I stumbled onto KKD in early 2010. While busted cult stocks are not typically in value investors playbooks, this one caught my eye. After several money-losing years, the company broke even for 2010, and it appeared as though it had cleaned up its act.
Stores had closed over the years, debt had been paid down, and the company was expanding again. But this time, a lot of the growth was international. While not the classic value story, I saw great value in the brand name itself wrapped in a package with a small $300 million market cap, and took a position. After three consecutive years of profitability, other investors are beginning to embrace KKD as well. While there was not much good news in the markets this past Friday, KKD shares were a bright spot, rising more than 21% to $17.32, on eight times normal average volume.
The company put up better-than-expected first-quarter numbers after market close on Thursday, beating on revenue ($120.6 million vs. expecations for $117 million) and earnings (20 cents vs. 16 cents). Revenue rose a solid 11.2%, and this represented the 18th consecutive increase in same-store sales at company-owned stores.
The company also raised earnings guidance for next year and is now expecting between 59 and 63 cents, up from 53 to 57 cents. The company ended the quarter with a total of 773 stores, 532 of which are international. Management believes that there's more growth on the horizon, projecting a total of 1,300 stores (900 international, 400 domestic) by January 2017.
Clearly, this is a new and improved Krispy Kreme, a far cry from the company that nearly imploded years ago. The stock is now trading at about 24 times 2015 consensus estimates, which may appear a bit rich, but perhaps not if the company can deliver on its growth plans. And therein lies the conundrum for the value investor who buys turnaround stories; when do the lines of growth and value cross? I've typically sold too early in such situations in the past, but I am holding onto this one at least for now. At the time of publication, Heller was long KKD. Follow @JonMHellerCFA This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.