Bear of the Day: Krispy Kreme (DNUT)

Nothing hurts quite like biting into a hot glazed donut only to find out the sugar rush doesn’t last. That’s exactly how investors in Krispy Kreme (DNUT) are feeling these days. The iconic donut maker may have brand recognition that rivals Coke or McDonald’s, but Wall Street cares about earnings trends, and right now, the frosting is starting to melt. Looking at the numbers, this one deserves a highlight as today’s Bear of the Day.

For the uninitiated, Krispy Kreme offers doughnut experiences through hot light theater and fresh shops, delivered fresh daily branded cabinets and merchandising units within grocery and convenience stores, quick service restaurants, club memberships, drug stores, and digital channels. It also operates Krispy Kreme company-owned shops and franchise shops. 

Over the last couple of months, analysts have been dialing back expectations for Krispy Kreme’s bottom line. In fact, the Zacks Consensus Estimate for the current year has slipped notably, coming from an expected loss of 16 cents to 27 cents. That helped push the stock down to a Zacks Rank #5 (Strong Sell). That’s never a good sign. The culprit? Rising costs and margin pressure. While revenue has shown decent growth thanks to store expansion and “hubs with spokes” distribution, labor inflation, higher commodity prices, and international weakness have eaten into profitability. Last quarter’s EPS missed the mark, highlighting just how thin margins have become.

Krispy Kreme, Inc. Price and Consensus

Krispy Kreme, Inc. price-consensus-chart | Krispy Kreme, Inc. Quote

On the surface, donuts are a simple business with inputs of flour, sugar, oil, and glaze. But in this inflationary environment, those inputs aren’t so sweet. Pair that with a debt load from re-IPO expansion plans and you’ve got a company working hard just to tread water. Even though management has leaned on price increases and co-branded deals with big-box retailers, it hasn’t been enough to keep earnings estimates from drifting lower.

Things are looking up for next year, with estimates now calling for the loss to narrow to 7 cents. The Consumer Products – Staples industry I sin the Bottom 27% of our Zacks Industry Rank. There are a couple of names within the industry that are in the good graces of our Zacks Rank. These include Zacks Rank #1 (Strong Buy) stocks ARKO (ARKO) and Village Farms International (VFF).

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This article originally published on Zacks Investment Research (zacks.com).

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