Krispy Kreme has
292 stores (Dunkin' Donuts has 3,600 in the U.S.
alone) and last year did $492 million in sales
and earned $33 million (that includes a one-time
charge of $9 million). But, boy, does it have
oomph.
Back in April 2000, few people outside Krispy
Kreme knew if the doughnuts' appeal could cross
significant geographic, cultural, societal and
financial barriers.
So far, the only holes in Krispy Kreme's strategy
are in the doughnuts themselves and the predictions
of many analysts about the stock's prospectus.
"We're relatively conservative and believe
in under-promising in hopes of over-delivering
when it comes to the restaurant business and the
stock business," said Scott Livengood, Krispy
Kreme's chairman, chief executive officer and
president.
"We believe our ability to exceed expectations
is a validation of that corporate philosophy and
our future prospects."
Analysts said in April 2000 the stock was destined
for the $15 to $20 a share range at best, which
is where most known food-related stocks are located.
Instead, it has been hovering at a value of $40
a share, or $160 a share un-split, most of this
year. The stock was split twice by Krispy Kreme
in 2001.
It has been as high as $187.60 a share un-split
in the past year.
That means an investor who spent $2,100 to obtain
100 shares of Krispy Kreme's stock on April 5,
2000 - the date of its initial public offering
- now has an investment worth around $16,000.
"We're in the third inning of a nine-inning
ball game when it comes to Krispy Kreme's stock,"
said David Geraty, an analyst with Minneapolis-based
Dain Rauscher Wessels.
Geraty said he not only has the stock rated to
reach $55 a share in the near future. He also
has it listed as his top-ranked stock investment
for high growth potential.
"There's little doubt now that Krispy Kreme
has slugged a home run with its stock so far when
some people thought it would be a flashin-the-pan
buoyed more by hype than substance," Geraty
said.
Krispy Kreme has been extremely successful in
creating not only a buzz about its stock,"
said John Stanton, a food marketing professor
at St. Joseph's University in Philadelphia and
an industry consultant.
"It has a mystique about its doughnuts that
follows Starbucks as a case study for how to roll
out a national brand," Stanton said.
Stanton said management has created an aura about
the Krispy Kreme experience through word of-mouth
from transplanted Southerners and clever marketing
efforts that is probably more pervasive than the
doughnuts themselves.
"I've eaten dozens of the doughnuts, and
probably added an inch or two to my waistline
because of them, so I know they're good,"
Stanton chuckled.
"But like Starbucks has managed to do with
the coffee mug, it's a cool, status-type sign
to be seen eating a Krispy Kreme doughnut, even
though that doughnut style has been around for
decades (65 years).
"That's how I can best explain why people
in so many new markets have waited in line for
hours, sometimes overnight, to be the first to
eat a Krispy Kreme doughnut."
Obstacle after obstacle has been set before the
Krispy Kreme stock phenomenon in the past 25 months.
They have included:
Krispy Kreme would never be able to attract enough
customers outside its native South to expand nationally.
Instead, Krispy Kreme has set record first-week
sales numbers in places such as Phoenix, Toronto,
Seattle, Oklahoma City, Wichita, Kan., and Minneapolis.
It has 217 stores in 33 states and almost every
major metropolitan marketplace in the country.
There are plans to open 750 franchise stores
and 2,250 doughnut/coffee shops in the next few
years.
"They have a long ways to go before they
have saturated the United States marketplace,"
said Andrew Wolf, a retail analyst with BB&T
Capital Markets.
"Krispy Kreme's strategy for entering the
larger metropolitan areas first, then gradually
building out into smaller markets, has served
them well.
"With the talk of Krispy Kreme cautiously
entering the international marketplace (in Japan,
England, Spain, Australia and Korea), it only
stretches the envelope for how far the company
can continue to grow the business."
The stock is one big balloon filled with hype
and buzz just waiting to burst with the first
big piece of bad business or earnings news.
Krispy Kreme officials have heard that talk from
the moment it announced its initial public offering
plans in December 1999. Several analysts said
in mid-2000 the stock would never last above $50
a share, then said $70 a share was too rich for
investors.
Krispy Kreme's lasting power and earnings performance
has changed most analysts' opinion of the stock.
In a recent review of First Call/Thomson Financial
and Zacks Investment Research, all but one of
the analysts surveyed rated Krispy Kreme as a
strong or moderate buy.
"No one honestly expected Krispy Kreme's
stock to stay this high this long when it debuted,"
Wolf said. "But the underlining financial
fundamentals of the stock have been so solid,
the stock no longer is seen as being way overvalued.
"Plus, with Krispy Kreme's ability to create
a national brand this quickly and sustain sales,
there's no reason for the stock to languish anytime
soon."
There are analysts who still tout with their reviews
of the stock that the bubble could burst with
one ill-timed piece of news. Thus far, Krispy
Kreme has been subjected to two pieces of piercing
news that ultimately failed to dissuade investors.
