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Greenberg: The 'Honeymoon' Is Over at Krispy Kreme

By: Herb Greenberg | 12/03/13 - 11:09 AM EST

Stock quotes in this article: KKD

SAN DIEGO (TheStreet) -- No way to sugar-coat this: Fresh off its impressive turnaround, Krispy Kreme's (KKD) growth is slowing.

Sales last quarter budged ahead 6.7%, down from 8.5% the year before and even higher in the interim quarters.

The bigger issue was same-store sales. The company warned a quarter ago that they would be "less dramatic" against "our outstanding comp performance last year."

And they were, but with a twist: Same-store sales at company-owned locations (mostly in the U.S.) rose a mere 3.7% -- quite a come down from the prior quarter's 11.4% gain and the prior year's 7%.

At the same time, domestic franchise same-store sales growth, which had been running on par with company stores, remained fairly robust at 10.7%.

Why the discrepancy between company-owned and franchise stores in the U.S.?

When asked, the company offered up a number of vague explanations, including "outstanding" execution by franchises. But it really boils down to two things the company has blamed in recent years for slowdowns outside of the U.S.:

Cannibalization and something it calls the "honeymoon effect." That is, after stores have big openings, things calm down. That's what Krispy Kreme says happened last quarter in Charlotte.

Then there was the quality of same-stores sales, which left something to be desired: At company-owned stores most of the gains came from price increases.

That's a subtle but important change. A mere quarter ago the company was crowing about how its 10% gain was "even more impressive when considering that many of our QSR peers have experienced a noticeable slowdown in comp sale and traffic over the past several months."

And back in March, at a Roth investment conference, CEO James Morgan said, "We hope to achieve low-to-mid single-digit organic comp growth gains this year, and that is exclusive of pricing."

Compare that with CFO Doug Muir's comments on yesterday's call, when he said, "We look for low-single digit, organic same store sales price in our company stores. Strategic price increases would be incremental to that."

Drill down into the exceptional data the company dishes up in its earnings release, and the trend is more disturbing at company-owned stores, whose revenue is almost equal to franchised stores: Average checks and customer counts tumbled.

Reality: For the first time in a long time this was an unappetizing quarter for Krispy Kreme. Without price increases, same-store sales at company-owned stores would've been ever worse, which is noteworthy because earlier this year the company said it could turn in "low-to-mid" single-digit organic growth gains this year without pricing. Now it's talking about how "strategic prices increases" will be "incremental." Does that mean they will be levers to pull to keep sales from being even worse? Or does the most recent quarter, with a tumbling traffic count, suggest that Krispy Kreme customers are sensitive to pricing?

And what about that cannibalization? The company talks about it so matter-of-factly. But cannibalizing, which had been occurring in international markets, can be a sign of saturation. Saturation leads to slowdowns.

And never mind the honeymoon effect. On Wall Street, at least - and for now -- the honeymoon for Krispy Kreme appears to be over.

-- Written by Herb Greenberg

>You can email me at: herbonthestreet@thestreet.com.

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