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Krispy Kreme's Growth Potential Filled With Holes, Wait for $15

Stocks in this article: KKD SBUX DNKN MCD YUM

Updated to add paragraphs three through five.

NEW YORK (TheStreet) -- Known for its sweet treats, Krispy Kreme (KKD - Get Report) stock has been anything but a delight to investors in 2014.

The shares closed Tuesday at $16.19, down almost 15%, and they have lost 17% year to date.

Ahead of earnings, Krispy Kreme was already being outperformed by Dunkin' Brands (DNKN) and Starbucks (SBUX) in both gross and operating margins. There were concerns that the glazed doughnut maker was losing ground to them, among others. As it turned out, we underestimated the threat.

The stock, which was down 17% year-to-date, was also feeling the pressure of added competition from breakfast offerings served at McDonald's and Yum! (YUM) brand's Taco Bell.

With the company missing earnings and revising down its full-year outlook by 6%, it made no sense for investors to risk a possible 6% pullback while analysts adjust to lowered guidance. With shares resting around $16, a 6% pullback points to a value around $15. The stock needs to hit $15 before it's a buy.

Not only did Krispy Kreme report lower-than-expected revenue and profits, the company lowered guidance. At this point, investors that have waited patiently for some sweet news, will have to wait a while longer. Meanwhile, these shares are destined for a new 52-week low.

Krispy Kreme logged $121.6 million in first-quarter revenue, climbing 0.8% year over year, missing Street estimates of $126.5 by almost 4%. Management attributed the miss to (among other things) the severe winter weather, which led to 1.5% decline in same-store sales.

Same-store sales, which tracks the performances of stores that have been opened at least one year, continues to be a challenge. The competition for breakfast has grown fierce.

Although management has made strategic moves to grow beyond doughnuts to areas like premium coffee and smoothies, these moves have been negated by new products from McDonald's (MCD) and more recently Yum! Brands' (YUM) Taco Bell breakfast offerings.

As it stands, each new Krispy Kreme initiative, including its smaller stores concept, only provide temporary boosts in profitability. These stores have performed well on their own. But the company still posted a 1-cent miss in adjusted net income.

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Excluding one-time charges, net income advanced 12% year over year to $15.8 million, or 23 cents per share, missing the consensus estimate of 24 cents. Granted that wasn't a huge miss. And on a year-over-year basis, that net income grew 12% is nothing to sneeze at. But to make a play on this stock, investors need to be mindful of what Krispy Kreme is likely to do in the long-term.

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Consider this, management cited poor weather as cause for the revenue and earnings miss. I don't have a problem with that. The downbeat guidance, however, suggests that Krispy Kreme doesn't expect sunny skies any time soon.

Previously, management had guided for full-year net income in the range of $51 million to $55 million. The new range is now set at $48 million to $51 million, down almost 6%. Likewise, the company lowered its full-year earnings per share range to 69 cents to 74 cents, from the prior range of 73 cents to 79 cents.

Management said that the lowered guidance is due to impacts of higher costs for things like technology implementation and higher compensation. To the extent that these capital expenses will produce long-term returns, these shares may do well. But we won't know for several more quarters.

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At the time of publication, the author held no position in any of the stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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