its latest quarterly report, it has dipped
into negative territory. The company had total revenue of $460.33 million
in the 12 months ended last quarter, only a modest 27.18% gain from
three years earlier, when total revenue in the equivalent 12 month period
was $361.96 million. And now sales have started to decline as evidenced
by the 4.57% year-over-year decline recently reported by the company. It
said in its latest announcement that last quarter's total sales were
$112.75 million compared to $118.14 million a year earlier. These results
underscore a very worrisome trend marked not only by a recent downturn
in Krispy Kreme Doughnuts,'s business but also an inability to show
sustainable long term growth that could lead to higher profits. Also based on its latest report, profits grew very
strongly last quarter when compared to the year earlier period and when measuring full year results against those
of three years ago. Its net income rose 208.79% to $14.76 million in its most recent quarter from $4.78 million
(excluding extraordinary items) in the year earlier period, while full year profit for the 12 months ended on
January 31, 2014 of $34.26 million was 350.80% higher than full year net of $7.60 million reported three years
earlier. The company's margins expanded significantly in the latest quarter, with an average 33.55% increase in
EBITDA, operating and net margins compared to the year earlier period; this reversed a margin contraction
reported during the previous quarter.
Despite missing the consensus earnings estimate by 7.69% in its March 13, 2014 report, the company's stock
rose a moderate 1.81% following the announcement. Given the positive reaction to the announcement, investors
may expect this negative surprise to be only a blip in the company's positive earnings surprise record, having
exceeded analysts' expectations by an average of 12.43% in the last six quarters.
Stock's Valuation Already Reflects Past Financial Results and Isn't
Without Risk at this Point
Shares of Krispy Kreme Doughnuts,, trading at 22.90 times trailing 12-
month earnings per share, are very expensive when compared to our
"optimum" P/E ratio of 15.00, a 52.65% premium. The MarketGrader-
calculated optimum P/E is derived from the company's two year EPS
growth rate, looking at quarterly earnings in rolling 12-month periods. By
this measure, Krispy Kreme Doughnuts,'s earnings per share have
declined at a -54.61% annualized rate during the last two years. If the
company manages to translate its recent margin gains into higher
Profitability grades, its negative EPS growth rate is likely to improve,
giving the stock a boost. The stock's forward P/E of 22.90, based on
estimates for the next four quarters, is higher than the S&P 500's forward
P/E of 15.20 but lower than its trailing P/E. The lower multiple investors are paying for its future earnings
compared to past earnings reflects how high expectations are for future earnings growth, which run ahead of
expectations for the market as a whole. Considering the company's poor overall fundamentals this premium over
the S&P appears risky and sets up the stock for a significant fall if future earnings disappoint.
Investors are currently valuing Krispy Kreme Doughnuts,'s shares at 3.39 times their tangible book value (which
excludes intangible assets such as goodwill), a relatively healthy valuation. When the company's intangible
assets, which represent a modest 9.09% of stockholders' equity, are added back to the rest of its assets, the
stock's price to book ratio drops to 4.83. The company's shares are currently valued at 22.51 times the $0.80 in
cash flow per share it generated during the last twelve months, a rich valuation of the company's earnings
prospects based on its weak fundamental indicators. Its price to sales ratio of 2.54 is slightly higher than the
Restaurants's average of 1.91, both based on trailing 12-month sales. Finally, from a value perspective, we look
at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes.
From that perspective Krispy Kreme Doughnuts,'s $1.18 billion market cap seems pretty rich, 26.05 times higher
than the net income (plus depreciation) it reported in its latest quarter.
