CIBC Lowers Krispy Kreme to 'Sector Perform'

Analyst John Glass says lower average weekly sales signifies a slower pace of new-store openings for the doughnut chain

CIBC World downgraded Krispy Kreme Doughnuts (KKD ) to sector perform from sector outperform.

Analyst John Glass downgraded on continuing concerns about falling new unit productivity, a declining return on capital, and an increased dependence on satellite and international stores to grow earnings. Glass thinks these issues add to the doughnut chain's risk profile, and could negatively impact fiscal 2005 earnings growth.

Glass notes average weekly sales fell 3.1% year-over-year -- the largest decline of the year, indicating new stores continue to open significantly below the chain's average. He remains a long-term fan of Krispy Kreme's story, and thinks the strategy evolution to smaller units may pay off. But he says Krispy Kreme's increased financial risk and declining near-term returns can't be ignored.

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