This would be a good time to point out that excitement is an interesting vehicle for investors. In the short-to-medium term, it can drive a stock price higher and lead to miraculous returns. Excitement is exactly what momentum traders look for, and many of them do quite well. However, excitement is also like a drug, and once that drug wears off, the sustainability of that momentum comes into question.
Considering that Krispy Kreme Doughnuts (NYSE:KKD)’s management expects a long-term earnings growth rate of 25%, the discussion above might not seem to fit in a discussion about Krispy Kreme. But if capital preservation is your top priority, then you might want to make sure this isn’t just a sugar rush. After all, this is a company that lost all momentum and destroyed investor wealth once before. You have to think about where the stock would be trading without monetarily stimulus measures driving the stock market higher since the depths of The Great Recession.
Great ambition
In addition to management expecting strong long-term earnings growth, Krispy Kreme Doughnuts (NYSE:KKD) upped its full-year earnings guidance to a range of $0.59 to $0.63 from $0.53 to $0.57.
Looking back, Krispy Kreme beat earnings and revenue expectations in the first quarter. Performance was thanks to increased traffic, an 11.4% jump in same-store sales, and margin expansion. Furthermore, franchise revenue increased domestically and internationally. By moving more toward franchising, risks decline and earnings improve.
With everything going right, it makes sense for Krispy Kreme to want to expand. Domestically, it wants to go from 250 stores to 400 stores. Internationally, it wants to go from 525 stores to 900 stores. This could play out very well for Krispy Kreme Doughnuts (NYSE:KKD)’s, but it’s also risky.
Aggressive expansion might be dangerous for a company like Krispy Kreme. While unemployment has remained steady, fewer people are looking for jobs, and wages are moving in the wrong direction. These trends have the potential to lead to a weaker consumer. If the consumer weakens, then spending at Krispy Kreme Doughnuts (NYSE:KKD) is likely to decline.
Krispy Kreme has also failed to make a splash for the health-conscious consumer. Americans are more health-conscious today than ever before, and Krispy Kreme Doughnuts (NYSE:KKD) is light years away from that trend.
As far as international expansion is concerned, there might be more potential in emerging markets thanks to increasing incomes. However, Krispy Kreme wants to almost double its international store count. Therefore, if anything goes wrong, revenue growth expectations won’t be met and costs will quickly increase. It simply might be too much too fast.
Krispy Kreme vs. peers
If you’re like most people interested in investing in Krispy Kreme Doughnuts (NYSE:KKD), then you’re probably wondering how it compares to Dunkin Brands Group Inc (NASDAQ:DNKN), as in Dunkin’ Donuts.
It might surprise you that Krispy Kreme’s doughnuts aren’t quite as unhealthy. According to statcrunch.com, Krispy Kreme Doughnuts (NYSE:KKD) have a lower calorie range, fewer carbs, and less sodium. However, Dunkin Brands Group Inc (NASDAQ:DNKN) wins the battle when it comes to investing.
Dunkin’ strategically offers coffee, ice cream, and sandwiches. Krispy Kreme is attempting to go this route as well for product diversification, but it would take many years for it to catch up.
Dunkin Brands Group Inc (NASDAQ:DNKN) has also proven to be more efficient, sporting a profit margin of 15.9% versus Krispy Kreme’s profit margin of 5.1%. And Dunkin Brands Group Inc (NASDAQ:DNKN) yields 1.7%, whereas Krispy Kreme Doughnuts (NYSE:KKD) doesn’t offer any yield.
On the other hand, Dunkin Brands Group Inc (NASDAQ:DNKN) has a boatload of debt to deal with, carrying a debt-to-equity ratio of 5.3. This will limit the company’s growth potential and it could lead to a dividend cut in the future if the economy sours.
Then there’s the all-mighty Starbucks Corporation (NASDAQ:SBUX) . Starbucks might not sell doughnuts, but it does sell coffee, ice cream, cookies, brownies, and other snacks. Some people visit Starbucks for these items opposed to coffee. But that doesn’t really matter. You just want to know if it’s the best investment of this bunch. The short answer is yes.
Starbucks Corporation (NASDAQ:SBUX) sports a healthy profit margin of 10.8%, yields a decent 1.2%, and its debt-to-equity ratio stands at a very impressive 0.1. This strong debt management will allow growth to occur without any hindrances and it may lead to more capital being returned to shareholders.
Starbucks is trading at 35 times earnings, which isn’t cheap, but it’s a better value than Krispy Kreme at 59 times earnings, or Dunkin Brands Group Inc (NASDAQ:DNKN) at 47 times earnings. Perhaps the most important point of all is that Starbucks Corporation (NASDAQ:SBUX) CEO, Howard Schultz, is a phenomenal leader, which is evidenced by employee ratings on Glassdoor.com. After 1,749 employee ratings, 86% of those employees approve of Schultz.
Conclusion
Krispy Kreme might very well have more room to run. As it’s often said, the trend is your friend. And you never want to bet against strong momentum. But Krispy Kreme Doughnuts (NYSE:KKD) plans to expand into the teeth of an unstable economy. These expansion plans aren’t expected to be complete until 2017, but once expansion plans are in motion, they’re likely to continue.
Krispy Kreme is a good little company, but based on its business model and the current economic environment, it might only continue to see success over the long haul if it stays little.
There is potential for the company to thrive if it follows through with its expansion plans, but it’s not going to be easy.
Overall, Krispy Kreme Doughnuts (NYSE:KKD) looks to be a decent momentum play, but a long-term investment would be high risk.
The article Can This Company Make You Dough? originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks Corporation (NASDAQ:SBUX). Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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