Takeaway: DÉJÀ VU - This is a great opportunity to buy the dip. The company's fundamentals are as strong as ever and the growth story is intact.



Krispy Kreme posted very solid 3QF14 results after the close yesterday and today’s dip offers a nice buying opportunity for those looking to be long the name.  Despite softer than expected top-line growth, the fundamentals of our bullish thesis remain intact.  In our opinion, today’s selloff was largely due to “disappointing” domestic company comps of +3.7%, which missed consensus metrix estimates of +6.7%.  However, domestic franchise comps (+10.7 vs. +6.8% estimate) and international franchise comps (-3.1% vs. -7.9% estimate) both significantly surprised to the upside.  Domestic company and franchise comps continue to grow and international comps are accelerating at a rate much faster than anticipated.  There is a chance that international comps could turn positive next year, which would be far sooner than the street currently expects.


While KKD appears to have failed to live up to lofty expectations, the fact of the matter is the company is in great shape.  All four business segments posted higher operating margins than a year ago, traffic was up +1.1% despite lapping a difficult comp of +7.1%, beverage sales were up +4.2%, the growth story is predominantly on track, and the balance sheet is as strong as ever.  Essentially, the growth drivers that made us bullish on the company back in early September are still in place.  Krispy Kreme has tremendous opportunities to drive long-term growth by continuing to refine its freestanding small factory shops, driving higher margin beverage sales, growing its capital light model, and expanding its domestic and international footprint.


As an aside, management did acknowledge that its original goal of 400 domestic shops by January 2017 may aggressive.  This is marginally negative, but isn’t a huge deal.  In fact, management would not completely rule it out and the overall growth story is largely on pace to play out.  Another point of contention is the gap between domestic company (+3.7%) and domestic franchise (+10.7%) comps.  To most, this signals that the company is doing something wrong.  But, to us, this resembles an impressive franchise base and an opportunity to refine company operations.  Seven domestic franchisees grew same-store sales by +20% or greater, while the remaining franchisees grew same-store sales by +7% or greater.  This type of operational execution and performance is what makes us excited about the growth prospects of this company.  KKD announced a development agreement with Dulce Restaurants, LLC, to develop 10 new shops in Houston over the next five years and management indicated that more announcements are likely to follow in the coming weeks and months.


The market’s reaction today is emblematic of what we saw last quarter after KKD reported “disappointing” 2QF14 results.  KKD is currently trading at a PE of 27.5x and 17.8x EV/EBITDA on a NTM basis, well below prior valuation levels.  This downward multiple revision represents a strong buying opportunity.


What we liked in 3QF14 results:

  • Revenues rose +6.7%, comparable sales rose +3.7%, and operating income rose +27.2%.
  • Domestic franchise and international comps blew away expectations.
  • Operating margins improved across all four business segments.
  • Traffic was up +1.1%, despite lapping a very difficult +7.1% comp.
  • International same-store sales could turn positive next year.
  • Beverage sales grew +4.2%, led by the coffee category which was up +15%.
  • The wholesale channel is growing.  Average weekly sales per door rose in both the grocery and mass merchant and convenient store channels.
  • Long-term opportunity to drive incremental sales and extend the Krispy Kreme brand through packaged ground coffee.
  • The majority of domestic unit growth over the next three years will be franchise.
  • Continue to develop and improve the freestanding small factory shop models.
  • Total franchise commitment for additional international development now stands at roughly 350 shops and the goal of 900 international shops by January 2017 remains achievable.
  • Recently announced two franchise agreements (Alaska and Houston) and plan to announce more in the coming weeks and months.
  • The growth story is intact.  Anticipate opening 10 to 15 domestic company stores, 20 to 25 domestic franchise stores and about 85 international franchise stores in FY15.
  • KKD is now much more attractive from a valuation standpoint.

What we didn’t like in 3QF14 results:

  • Total revenues came in light, driven by disappointing domestic company comps (+3.7% vs. +6.7% estimate).
  • Management sounded unsure that they would be able to hit the original goal of 400 domestic stores by 2017, calling it a “stretch” goal.
  • Facing difficult domestic company and franchise same-store sales comparisons in 1HF15.
  • Preliminary FY15 EPS guidance of $0.71-0.76 came in below expectations of $0.77.



KKD: DÉJÀ VU (BUY THE DIP) - KKD franchise

KKD: DÉJÀ VU (BUY THE DIP) - kkd international



Howard Penney

Managing Director


$FXB: Don't Mess With The Pound

Takeaway: We remain bullish on the British Pound (via FXB).

After another blockbuster economic data point out of the UK this morning (November Construction PMI 62.6! vs 59.3 in October), the Pound continues to pound the Burning Buck at $1.64 versus the US Dollar.


$FXB: Don't Mess With The Pound - uk99


Guess what? It can go a lot higher from here.


Especially if the Fed engages in open-market storytelling about why the ISM growth data (best in 3 years) isn’t enough to taper.


Yes - we remain bullish on the British Pound (via FXB).


Incidentally, all of those Keynesian college professors who said austerity would kill the UK (Danny Blanchflower at Dartmouth)?


They are eating crow.


$FXB: Don't Mess With The Pound - UK Construction PMI

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[podcast] mccullough: buy the damn bubble? (#btdb)

Hedgeye CEO Keith McCullough explains what he's thinking and doing on this morning's macro conference call and why Simon "Chartreuse" Potter at the NY Fed is a piece of work. 


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After another blockbuster economic data point out of the UK this morning (November Construction PMI 62.6! vs 59.3 in October), the Pound continues to pound the Burning Buck at $1.64 versus the US Dollar. Guess what? It can go a lot higher from here. Especially if the Fed engages in open-market storytelling about why the ISM growth data (best in 3 years) isn’t enough to taper. Unbelievable. 


Rates down means Gold up this morning (following rates up and Gold getting slammed yesterday). ‘Tis the season and the end of a fantastic year of being long growth and short the anti-christ of it (Gold). Capitulation in Gold should happen as US growth expectations lock in 1-year highs. Thursday’s US GDP print for Q313 should be the top in growth, sequentially.


Mother Russia remains in a body bag this morning. She's leading the European Equity decline (as it has all year). The RTSI is down -1.9% to -6.1% year-to-date. Now all we need is for Brent Oil to snap its TAIL risk line of $108.69 again. If that happens, Vladimir Putin will have more issues than the Ukraine. That's saying something.

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Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


The "January Effect" gets priced in in December with 9 of the 13 Decembers since 2000 being +1% for the S&P @hedgeyeJC


"It's hard to beat a person who never gives up." -Babe Ruth


Sony's PlayStation 4 may be turning into the hit the company needs. Global sales of the game console topped 2.1 million as of Dec.1, just two weeks after it was launched in the U.S. and Canada and three days after it was made available in other markets.






Hong Kong is on public-health alert after the city confirmed its first human case of the deadly H7N9 bird flu, with an Indonesian domestic worker hospitalized in critical condition.  Health secretary Ko Wing-man said the government has raised its influenza pandemic response level to "serious" from "alert."  The number of human H7N9 infections in China has dropped significantly in recent months.  As of early November, there were 139 confirmed human cases of H7N9 and 45 deaths reported since April, according to the WHO.


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%