Is it too late to buy this year's top turnaround stock?
After a brush with bankruptcy in 2009, this wildly popular quick-serve company is up 95% this year alone.
The financial crisis forced every company in the world to re-evaluate its business model. Frozen credit markets, a recessionary global economy and weak consumer demand scared even the most profitable and successful companies into becoming stronger, leaner and more competitive. The result four years later is record margins, cash and earnings for the S&P 500.
But while the financial crisis ended up making the entire private sector stronger and more competitive, there is one company that stands out among its peers for its amazing rebound.
After a highly publicized IPO in April 2000 during the aftermath of the tech bubble, Krispy Kreme Doughnuts (KKD) proceeded to surge, climbing from $10 to an all-time high of $49 in the next three years. That fueled massive buzz that the company was well on its way to becoming the next Starbucks (SBUX) or Dunkin' Brands (DNKN).
But after expanding too quickly and taking on too much debt, Krispy Kreme came dangerously close to bankruptcy during the darkest moments of the financial crisis, with shares trading as low as $1.15 in the spring of 2009. But since then, Krispy Kreme has been one of the best turnaround stories on the Street, with shares surging after the company successfully emerged from the brink of bankruptcy.
That rebound has given Krispy Kreme a second chance to grow into a quick-serve giant like Starbucks or Dunkin' Donuts. And it's creating a big opportunity for investors. That's because in spite of Krispy Kreme's incredibly popular doughnuts and a virtual cult following of doughnut lovers, it is still a very small company with a limited domestic and international presence.
At the end of its most recent quarter, Krispy Kreme had franchised 509 international stores and 142 U.S. stores, and owned another 97. That puts Krispy Kreme's global store count at just 748 stores. By comparison, Starbucks has more than 70,000 global locations. That's where Krispy Kreme's management is headed, outlining a strategy to nearly double the company's total store count, to 1,300, by 2017.
International markets will be a big part of Krispy Kreme's expansion strategy, with management aiming to increase its franchised international store count to 900. That includes expansion into the high-growth Asia markets, where Krispy Kreme is on schedule to open its first location on the continent in October with a 1,200-square-foot flagship store in Singapore that lets customers watch doughnuts being made. Krispy Kreme is also seeing strong results in Europe, with its first store in Scotland selling close to 5 million doughnuts in its first six months of business.
But don't think this is a replay of the company's first attempt at growth, where management was overly aggressive and optimistic. Krispy Kreme emerged from the financial crisis with a more realistic and conservative approach to growth and financial management that will help it better execute that more realistic expansion strategy.
Krispy Kreme will also benefit from a huge rebound in its financial profile. After flirting with bankruptcy little more than four years ago, Krispy Kreme ended its 2013 fiscal year with cash and equivalents of $66 million and no long-term debt. That will give the company plenty of financial flexibility to execute its expansion strategy and navigate economic volatility.
Looking forward, analysts are bullish on Krispy Kreme's expansion strategy, calling for earnings growth of 35% in fiscal 2014 and annual earnings growth of 30% in the next five years.
Risks to consider: Rising commodity costs are a big threat to quick-serve restaurants. Krispy Kreme actively hedges its commodity exposure with derivatives, but that led to the company absorbing a $400,000 loss in the second quarter. Although that was a one-time write-down, ongoing volatility in agriculture poses a threat to margin strength. Krispy Kreme has also cited rising health care costs as a long-term headwind.
Action to take: Krispy Kreme is one of the biggest turnaround stories in the past five years, successfully rebounding from near bankruptcy during the financial crisis. And now, the company is stronger and smarter than ever, with plans to almost double its global store count in the next four years. Shares recently fell 17% in one day after a small earnings miss, but that helped sweeten the valuation, returning to a forward P/E (price-to-earnings) ratio of 29 times that's in line with its 10-year average. That makes Krispy Kreme a buy anywhere under $21 and in position for big long-term gains.
Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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