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What Krispy Kreme Doughnuts (KKD) Must Do to Keep Growing

Kreme Doughnuts (NYSE:KKD)On Thursday, Krispy Kreme Doughnuts (NYSE:KKD) will release its latest quarterly results. After having soared to new 52-week highs earlier in the quarter, the doughnut maker has seen its stock settle back a bit, raising questions about whether the company has gotten ahead of itself in its impressive recovery.

Krispy Kreme Doughnuts (NYSE:KKD) arguably started the doughnut craze more than a decade ago, but many investors concluded the company was a passing fad when shares tanked in the middle of the last decade. Now, though, value investors have seen the potential of the company, which still has a loyal following and a valuable brand. Let’s take an early look at what’s been happening with Krispy Kreme Doughnuts (NYSE:KKD) over the past quarter and what we’re likely to see in its quarterly report.

Stats on Krispy Kreme

Analyst EPS Estimate $0.17
Change From Year-Ago EPS 21%
Revenue Estimate $115.97 million
Change From Year-Ago Revenue 6.9%
Earnings Beats in Past 4 Quarters 3

Source: Yahoo! Finance.

How can Krispy Kreme heat up its earnings this quarter?
Analysts have gotten somewhat more optimistic about Krispy Kreme Doughnuts (NYSE:KKD)’s earnings in recent months, with a penny-per-share increase in earnings estimates for the April quarter. Although they’ve kept their consensus stable for the current fiscal year, they’ve boosted profit expectations by a nickel for next year, and that has helped contribute to a modest 7% rise in the stock price since late February.

Much of the stock’s strong performance this quarter came in the run-up to its fourth-quarter earnings report in mid-March. Although investors were initially disappointed with the results, Krispy Kreme Doughnuts (NYSE:KKD) did manage to post a 7.5% increase in same-store sales and an 85% improvement in adjusted net income. Although the stock initially dropped on less ambitious guidance than bullish investors wanted to see, Krispy Kreme nevertheless provided a forecast that was somewhat ahead of analyst projections.

But in April, Krispy Kreme got a downgrade from Wall Street analyst Wedbush. Essentially, Wedbush believed that the company needed to push franchise expansion in order to sustain its valuation. Yet perhaps out of caution after its aggressive expansion plans a decade ago proved ill-fated, Krispy Kreme Doughnuts (NYSE:KKD) only expects a handful of new franchise locations this year, compared to several hundred new stores for rival Dunkin Brands Group Inc (NASDAQ:DNKN).

The real question for Krispy Kreme is whether it can offer an overall morning-restaurant experience that matches up to its rivals. Starbucks Corporation (NASDAQ:SBUX) has long focused on its coffee and other drinks to draw customers in, with pastries and other food items being more of an afterthought for the company. By contrast, Dunkin Brands Group Inc (NASDAQ:DNKN)’ started with its doughnuts but has aggressively promoted its coffee offerings. Krispy Kreme has a big opportunity if it can give customers who don’t want doughnuts a reason to visit their locations.

In Krispy Kreme’s report, look for details on its long-term strategy for growth. With competitors pushing a lot harder than Krispy Kreme has lately, now isn’t the time for Krispy Kreme to pull any punches. Only a strong growth initiative will get the company moving back in the right direction again.

The article What Krispy Kreme Must Do to Keep Growing originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends and owns shares of Starbucks.

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