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Krispy Kreme's Hot Now -- Earnings Preview

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There's nothing more heart-warming than seeing the Hot Now sign lit outside a Krispy Kreme store on a brisk evening. Walk inside the steamy, sugary aroma-laden shop to see the assembly line, "Doughnut Theatre," the company calls it, at work with fresh hotly glazed dougnuts with your name on it. Since 1937 Krispy Kreme Doughnuts (NYSE: KKD) has been glazing doughnuts and brewing coffee and is now found in 710 locations in 22 countries. The P/E is low at 3.10, and it has a PEG of 0.7 and a beta of 1.

Krispy Kreme had been a big momentum name in the early 2000s and the stock touched $50.00 only to sink to a dollar a share, barely enough to buy one of their doughnuts. Financial mismanagement, overambitious expansions, and high executive compensation all led to a horrific drop for shareholders. But things have been looking sweeter now; only one quarter shy of four straight years of same store sales growth.

Krispy Kreme is reporting Q3 earnings on Nov. 19 after the bell. Commodity costs, expansion plans, and promotions will be on the tips of analysts' tongues.

More Excuses?

The company had a very strong second quarter report on Aug. 22 with a 40% surprise and raising guidance to the upper limit. My favorite part of the call was CEO James Morgan's summary of significant national consumer research on the brand: "We have a unique opportunity to create more doughnut use occasions as consumers tell us that they just need more excuses to eat Krispy Kreme doughnuts." Really, who needs excuses?!

Analysts will be asking if they've created more "excuses" for customers to chow down, like the National Doughnut Day and 75th anniversary promotions they ran in Q2, while checking on the numbers for the Aaaarh! Talk Like A Pirate Day in September and National Coffee Day in October. Did the latter increase same store sales numbers to show 5.4% growth and keep the streak of 15 quarters going? They'll also want to know how much they've increased their social media presence since the last call and any other marketing initiatives.

What Analysts Want (Besides Free Samples)

Many other food and restaurant companies have mentioned commodity costs on their calls recently. CFO Douglas Muir said on the last call they had pretty much hedged sugar for some time. He added they were good for the second half of FY2012 for yeast, doughnut mix and flour but were waiting for opportunities to lock in prices after that. They'll want to know can the company maintain or improve their current 40% margin.

Plans for expansion are another likely topic. The company has stated before their goal is 200 more locations in the next five years. Where and when will be as important as how much more debt they are willing to bear as the current debt load stands at $27.01 million in debt to $51.2 million. Another question will be whether they have found a Vice President of Franchise Development yet as they plan to expand the number of domestic franchises from 160.

International franchises were not as robust last quarter and those numbers will need to improve.  Investors will want to know how the newest franchise agreement for 15 stores in Singapore is doing, as well as how the India and Russia franchise agreements are progressing with more countries to come.  They had 390 international shops and opened 24 in the second quarter. They already have international franchise agreements for 400 more stores over the coming years.

Should You Bring Home Krispy Kreme?

Analysts expect $0.08 EPS and revenue to climb $3 million for the quarter, a tall order for a small cap name at $453.71 million. CEO Morgan needs to maintain the guidance at the high end of the range. While it's lightly covered Zack's ranked it a buy in October.

Compared to competitors Dunkin Brands Group (NASDAQ: DNKN), Starbucks (NASDAQ: SBUX) and Einstein Noah Restaurant Group (NASDAQ: BAGL) Krispy Kreme has by far the lowest P/E, lower than the industry average of 18.65. It doesn't have a yield of 3.30% like Einstein Bagel or the 2.00% yield of Dunkin' Donuts.

But it does have upside -- trading at $6.92 with a price target of $9.75 it has 30-40% upside. In addition, it's not at 52-week highs like some of the other names.  This is still somewhat speculative but it's a name that has really turned itself around. Krispy Kreme is Hot Now.

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Krispy Kreme Doughnuts and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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