If You’re Bearish on Krispy Kreme Stock, You Need to Read This

KKD StockKrispy Kreme Stock Has Potential

Since last September, Krispy Kreme Doughnuts (NYSE:KKD) stock has dropped. But, after hitting a bottom of $13.16 last February, Krispy Kreme stock is making a sweet comeback. KKD stock could easily return to the highs of a year ago, when it was trading at well over $22.00 per share. Indeed, the worst is over, as KKD stock is up more than two percent year-to-date and has risen more than 20% since touching a 52-week low of $12.90. The company should have a great year ahead as it pursues growth.

While its donuts are popular, few know that most analysts expect KKD stock to hit an average price target of $21.75, which represents almost 50% upside—a bargain in any sector. Some analysts see it going to $24.00. (Source: “Krispy Kreme Doughnuts, Inc. (NYSE:KKD) Price Target Changes,” Risers and Fallers, March 9, 2016.)

Krispy Kreme just published its fourth fiscal quarter, during which it earned $8.2 million ($0.13 per share) against $6.5 million ($0.10 per share) a year earlier. Revenue rose four percent year-over-year to $130.4 million. Krispy Kreme also delivered a year-over-year guidance, predicting earnings per share (EPS) between $0.87 and $0.91 against $0.80 last year.

So why has KKD stock stumbled, remaining flat around $14.50 to $14.00? The problem is that analysts were expecting better. Even though Krispy Kreme beat their earnings predictions of $0.21 per share, Wall Street predicted revenue of $133 million. (Source: “This Is Why Shares of Krispy Kreme Are Getting Slammed Today,” Fortune, March 23, 2016.)

However, Krispy Kreme also has a strategy to focus on revenue. It will lower the number of promotional discounts and likely focus more on its franchising stores, which performed better than those the company owns. How that focus will be translated is unclear, but if warranted, Krispy Kreme could shift investments away from company-owned stores to franchised ones. (Source: Ibid.)

Krispy Kreme has to confront competition from a number of companies, from fellow donut specialist Dunkin Donuts to Starbucks. Therefore, Krispy Kreme has focused on store count, increasing it by 10% year-over-year to reach 1,084 company-owned and franchised locations. It plans to add 130 more this year as it hunts growth. (Source: “Has Krispy Kreme Fixed Its Holes Ahead of Fourth-Quarter Earnings?The Street, March 18, 2016.)

Finally, Krispy Kreme has launched a loyalty program and mobile payment app to better balance the competition with Starbucks, which has tested both to its satisfaction. (Source: Ibid.) Krispy Kreme is a “simple” stock to own.

Despite its more than 1,000 store locations, the company focuses on one main item: evidently, the donut. It hasn’t expanded its menu to become a larger restaurant brand, which would have placed it into the McDonald’s and Chipotle Mexican Grill sphere. Tim Hortons, owned by Yum! Brands, Inc. (NYSE:YUM), has tried that already.

For now, Krispy Kreme can keep costs low, keep making glazed donuts, and enjoy growth all the same. The stock is as simple as taking a bite out of one of its donuts.