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What sits in your stomach like a rock but shoots up the Nasdaq like a rocket? That would be Krispy Kreme (KREM), a Winston-Salem (N.C.) company founded in 1937 that makes donuts -- and nothing but. Once found mainly in the Deep South, Krispy Kreme shops now span the country with 144 locations from New York City to Southern California. And after the company's initial public offering on Apr. 5 at 21, Krispy Kreme shares nearly doubled in their first three days, closing at 40 1/8 on Apr. 7. That's a climb more characteristic of an Internet stock -- which seems appropriate, if you're into dubious valuations.
To be sure, Krispy Kreme's donuts are a cut above average, perhaps in taste and certainly in buzz. They occupy a star spot on the Web page of Kozmo.com, the Internet convenience store that delivers sweets and videos in an hour or less. Celebrity spotters have also spied the likes of Jennifer Tilly and Lauren Bacall snarfing Krispy Kremes. Lots of other Americans love the donuts, too (including Bill Clinton, though, of course, he's fond of most donuts).
In fact, a loyal following bought $220.2 million worth of Krispy Kremes last year, resulting in net income of $6 million in 1999, a record profit on a 21% increase in sales. And the company "did all this with virtually no advertising," says Dennis Lombardi, executive vice-president of Chicago-based food consultancy Technomic.
STRONG TEAM.
Considering Krispy Kreme's understated marketing, its numbers look healthier than the arteries of many of its customers. According to the company's prospectus, average sales at company-owned stores have tracked steadily upward from $39,000 per week in 1996 to $54,000 as of last Jan. 30. Krispy Kreme plans to add 22 more stores by the end of 2001 and 100 more by 2005.
It has also inked a deal with Starbucks to shore up the coffee chain's edibles selection. Perhaps most important, the general consensus is that Krispy Kreme has a strong management team. "Any company that has been around since they have can't be poorly run," says Lombardi.
Still, the question remains: How much is a donut company worth? And the likely answer is: Probably not what investors are paying right now. First, Krispy Kreme comes with some unique caveats. According to the prospectus, all Krispy Kreme donut-making equipment is manufactured at a single location, its Winston-Salem plant. In the admittedly unlikely event of a fire or an accident, the company's expansion plans could take a hit.
Likewise, the magical gooey dough used for Krispy Kremes comes from a single source, from that same North Carolina plant, as dry mix in 50-pound sacks. Ostensibly, that's to maintain quality control. But it also guarantees minimum flexibility and resilience.
COFFEE CHIC.
Even if you discount those factors, the company is fully valued, and maybe then some. Krispy Kreme is the only publicly traded donut companies, so exact comparisons are impossible. (British conglomerate Allied Domecq owns Dunkin Donuts, which is about 10 times larger than Krispy Kreme.)
Perhaps the closest analog is Starbucks (SBUX), which has managed to parlay Seattle coffee chic into an international product. Starbucks has also delivered on earnings quarter after quarter (with a few glitches last year). So its stock -- which at 40 or so is just a bit below its 52-week high of $45.25 -- trades at a price-earnings ratio of 67.3. At the market's close on Apr. 7, Krispy Kreme was trading at a hefty p-e of 66.7.
Several analysts who prefer to remain anonymous express shock at the runup. "It did seem a little crazy," says one analyst at a prominent investment bank. Investors seem to be betting on the Krispy Kreme brand. Granted, it has been around for 63 years. But as the company says in its prospectus, consumer tastes are fickle. And analysts say for every Starbucks or McDonald's, many more dead chains are in the fast-food dumpster.
"Will people continue to desire that one particular product? Will Krispy Kreme maintain its cult status?" asks Lombardi. Starbucks has habit-forming caffeine on its side. But how many of us need our daily donut to get started? Go ahead and eat Krispy Kremes -- they're tasty. But for now, with that 66 multiple in mind, investors might want to check their appetites at the door.
Salkever is a staff reporter for BW Online in New York
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