Growth Supports Price at Krispy Kreme, Analysts Say

Krispy Kreme ( KKD) reported its 11th consecutive quarter of earnings growth Wednesday, at a time when doughnuts appear as popular as ever.

In the first quarter, Krispy Kreme earned $13.1 million, or 22 cents a share, compared to $8.9 million, or 15 cents a share, a year ago. Total sales rose 33.9% to $148.7 million, vs. $111.1 million last year. Comparable-systemwide-store sales, a key metric for the company, rose 11.2% in the quarter.

The results come as doughnuts were the fastest-growing segment of the dining category last year, according to Technomic, a restaurant consultant firm. Sales grew 9%, compared to 3.5% industrywide.

"Krispy Kreme's popularity has been exponentially high in the last five years," said Dennis Lombardi, executive vice president of Technomic. "I will leave it to others to say if that is a trend or a fad."

Meantime, Krispy Kreme expects to earn 90 cents a share for the full year. It is predicting earnings of 20 cents a share in the second quarter, 22 cents in the third quarter, and 26 cents in the fourth quarter. The company is forecasting comparable-systemwide-store sales of 10% for the full year.

As a way to drive sales, Krispy Kreme will continue to build new stores. It is planning 20 openings in 11 markets in the second quarter, compared to 12 openings in four markets in the year-ago period.

Analysts support the strategy, noting that there are relatively few Krispy Kreme stores in existence. "They still only have 282 stores," said Kathleen Heaney, an analysts at Breen Murray. "I do not see over saturation as an issue for the company. But it will become harder to maintain sales-growth levels."

Heaney rates Krispy Kreme stock a buy, despite its rich valuation (the firm has done no investment banking for Krispy Kreme). The company trades at a price-to-earnings ratio of 39, based on 2004 earnings estimates, compared to 16.6 for the S&P 500. "It is selling below its growth rate," Heaney said. "And it is still in the early stages of growth."

Other analysts argue that Krispy Kreme's price-to-earnings ratio relative to growth is appealing.

Andrew Wolf, an analyst at BB&T Capital Markets, said Krispy Kreme has a lower price-to-earnings ratio relative to estimates for 2003 growth than other specialty food chains, including Cheesecake Factory ( CAKE), P.F. Chang's China Bistro ( PFCB), Panera Bread ( PNRA), and Whole Foods Market ( WFMI). He rates Krispy Kreme a buy and his firm has done investment banking for the company.

Nevertheless, Wolf acknowledges a challenge Krispy Kreme faces in growing sales. Last quarter, the biggest driver of comparable-store sales came from off-premise markets, such as supermarkets. "To keep comps double digit, they will have to continue to generate strong off-premise penetration," he said.

In recent trading, shares of Krispy Kreme were moving up $2.36, or 7.4%, at $34.22.

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