Why People Aren't Buying Doughnuts Like They Used To

Retail

Published: June 3, 2014 6:44 am

The doughnut business is in trouble. At least that is a conclusion that can be drawn from the earnings posted by Krispy Kreme Doughnuts Inc. (NYSE: KKD) and Wall Street’s subsequent reaction. Maybe a move toward healthier eating has hurt the chain. Or, maybe it was competition.

Krispy Kreme lowered its full-year guidance from a range of $0.73 to $0.79 to a range of $0.69 to $0.74.

The company announced:

For the first quarter ended May 4, 2014, revenues increased 0.8% to $121.6 million from $120.6 million. Excluding the effects of refranchising three stores in Kansas and Missouri and three stores in Dallas in February and July of 2013, respectively, revenues rose 2.1%.

Excluding some portion of results does not reflect the company’s health, so Krispy Kreme has no reason to do so, other than as an excuse for poor performance. Based on the earnings data, the company’s growth has withered to almost nothing. Investors expressed anxiety by dropping shares by 14%. That sell-off moved shares close to a 52-week low. What was once a very hot stock has underperformed the S&P 500 so far this year.

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Like most public companies, Krispy Kreme did not admit it may have a long-term problem. Many other large chains sell doughnuts. First among these are Starbucks Corp. (NASDAQ: SBUX) and Dunkin’ Brands Group Inc. (NASDAQ: DNKN). And Dunkin’ earnings were also poor, a signal that the doughnut trade in general has weakened.

The other thing public companies rarely admit is when their entire customer market has started to turn against them. It may be that the pressure health care advocates have put on the public to eat better foods and wean themselves from fat and high calories has started to take hold. If so, Krispy Kreme is up against a trend it cannot reverse, at least on its own. And that puts long-term earnings in a great deal of jeopardy.

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