Revenue Qtrly. 01/31/2014 $113M
Revenue Qtrly. Year Ago $118M
Revenue 1 Yr. Chg. (4.57%)
Revenue 12 Mo. Tr. Latest $460M
Revenue 12 Mo. Tr. 3Y Ago $362M
Revenue 12 Mo. Tr. 3Y Chg. 27.18%
Net Income Qtrly. 01/31/2014 $15M
Net Income Qtrly. Year Ago $4.78M
Net Income 1 Yr. Chg. 208.79%
Net Income 12 Mo. Tr. Latest $34M
Net Income 12 Mo. Tr. 3Y Ago $8M
Net Income 12 Mo. Tr. 3Y Chg. 350.8%
P/E Ratio 12 Mo. Tr. 01/31/2014 29.08
Optimum P/E Ratio 15.00
Forward P/E Ratio 22.9
S&P 500 Forward P/E Ratio 15.20
Price to (Tangible) Book Ratio 4.83
Price-to-Cash Flow Ratio 22.51
Price/Sales Ratio 2.54
2 MarketGrader.com 2010. MarketGrader.com Corp. All Rights Reserved.
April 24, 2014
Krispy Kreme Doughnuts, Inc.
NYSE: KKD - Restaurants
Profitability
C
Cash Flow
B+
Asset Utilization B+
Capital Utilization D
Operating Margins B
Relative Margins F
Return on Equity D
Quality of Revenues D
Cash Flow Growth F
EBIDTA Margin B-
Debt/Cash Flow Ratio A+
Interest Cov. Capacity A
Economic Value B
Retention Rate A+
45.3
Company's Weak Profitability Grades Underscore a Difficult
Operating Environment
Despite having earned $34.26 million during the last 12 months, for a
decent net profit margin of 7.44%, Krispy Kreme Doughnuts,'s profitability
indicators are very poor. This is based on a very weak return on equity,
an important component of our analysis and an operating margin that
trailed the industry average, both also based on 12-month trailing results.
During the same period the Restaurants industry had an average
operating margin of 16.40%, 52.10% better than the company's 10.54%
margin. Krispy Kreme Doughnuts,'s poor return on equity of 12.92%
based on what the company earned over the last four quarters actually
represents an improvement from the return on equity of 8.43% achieved
in the 12 months ended a year earlier. This measure is important to
MarketGrader in measuring profitability trends over time and the efficiency of company's management.
While this improvement is a positive sign for the company's investors, it would be prudent for management to
continue to be conservative about the company's leverage as it is now, with total debt currently less than one third
of its total equity. Its long term debt accounts for 0.62% of total capital. Krispy Kreme Doughnuts,'s core earnings
in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA
for the most recent period was $60.15 million, or 27.43% above the $47.20 million earned from its core operations
in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it
includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are
nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.
Company's Management of its Cash Flow Appears Very Sound but
Could Improve in a Few Areas
Krispy Kreme Doughnuts,'s cash flow declined significantly last quarter to
$15.90 million, 25.46% lower than the year earlier quarterly cash flow of
$21.33 million. This marks an accelerating decline from twelve month
trailing cash flow, which fell to $56.91 million in the period ended last
quarter, 4.04% lower than the $59.31 million in the year earlier period,
underscoring the ongoing deterioration of the company's business. Even
though the company has $2.00 million in total debt, its net debt is virtually
zero since it has $55.75 million in cash on hand; and since it generated
$12.75 million in earnings before interest, taxes, depreciation and
amortization last quarter, it's safe to say its liquidity is remarkable.
Therefore the company's debt is not only very manageable with its own
cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the
ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future
value of its earnings. While the total amount of cash and equivalents on its balance sheet is 15.96% lower than 12
months ago when it was $66.33 million, during the same period the company's leverage also fell with total debt
now representing 0.75% of total capital compared to 9.46% last year.
MarketGrader's Economic Value indicator looks at the company's returns on invested capital after measuring the
cost of obtaining it and of keeping investors' capital tied up in its business. In this case, Krispy Kreme Doughnuts,
had $266.75 million in invested capital as of its most recently reported quarter, on which it generated a 18.19%
return based on 12-month trailing operating income. Its total after tax cost of capital was 11.09% during the same
period, most of it associated with its weighted cost of equity, which was 10.85% vs. its 0.24% weighted cost of
debt. Deducting these costs from the total return on investment translates into Krispy Kreme Doughnuts,'s
economic value added (EVA) of 7.10%. While not outstanding, this represents and acceptable true economic
profit after accounting for both operating and capital costs. Krispy Kreme Doughnuts, does not pay a dividend
and hasn't done so within at least the last five years.
