Doughnut and sweet treat brand Krispy Kreme Inc. (DNUT - Get Rating) is present in more than 30 countries with its unique network of doughnut shops, collaborations with top retailers, and a quickly expanding e-commerce and delivery business. The Winston-Salem, N.C.-based company’s shares gained nearly 2% in price after reporting stable financials for the fourth quarter. However, it missed the consensus earnings estimate by 14%.

The stock has plunged 21.2% in price year-to-date and 12.3% over the past six months to close yesterday’s trading session at $14.91. 

In addition, while DNUT’s 11% – 13% net revenue guidance is in line with Wall Street’s forecast, the company’s 38 cents – 41 cents per share forecast for adjusted profits fell short of analysts’ forecasts of 45 cents per share. This could further affect the company’s price performance in the near term.

Here’s what could shape DNUT’s performance in the near term:

Premium Valuations

In terms of trailing-12-months non-GAAP P/E, the stock is currently trading at 37.66x, which is 180.64% higher than the 13.42x industry average. Also, its 2.41x forward EV/Sales multiple is 88.5% higher than the 1.28x industry average. Furthermore, DNUT’s 1.61x forward Price/Sales  is 57.4% higher than the 1.02x industry average.

Poor Profitability

DNUT’s 28.9% trailing-12-months gross profit margin is 19.3% lower than the 35.8% industry average. Also, its ROA and net income margin are negative 0.78% and 1.77%, respectively. And its $141.22 million trailing-12-month cash from operations is 18.1% lower than the $172.34 million  industry average.

POWR Ratings Reflect Uncertainty

DNUT has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DNUT has a D grade for Quality and a C for Value. The company’s poor profitability is in sync with the Quality grade. In addition, the stock’s higher-than-industry valuation is consistent with the Value grade.

Among  43 stocks in the B-rated Restaurants industry, DNUT is ranked #39.

Beyond what I’ve stated above, you can view DNUT ratings for Growth, Stability, Sentiment, and Momentum here.

Bottom Line

Though the company reported stable financial performance fueled by strong holiday sales, it has struggled with inflation costs and labor shortages. It also failed to keep up with consensus earnings estimates in the last reported quarter and guidance for the coming quarter. In addition, DNUT’s higher valuation is not justified, given its negative profit margins. So, we think the stock is best avoided now.

How Does Krispy Kreme Inc. (DNUT) Stack Up Against its Peers?

While DNUT has an overall D rating, one might want to consider its industry peers, Good Times Restaurants Inc. (GTIM - Get Rating), which has an A (Strong Buy) rating and Dine Brands Global Inc. (DIN - Get Rating), and Nathan’s Famous Inc. (NATH - Get Rating), which have an overall B (Buy) rating.

DNUT shares were unchanged in premarket trading Tuesday. Year-to-date, DNUT has declined -21.01%, versus a -8.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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