Donuts rise from the ashes

Krispy Kreme is rebuilding itself, primarily via international franchising.

By TheStreet Staff Mar 5, 2013 11:58AM

thestreet logo Baker copyright Blend Images, SuperStockBy Jonathan Heller

 

Monday was a big day for Krispy Kreme (KKD), and not just because the stock ended the day up 5.5%, or because the company announced that it has entered an agreement for 10 franchises in Taiwan.

 

The stock hit an eight-and-a-half-year high Monday, and is now in territory it has not seen since the summer of 2004. Those were heady times for this former cult stock; the wheels were beginning to come off as the company's overly aggressive expansion plans, poor management, and accounting issues converged to nearly take the company under.

 

This was a $40 stock in March of 2004; by August of that year, it was at $14.kkd chart

 

It only got worse from there. The profits dried up, and between 2004 and 2009, the company closed 240 stores By early 2009, shares changed hands for just over a buck, and this once can't-miss brand appeared to be on its last legs; its rich history all but a memory. While it did not go public until 2000, the company had been founded in 1937, and had a regional cult-like following. Going public presented an opportunity to take Krispy Kreme national.

 

After what seemed like a great start, the company lost money for five consecutive years through 2009, and had to restate several years of financials. By then, investors had all but given up on the company; this was not the second coming of  Starbucks (SBUX), as some might have believed. But very quietly, Krispy Kreme began to right the ship. In 2010, the company reported break-even results, and same-store sales showed some signs of life.

 

The company was profitable in 2011 and 2012, and has been delivering better-than-expected results. Last quarter, same-store sales rose 6.8%, and earnings per share of 12 cents easily beat the eight cents consensus estimate. The company also added 20 new stores. Interestingly though, much of the company's new-found expansion is not coming from the U.S., but from international franchising.

 

In early December, the company opened its 500th international store, which also happened to represent its 90th location in Mexico. For perspective, consider that at the end of the third quarter, there were just 238 U.S. locations.

 

During the company's rapid growth phase in the early 2000s, there was a store located about 10 minutes from us, or you could just buy Krispy Kreme's at the local ACME. The store later closed, and ACME stopped selling the product. Now, they are much harder to come by, at least in our area. Yet, there are nearly 90 locations in Saudi Arabia, 50 plus in Qatar, and the list goes on. In January, the first franchise opened in India. Krispy Kreme is rebuilding itself, primarily via international franchising.

 

Investors have started to take notice again, as has Wall Street, and shares have doubled since last August. Despite the run-up, the company's enterprise value is still just $845 million. There was some speculation earlier this year that Krispy Kreme might be a takeover target, but that remains to be seen.

 

The balance sheet continues to be quite solid. The company ended its latest reported quarter with $50 million in cash, and just $26 million in total debt. Sweetening the deal from an asset perspective is that the company owns the land and building for 43 of its stores, and the building alone at another 22 locations.

 

kkd 2 

When I took a position in early 2010, it was based on a belief that there was value in the company's brand, value in the real estate, and that the company was taking the right steps to fix itself, albeit in scaled down form. But it simply was not on the radar of most investors at that time. Some had no doubt been burned by the company's earlier fall from grace.

 

Now, Krispy Kreme is getting a lot more attention and scrutiny, and expectations are higher; not necessarily a positive. Sometimes the lines between growth and value are narrow, and Krispy Kreme appears to be back in growth mode. It's been a remarkable comeback so far.

 

We'll see if there's been further progress when the company reports fourth quarter and full year results on March 14th after market close.

 

At the time of publication, Heller was long KKD.

 

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