A Merrill Lynch analyst's critical financial review
titled, "Can't Sugar Coat This One,"
from November 2000 sent the stock down 12 percent
for one week before it rebounded.
That's because Krispy Kreme has exceeded analysts'
earnings expectations every quarter - eight to
date - since becoming a public company.
The stock also appeared vulnerable when it was
briefly tagged with the same accounting paint
stroke of Enron.
The stock fell 10 percent in one day after Forbes
magazine reported in its Feb. 18 edition it had
concerns with a Krispy Kreme financial reporting
strategy regarding a new Illinois facility.
Even though Krispy Kreme's strategy of a synthetic
lease for the $35 million mixing plant in Effingham,
Ill., was legal, the company opted to use conventional
financing that will show up on its balance sheet
to fund the facility.
Livengood said the change in financing method
was made in deference to investor perceptions
after Enron bankruptcy.
Since then, the stock has regained the 10 percent
downturn and moved higher.
Livengood and Krispy Kreme management also responded
to the criticism by quickening the pace of publicly
disclosing its financial dealings, including ownership
stock sales.
"We've become accustomed to the scrutiny,"
Livengood said.
"The only disappointment we had in that whole
experience was the lack of accuracy in some of
the reporting by people who didn't know all that
they should have about our company.
"We certainly believe in full disclosure,
not just the minimum level of disclosure popular
among some businesses."
Geraty said analysts and investors do realize
that one significant missed earnings report or
bad business news could end the euphoria around
the stock.
The stock's price-earnings multiple has risen
at least 25 percent above the average for its
industry, which is typically a warning sign that
the stock is overvalued.
"But they also realize the company has ample
resources and growth potential," Geraty said.
"They could open 750 stores (up from 217
currently in 33 states) and 2,250 doughnut/coffee
shops before they would reach a major saturation
point domestically."
OK, so Krispy Kreme has been fortunate enough
to have attracted a national following and initial
publicity surges as it enters new markets.
But it surely couldn't keep up its sales volumes
once consumers satisfied their initial tastes
of the doughnuts.
After all, surely Krispy Kreme will fall victim
to the Coors syndrome, in which the mystique about
the Colorado-made beer evaporated soon after the
time it became available east of the Mississippi
River.
"Coors is still a fine-selling beer, but
it was never the same once the decision to blanket
the country was made," Stanton said. "You
could also point to Izod and the buzz created
around it when it was initially only available
in golf shops.
"Did Izod want to start that way? No, it
would have rather began in department stores.
But being exclusively available created a surge
in demand for the shirts.
"But think about this. How many alligator-logo
shirts do you see men wearing today?"
Ah, but Krispy Kreme could and has managed to
keep the buzz aloft.
Krispy Kreme stated in its first-quarter 2003
earnings report Thursday that system wide sales,
including sales of both company and franchise
stores, increased 30.4 percent to $183.1 million.
The company's deliberate decision not to go into
even a marketplace like New York City too aggressively
has kept the Krispy Kreme fever going strong.
"There will be some cannibalization of current
Krispy Kreme stores as more stores are opened
in a marketplace," Geraty said.
"They learned somewhat of a lesson in that
in how they rolled out in the California marketplace.
"But there's current demand for their product
that if they place new stores in geographically
advantageous place, they could roll out 70-80
stores a year for a few years without having to
worry about cannibalizing same store sales."
A recent story out of Aurora, Colo., epitomizes
the Krispy Kreme phenomenon in a quirky way that
relates the doughnut maker to retail king Wal-Mart
as a potentially inconvenient neighbor.
The Associated Press reported that Aurora residents
expressed concerns to their city leaders about
Krispy Kreme's plans for a second store there.
It seems that after Krispy Kreme's first store
there did $369,000 worth of business in its first
week, resident’s feared increased traffic
and other woes related to a second store.
"It'll be a total zoo around here if they
move in," resident Elaine Hall was quoted
in the Associated Press account. "This intersection
is already one of the worst in the city."
Stanton said as much as he knows about Krispy
Kreme's management style, he expects them to try
to extend the doughnut's mystique as far as possible
with the new stores.
"As soon as they hit a saturation point,
they will be lumped into the rest of the doughnut
makers," Stanton said. "But as long
as they keep making delicious doughnuts that satisfy
customers enough that they tell their friends
about them, their brand will remain as hot as
the doughnuts coming off the conveyor belt."
For starters, get a load of KKD's stock: up four
times since its IPO three years ago. Net income
per share has compounded at more than 45% since
1998. Significantly, Krispy Kreme's same-store
sales are still growing by more than 11%. It has
operating margins of nearly 16%—and growing.
System wide revenues, which include sales by franchises,
were $779 million last year and should cross $1
billion this year.
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