Cash Flow Qtrly. 01/31/2014 $16M
Cash Flow Qtrly Year Ago $21M
Cash Flow 1 Yr. Chg. (25.46%)
Cash Flow 12 Mo. Tr. Latest $57M
Cash Flow 12 Mo. Tr. 3Y Ago $21M
Cash Flow 12 Mo. Tr. 3Y Chg. 177.51%
Free Cash Flow Last Qtr. $11M
Economic Value
Total Invested Capital $267M
Return on Inv. Capital 18.19%
Weighted Cost of Equity 10.85%
Weighted Cost of Debt 0.24%
Total Cost of Capital 11.09%
Economic Value Added 7.10%
3 MarketGrader.com 2010. MarketGrader.com Corp. All Rights Reserved.
April 24, 2014
Krispy Kreme Doughnuts, Inc.
NYSE: KKD - Restaurants 45.3
Profile
Krispy Kreme Doughnuts, Inc.operates as an retailer and wholesaler of doughnuts, complementary
beverages and treats and packaged sweets. It operates through four business segments: Company
Stores, Domestic Franchise, International Franchise and KK Supply Chain. The Company Stores
segment is comprised of the doughnut shops operated by the company. These stores sell doughnuts
and complementary products through the on-premises and wholesale channels and come in two
formats: Factory Stores and Satellite Shops. Factory stores have a doughnut-making production line,
and many of them sell products through both on-premises and wholesale channels to more fully
utilize production capacity. Satellite shops, which serve only on-premises customers, are smaller
than most factory stores, and include the hot shop and fresh shop formats. The Domestic Franchise
segment consists of the company's domestic store franchise operations. This segment sell
doughnuts and complementary products through the on-premises and wholesale channels in the
same way and using the same store formats as in the company's stores segment. The International
Franchise segment consists of the company's international store franchise operations. This segment
sell doughnuts and complementary products almost exclusively through the on-premises sales
channel. The KK Supply Chain segment produces doughnut mixes and manufactures doughnut-
making equipment, which all factory stores, both company and franchise, are required to purchase.
The company was founded by Vernon Carver Rudolph on July 13, 1937 and is headquartered in
Winston-Salem, NC.
Key Facts:
370 Knollwood StreetSuite 500
Winston-Salem ,NC 27103-1865
Phone:
www.krispykreme.com
Biggest Company in Sub-Industry
McDonald's Corporation (MCD)
Grade 76.6
Market Cap:$98.04 billion
Smallest Company in Sub-Industry
Ginger Beef Corporation
Grade 20.9
Market Cap:$1.73 million
MarketGrader Dilution Analysis
Impact of Change in Shares on EPS - Q1 2014
Dilution Summary
*EPS Latest $0.21
*EPS Year Ago $0.07
EPS Change 1 Yr. 204%
C. Shares - Latest(M) 71
C. Shares - Yr Ago(M) 70
C. Shares - 1Yr Chg. 2%
EPS if Yr. Ago Shares $0.21
EPS Chg. if Yr. Ago 209%
EPS Loss from Dilution $0.00
*Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company.
Income
Statement
Last Qtr
(01/2014)
12 Mo.
Trailing
Revenue $113M $460M
Op. Income $10M $49M
Net Income $15M $34M
*EPS $0.21 0
*Earnings per share are based on fully diluted net income per share
excluding extrodinary items. This number may not match the
headline number reported by the company.
