Investing

Krispy Kreme's Unlikely Comeback


Glazed doughnuts roll along on a conveyor belt at a Krispy Kreme store in Charlotte, N.C.

Photograph by Chuck Burton/AP Photo

Glazed doughnuts roll along on a conveyor belt at a Krispy Kreme store in Charlotte, N.C.

(An earlier version of this story ran online.)

In the three years following Krispy Kreme Doughnuts’ (KKD) initial public offering in 2000, its shares soared 840 percent, despite a bear market. Back then, everyone wanted a bite of the Winston-Salem (N.C.) doughnut maker: Baseball great Hank Aaron scored a franchise in Atlanta, and American Bandstander Dick Clark lobbied unsuccessfully for a Times Square concession. In 2003 the cover of Fortune magazine anointed Krispy Kreme “America’s hottest brand.”

The hot-glazed hype peaked just as the Atkins diet and its carbophobia took hold. It didn’t help that Krispy Kreme alienated its franchisees by skimping on brand promotion. And when rival Dunkin’ Donuts (DNKN) reinvented itself as a top destination for coffee, its Southern rival failed to serve up a competitive brew.

Short-sellers swarmed Krispy, and were vindicated in 2004 when the company reported its first quarterly loss since going public. Later that year, the Securities and Exchange Commission opened an inquiry into accounting irregularities. As stores shut down and rumors of bankruptcy swirled, the market increasingly saw Krispy Kreme as another fast-food flameout. The stock hit bottom at $1.08 four years ago.

A lot has changed since. Krispy now trades for $13.25 a share, up more than 60 percent from a year earlier. New management has returned the company to profitability after 14 quarters of losses. International franchises kicked in $4.3 million in operating income in Krispy’s latest quarter; in the U.S., where the company owns many of its stores, franchises contributed just $1.2 million. An appreciation for fried dough, it seems, transcends cultural barriers, with appetite for Krispy Kreme’s flagship product particularly strong in Asia and the Middle East. Backed by a 12 percent equity investment from Kuwait’s Al Kharafi family, the company last year set a target to increase franchises abroad to 900 stores by 2017 from 506 now. At home, the chain hopes to expand to 400 U.S. stores from 240 over the same period.

There’s plenty of room to grow. Krispy Kreme has “hardly any penetration in Latin America and virtually none in continental Europe—places like Turkey and Russia,” says Anton Brenner of Roth Capital Partners. “The brand is as iconic internationally as it is in the U.S.” The company declined to make executives available to comment for this story.

Krispy Kreme still has only 2.1 percent of the U.S. coffee and snack shop market, compared with Starbucks’s (SBUX) 36 percent and Dunkin’s 25 percent, according to market-research firm IbisWorld. Beverages now chip in 12 percent of Krispy Kreme’s sales; the company aims to raise that to more than 20 percent with its reformulated coffee. Short interest for its shares—a gauge that measures to what extent investors are betting the stock will fall—was up 43 percent in the company’s latest reporting period, according to Schaeffer’s Investment Research.

Among the believers is Stephens analyst Will Slabaugh. In a Feb. 12 note to clients he wrote, “We like the company’s refreshed emphasis on what drove the brand’s success over its long history.” The septuagenarian baker is also catching up with the times: An app and desktop widget now alert die-hard fans to fresh-from-the-oven doughnuts, flagging locations with lit-up “Hot Now” signs.

The bottom line: Shares of onetime market favorite Krispy Kreme are up more than 60 percent over the past year as investors digest its turnaround.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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Companies Mentioned

  • KKD
    (Krispy Kreme Doughnuts Inc)
    • $20.51 USD
    • 0.13
    • 0.63%
  • DNKN
    (Dunkin' Brands Group Inc)
    • $47.41 USD
    • -0.13
    • -0.27%
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