Krispy Kreme Doughnuts (KKD) shares took a huge hit to the tune of 21% after the company said that it swung to a loss in the fourth quarter and guided lower going forward. It’s too bad for the bulls because the stock seemed to be building a little momentum and garnered some confidence from skittish investors, but that went up in smoke. Does the stock have a chance to rebound?
Rising Costs = Trouble
The company reported a loss of two cents per share versus the consensus estimate for a profit of four cents. Revenues also missed expectations by over $1 million dollars. The miss was an unpleasant surprise since the company posted huge beats the past two quarters and earnings estimates have actually increased by almost 10% over the past two months for this year.
KKD is being squeezed by rising commodity prices, which are inputs to its business of making doughnuts. In response, the company will raise the prices of its products, which could affect demand from consumers. Doughnuts aren’t exactly the most inelastic products on the market, so cost-conscious consumers might cut back on their expenditures for the sweet stuff.
CEO James Morgan said, “international same store sales comparisons will remain under pressure due to the substantial expansion in recent years. Not surprisingly, commodity costs are poised to rise significantly compared to fiscal 2011, and we are therefore implementing various price increases to largely offset higher input costs.”
Rebound Coming?
I think the next big key for the stock is how customers react to the price hikes. Clearly investors are having concerns considering how poorly the stock acted on Friday. After the drubbing the stock took last week, investors will be gunshy about buying the stock back until there is further evidence that the price hikes are sticking without any demand destruction. Until then they will likely be testing other waters. I would suggest avoiding this stock for now.
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