Balance Sheet Latest
Total Assets $339M
Total Debt $2.00M
Stockholders Eq. $265M
All numbers in millions except EPS
Ratios
Price/Earnings (12 mo. trailing) 29.08
Price/Tangible Book 4.83
Price/Cash Flow 22.51
Price/Sales 2.54
Debt/Cash Flow 3.52
Return on Equity 12.92%
Gross Margin (12 mo. trailing) 15.46%
Operating Margin (12 mo. trailing) 10.54%
Net Profit Margin (12 mo. trailing) 7.44%
Total Assets $339M
Intangible Assets $24M
Long Term Debt $1.66M
Total Debt $2.00M
Book Value $265M
Enterprise Value ($54M)
Gross Margin last Qtr. 15.47%
EBITDA Margin last Qtr. 11.31%
Operating Margin last Qtr. 8.63%
Operating Margin Sub-Industry Avg. 16.40%
Operating Margin 12 mo. trailing 10.54%
Net Profit Margin Last Qtr. 13.09%
4 MarketGrader.com 2010. MarketGrader.com Corp. All Rights Reserved.
April 24, 2014
Krispy Kreme Doughnuts, Inc.
NYSE: KKD - Restaurants 45.3
Top Down Analysis
# Ticker Grade Sentiment Name Price Next EPS
1 TTWO 87.68 N Take-Two Interactive Software, Inc. $20.89 05/13/2014
2 RGR 87.33 N Sturm, Ruger & Company, Inc. $63.01 04/29/2014
3 KORS 81.90 P Michael Kors Holdings Ltd $91.44 05/28/2014
4 FOSL 81.64 N Fossil Group, Inc. $108.28 05/13/2014
5 LVS 81.55 P Las Vegas Sands Corp. $77.95 05/06/2014
6 TIVO 78.21 N TiVo Inc. $12.00 05/28/2014
7 NLS 78.20 N Nautilus, Inc. $8.22 05/05/2014
8 XRS 77.57 P TAL Education Group $23.33 07/22/2014
9 CLCT 77.45 N Collectors Universe, Inc. $22.89 05/12/2014
10 PCLN 76.95 P The Priceline Group, Inc. $1,219.95 05/12/2014
363 KKD 45.30 N Krispy Kreme Doughnuts, Inc. $18.03 06/05/2014
# Ticker Grade Sentiment Name Price Next EPS
1 MCD 76.58 P McDonald's Corporation $99.13 07/21/2014
2 PNRA 74.48 N Panera Bread Company $169.63 04/29/2014
3 TXRH 64.58 N Texas Roadhouse, Inc. $24.53 04/28/2014
4 RUTH 64.42 N Ruth's Hospitality Group, Inc. $12.65 05/02/2014
5 CMG 64.29 N Chipotle Mexican Grill, Inc. $504.05 07/17/2014
6 THI 63.36 N Tim Hortons Inc. $54.93 05/07/2014
7 PZZA 63.30 P Papa John's International, Inc. $47.36 05/06/2014
8 NATH 62.54 N Nathan's Famous, Inc. $49.46 06/11/2014
9 BLMN 62.32 N Bloomin' Brands, Inc. $21.87 04/29/2014
10 MTY.CA 62.27 N MTY Food Group Inc. $31.31 07/03/2014
37 KKD 45.30 N Krispy Kreme Doughnuts, Inc. $18.03 06/05/2014
Consumer Discretionary
Stocks in Sector: 730
Buys: 169 (23.15%)
Holds: 129 (17.67%)
Sells: 432 (59.18%)
No. of stocks at:
52-Wk. High: 8
52-Wk. Low: 14
Above 50 & 200-day MA: 225
Below 50 & 200-day MA: 296
Restaurants
Stocks in Sub-Industry: 63
Buys: 15 (23.81%)
Holds: 12 (19.05%)
Sells: 36 (57.14%)
No. of stocks at:
52-Wk. High: 0
52-Wk. Low: 1
Above 50 & 200-day MA: 9
Below 50 & 200-day MA: 27
1. Price Trend. C 2. Price Momentum. D
3. Earnings Guidance. A- 4. Short Interest. B-
5.5
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