During the Monday market plunge, few stocks survived the sell off, but one long neglected name soared – Krispy Kreme Doughnuts (KKD: Charts, News, Offers) gained over 22% in regular trading after it reported extremely impressive earnings. The doughnut chain, which had been pounded against the ropes quarter after quarter by its much more successful arch rival Dunkin’ Donuts, finally trounced analysts expectations of 9 cents per share with earnings of 13 cents per share, or $9.2 million. This is more than double its earnings of 6 cents per share, or $4.5 million, it posted a year earlier. Revenues increased 13.6% to $104.6 million, far above the analysts’ estimate of $96.5 million. The company further excited investors when it claimed that it was likely to hit the “high end” of its fiscal 2012 operating income forecast of $22-$24 million. Krispy Kreme attributed this turnaround to lower impairment charges and lease termination costs.
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Company-owned same-store sales increase 5.8%, silencing bearish critics claiming that healthier-eating trends threaten to marginalize high-fat fast food companies such as Krispy Kreme. Its company store revenue increased 11%, while its franchise revenue increased 7.7%. Even more impressively, the company’s international segment, which includes locations in Australia, Bahrain, Indonesia, Japan, Lebanon, Mexico, Kuwait, the Philippines, South Korea, the U.K., the U.A.E. and the Dominican Republic, reported an 18% increase in sales. The company’s KK Supply Chain, which manufactures doughnut mixes and doughnut-making equipment, which its factory and franchise stores are required to purchase from, reported a 17% increase in revenue. The company’s operating margin increased from 6.6% to 9.4%.
Krispy Kreme had previously dived due to poor management and a flawed approach to managing its rapid expansion. The company has now taken to slimming down its operations and making cuts where they count. During the reporting quarter, the company shuttered 15 stores while opening 21, ending with 652 domestic and global locations. While commodity costs have hit restaurants across the market, Krispy Kreme intends to reduce the use of some key ingredients – such as sugar and flour – and raise prices in order to counter rising raw material costs and inflation. Whether or not this will impact store traffic remains to be seen – but management has thus far done a good job maintaining its focus. The company has now finished its first profitable fiscal year since 2004. For reference, Krispy Kreme shares traded near $50 in 2003 and in the $30s during 2004 prior to its epic fall from grace, which bottomed out in 2009, when shares declined to nearly $1 per share. Shares currently trade in the $7-$8 range.
One of Krispy Kreme’s fatal mistakes seven years ago was its failure to recognize the strategies employed by its industry peers, McDonald’s (MCD: Charts, News, Offers) and Starbucks (SBUX: Charts, News, Offers), which both expanded their specialty drink, salad and dessert menus to appeal to a wider audience. This helped McDonald’s sidestep the commodities crisis and pacify its “healthy eating” critics. In addition, both McDonald’s and Starbucks renovated their existing stores to appear more upscale. Appearing to aspire to Starbucks’ rapid expansion model, Krispy Kreme also spread itself too fast and too thin, leaving it an easy target for the 800-pound, privately traded gorilla of the doughnut industry, Dunkin’ Donuts, which is gearing up for an IPO.
Krispy Kreme would be well advised to expand its existing coffee and drinks menu and renovate its stores to cash in on the popularity of coffeehouses and snack restaurants. Based on American market surveys, the most popular coffeehouse and snack restaurant by numbers is Starbucks (36%), followed by Dunkin’ Donuts (28%) and Krispy Kreme (16%), signifying a strong starting position for the company to build upon. The stock currently trades with a forward P/E of 19.8 with a PEG ratio of 0.46, which signals a value investing opportunity despite the stock’s current surge.
Other News About Krispey Kreme
Krispy Kreme ‘hot now’ as sales soar
Krispy Kreme beats the Street.
Krispy Kreme Books Sweetest Profit in 7 Years
After 7 years, investors finally breathe a sigh of relief.
Other Stocks in the News
McDonald’s Replaces Cashiers with Touch-Screens
McDonald’s tests self check-out kiosks in Europe.
Starbucks avoids high coffee prices
Starbucks attempts to sidestep a 34-year high in coffee prices.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
