Franchisee Growth Is Flying Under The Radar At Krispy Kreme

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  • Krispy Kreme Doughnuts KKD shares are down nearly 10 percent year-to-date, touching a high of $22.10 on February 26.
  • Wedbush analyst Nick Setyan maintained an Outperform rating on the company, while reducing the price target from $24 to $22.
  • Share buybacks remain a potential source of upside, Setyan said.

Krispy Kreme Doughnuts reported its Q2 EPS short of consensus expectations due to softer-than-expected CPG results and losses on commodity derivatives. The company’s core retail business remains strong, with same-store sales growth up 7.3 percent at domestic franchises and 2.3 percent at co-owned locations.

The company reduced its FY16 EPS guidance from $0.80-85 to $0.76-0.80 to reflect higher-than-expected commodity derivative losses and weakness in the CPG segment.

Analyst Nick Setyan believes that the company will continue to outperform in the core retail segment and pointed out that quarter-to-date comps in Q3 are trending above the Q2 run-rate, despite tougher comps.

“Given continued focus on gross margins and average check, as well as increasing contributions from higher margin small factory stores, we believe the high end of guidance is achievable. We also note the commodity derivatives losses translate into savings on gas and fuel costs,” Setyan wrote.

The increase in Krispy Kreme’s franchisee unit growth remains underappreciated, Setyan believes. He added that the increased franchisee development is a validation of the company’s factory store model.

The EPS estimates for FY16 and FY17 have been reduced from $0.85 to $0.80 and from $1.00 to $0.94, respectively.

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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsWedbush
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