Great Donut Debate Hits Delicious Dilemma

NEW YORK ( TheStreet) -- There are few edibles I know with fewer nutritional merits than donuts. On the other hand, there are few that are more irresistible.

One venerated brand will be slipping into the earnings confessional after the market closes on Thursday. Krispy Kreme Doughnuts ( KKD) hopes to show its shareholders and Wall Street there are no holes in its business plan.

You don't need a Great Depression to start a donut-selling business but it apparently didn't hurt KKD. It's grown to become an international retailer of premium-quality sweet treats.

Headquartered in Winston-Salem, N.C., the company has offered its addictive donuts and better-than-average coffee since 1937. In spite of some rough spots along the way the epitome of donuts and coffee can be found at over 740 locations in 22 countries around the world and inside approximately 10,000 grocery, convenience and mass merchant stores in the U.S.

KKD is a proud organization that wisely chose to help all kinds of groups raise money. As the company likes to put it, "Krispy Kreme is proud of its fundraising program, which for decades has helped non-profit organizations raise millions of dollars in needed funds." It has helped KKD's image in a big way!

You can find everything you need to know about the company except how good its stores smell by visiting KKD's Web site.

The company plans to host an earnings conference call to review the results of its fiscal 2014 first quarter results and present management's outlook for the balance of fiscal 2014 at 4:30 p.m. (ET) on Thursday. There'll be a live webcast of the conference call available at its home webpage.

Analysts will be listening carefully and expect this quarter's EPS to have increased by an average estimate of over 21% from the same year-ago quarter.

When it comes to sales growth and revenue, the same group of analysts is looking for around a 7% year-over-year quarterly improvement. KKD had huge positive earnings surprises virtually every quarter in the previous fiscal year. Yet in the last quarter it disappointed by 25% which barely moved the stock's price.

Here's a one-year chart including the recent history of revenue per share (TTM) and EBIDTA earnings. You can see that KKD took off in late 2012 and never looked back including Tuesday's 3.2% rally.

KKD Chart KKD data by YCharts

KKD isn't the only donut shop in town. The Great Donut Debate swirls around the question, "Which has the best, freshest, most mouth-watering donuts and coffee?" More people are saying it's Dunkin' Brands ( DNKN).

From my own random sampling of Americans DNKN was referred to as "the healthier donut" and KKD was called "the most consistently tantalizing and best-smelling donut."

DNKN donuts claimed a few years ago that its donuts don't have trans-fats or other artery-clogging ingredients. I don't know if that's still true but it sounded positive. When it comes to sugar content I imagine both companies' donuts have all that our pancreas can handle.

Dunkin' Donuts claims it's the world's leading baked goods and coffee chain, selling more than one billion cups of coffee per year! Founded in 1950 in Quincy, Mass., Dunkin' Donuts became famous for its many varieties of donuts and a wide range of bakery products.

As an investment thesis, DNKN also owns the Baskin-Robbins brand. Baskin-Robbins is the world's largest chain of ice cream specialty shops serving premium ice cream, specialty frozen desserts and beverages to more than 300 million customers each year. Founded in 1946 in Glendale, Calif., the ice cream chain now has more than 6,000 outlets in 49 countries, with roughly 2,400 outlets in the U.S.

You can learn about DNKN's first-quarter 2013 earnings results, which were reported on April 25 at its Web site.

First quarter highlights of the report included:
  • Dunkin' Donuts U.S. comparable store sales growth of 1.7%
  • Added 108 net new restaurants worldwide including 78 net new Dunkin' Donuts in the U.S.
  • Adjusted operating income increased 12.2%
  • Adjusted operating income margin expanded 240 basis points to 43.7%
  • Adjusted EPS increased 16.0% to $0.29

In comparing "donuts to donuts," let's look at a one-year price chart of DNKN using similar metrics to the KKD chart above. DNKN Chart DNKN data by YCharts

It appears the donut and coffee business has been booming the past year. For the sake of comparison, KKD is selling at almost 20 times forward (one-year) earnings and has a price-to-earnings-to-growth (PEG) ratio of a modest 0.88. DNKN stock is selling at over 22 times forward earnings with a PEG of 1.71, almost twice that of KKD's which suggests its shares are more highly valued.

At $40 a share DNKN's dividend yield is 1.9%. KKD doesn't pay a dividend yet. KKD did open some stores in India, which should be a profitable move since "sweets" are very popular there. But, let's face it, KKD is the small fry in the comparison, with a market cap of less than $886 million. DNKN's market cap is over four times larger at $4.29 billion.

So the great donut debate continues.

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

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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