Novice Investing - Krispy Kreme Sugary Earning

Date: Thursday 28th 2008f August 2008 12:59:34 AM

Krispy Kreme Sugary Earning - 06/18/2008

By: Hari Wibowo

		Krispy Kreme Doughnuts Inc. 370 Knollwood Street Winston-Salem, NC 27103 United States

Last week was sweet for doughnut makers Krispy Kreme Inc. (KKD), which corresponded with its 1st quarter earning release. Krispy Kreme announced a net profit of $ 4 Million (6 cents per share) versus a loss of $ 7.4 Million or 12 cents per share a year ago. Shares went up 32% during the week. Things has gotten bad enough that expectation was very low, prior to Krispy Kreme's earning release. Analysts were merely expecting an 8 cents per share of net profit for the entire year. Even after this earning surprise, analysts are still forecasting a net profit of 13 cents per share for the year. Subtracting the 6 cents per share earned during the quarter, you would get an expectation of 7 cents per share of net profit for the next subsequent three quarters.

Clearly, analysts err on the safe side here. Krispy Kreme has been blowing investors off for a while now with four consecutive years of net loss. We, too, feel that investors need to be cautious. For one, Krispy Kreme reported 7 percent drop in revenue at $ 103.6 Million. Meanwhile, comparison from a year ago was easier due to the $ 9.6 Million refinancing charge and $ 14.9 Million litigation expense last year. This quarter, Krispy Kreme reported no such expense.

Further, Krispy Kreme management has indicated that there would be more stores closures in the coming year. In 2008, Krispy Kreme closed 31 stores. Thus, you would expect revenue to continue trending down. At this environment, it is very difficult for Krispy Kreme to increase its earnings significantly. You can only cut your expense so much. Finally, with high commodity prices impacting Krispy Kreme's raw material cost, profitability may deteriorate at Krispy Kreme in the coming quarter.

Meanwhile, Krispy Kreme's balance sheet remains unimpressive. With negative net cash of $ 45 Million, Krispy Kreme cannot afford to incur losses for considerable period of time. Fortunately, the company managed to produce positive cash flow from operations this past quarter (+ $ 6.50 Million). However, with higher raw material cost impacting its business and several other things mentioned previously, Krispy Kreme need to do better to grow revenue in order to sustain its survival.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Krispy Kreme Doughnuts Inc. (KKD) or any other securities.

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