Krispy Gets Kremed

NEW YORK (TheStreet) -- Wall Street was in a foul mood following the release of Krispy Kreme's (KKD) second quarter earnings after the market closed on Friday. Shares fell 15% on eight times normal average volume Friday after the company reported earnings per share of 14 cents, 2 cents below consensus estimates.

It didn't seem to matter that revenue, which was up 10.4% from the same quarter last year to $112.7 million, came in better than the $111.4 million consensus. As a former Bloomberg colleague was fond of saying, "when you miss on earnings, Wall Street takes you out back and shoots you."

Indeed, the punishment was severe for what I consider to be the maker of the world's best cream doughnut, but I'm not all that surprised. Krispy Kreme is a classic rags to riches, back to rages story that may again be in the early stage of re-entering the riches phase.

Most investors gave up on this name years ago when the company nearly imploded, and for several years, Krispy Kreme was all but forgotten as a publicly traded company. Its resurgence in the past few years was first met with great skepticism. However, as the company demonstrated a renewed ability to expand, began putting up good solid store sales growth numbers and a growing bottom line, Krispy Kreme has been re-embraced by investors, primarily over the past year.

When that happens, expectations grow, and when they are not met, investors, particularly those with short-term focus, become sellers. Friday's trading action was demonstrative of this, but this really was not a bad quarter.

Same store sales, sales at stores open more than one year, rose 10% for the quarter, and that represented the 19th consecutive quarter of same store sales growth. Company management also reaffirmed earnings guidance for the year, suggesting that it expects adjusted net income will be in the $42 million to $45 million range, with earnings per share in the 59 cents to 63 cents range. The balance sheet remains strong as the company ended the quarter with $60 million in cash and just $1 million in debt. The company also announced a $50 million stock buyback program.

Yet, the market focused primarily on the 2 cent earnings miss and wiped away more than $230 million in market value over a single trading session. No, this was not a bad quarter, but Krispy Kreme shares had risen more than 150% year to date, the stock was due for a breather, and this earnings miss provided the an excuse for some profit taking. KKD Chart KKD data by YCharts

Where we go from here remains to be seen but I would not be surprised to see the shares continuing to be somewhat volatile in the near-term. In my view, Krispy Kreme's resurging growth story appears to remain intact. I began buying shares when the company just began turning around and appeared to be a value play. By now, in similar cases, I probably would have closed my position, and walked away. However, I believe there is still great value in the brand name and wonder what shares will be worth in five years, as the company continues global expansion.

At the time of publication the author was long KKD.

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

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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