An Underappreciated Doughnut Make With Some Upside Potential

• Krispy Kreme Doughnuts KKD shares are down 12 percent year-to-date, and are trading close to the lower end of their 52-week range of $16.41 - $22.32.
• Wedbush’s Nick Setyan maintained an Outperform rating for the company, with a price target of $24.
• Setyan expects the company to report robust results for F2Q, backed by gross margin expansion.

Krispy Kreme Doughnuts is scheduled to report its F2Q results on September 9. Analyst Nick Setyan expects the company to report its FQ2 EPS at $0.18, in-line with the consensus, on revenue of $129.6 million, as compared to the consensus estimate of $131.8 million.

“Our recent checks of co-owned locations indicate SSS growth in the low-single digits, roughly in-line with 3% FQ2 consensus,” Setyan wrote.

Krispy Kreme Doughnuts guided to FY16 EPS of $0.80-0.85, on adjusted net income of $55-59 million. Setyan believes that the company would be able to achieve the high end of its EPS guidance range, citing less risk from incremental currency headwinds, continued mix benefit, easier comps, loyalty rollout, and “an evolving marketing campaign ahead.”

In the report Wedbush noted, “Guidance for domestic franchised development was increased in FQ1 to 15-20 from 10-20 previously, which we view as validation of the factory store model and evidence of franchisee confidence in management’s strategy. With a double digit company-owned and international growth rates, Krispy Kreme remains one of only 2 publicly-traded restaurants with a 90% franchised model and 10%+ unit growth.”

Krispy Kreme Doughnuts spent $7.4M repurchasing shares in FQ1. The company has about $36M remaining in existing authorizations, and the buybacks “remain a potential source of upside,” Setyan added.