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Krispy Kreme's Delicious Progress
Krispy Kreme Doughnuts (NYSE:KKD) reported improved first quarter earnings for its fiscal year 2011. The donut chain has been overhauling its operations the past few years, in hopes of positioning itself for further growth.
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Earnings Up, Revenue Down, Same-Store Sales Improve
Krispy Kreme earned $4.5 million, or 6 cents per share, compared with $1.9 million, or 3 cents per share in last year's same quarter. Revenue was off by 1.4%, from $93.4 million last year to $92.1 million this year's quarter. This was due to the effects of refranchising some stores. Without this effect, revenue would have risen 0.4%.
The key same store sales number rose 3.4%. This was the sixth consecutive quarter for same-store sales' increase. The company raised its outlook for operating income in fiscal 2011 based on these better than expected first quarter results.Where operating income for fiscal 2011 was expected to be $10-13 million, the company now expects operating income of $11-15 million.
Other Donuts, Coffee
Krispy Kreme in the U.S. has certainly not reached the status of Tim Horton's (NYSE:THI), the iconic Canadian coffee and donut experience. Nor has Krispy Kreme found a niche in the U.S. yet anything like Starbucks (Nasdaq:SBUX), the dominant coffee venue. Krispy Kreme is instead in the business stage where it is still trying to work through some of its rough years.
Earnings in fiscal 2010, 2009 and 2008 respectively were zero, a loss of 6 cents per share, and a loss of $1.05. Each successive year from 2008-2010 saw declining revenues. The company has struggled with operations ever since it was a high-flying IPO years ago, and has actually had to settle into the grind of working through its more mundane prospects. Its stock chart shows a dramatic fall after trading at nearly $45 a share in 2003 and 2004, to its current level of $3.86.
Krispy Kreme's Direction
With its rocky history apparent, Krispy Kreme has been making strides toward what it describes as "a strong foundation." The company has reduced debt over the years, from $118.24 million to $42.6 million from 2006 to 2010. It has improved free cash flow from a negative $8.51 million in 2006 to a positive $11.86 million in 2010. The company is also trying to tighten up its operations by re-franchising and closing weaker stores. This has been an ongoing process. (Learn more about free cash flow; see: Free Cash Flow: Free, But Not Always Easy.)
Leaner, Fitter Krispy Kreme
Although the company's market cap has shrunk over the years to its current $248.83 million, its smaller self is in a much better position to survive and be competitive than before. Other fast food names, burger places such as Wendy's/Arby's (NYSE:WEN), Sonic (Nasdaq:SONC) and Jack In The Box (Nasdaq:JACK) are struggling to find niches, integrate brands or re-franchise stores. This is not uncommon in what is an ultra-competitive space.
Krispy Kreme, like most fast food outfits, has some cross-competition, while it actually has little direct competition with, say, a Tim Hortons. Its competitors are anyone like the private Dunkin Donuts or fast food places that serve breakfast coffee or desserts. When consumers decide whether they're going to eat tacos, pizzas, burgers or other fast food for a meal, their choice obviously impacts the restaurants not chosen. It's the same if a consumer gets coffee at Starbucks, they're not getting it at Krispy Kreme. So with pressure still on industry-wide, it just makes sense to be leaner and fitter to compete.
The Bottom Line
This is still a bit of a high speculative stock. The company has chosen the right path to straighten out its operations and increase efficiency, to consolidate before having any serious thought of growing. It looks like management is on the right track. If so, Krispy Kreme may be a stock worth watching as a solid turnaround play. (Learn more about Turnaround stocks, see: Turnaround Stocks: U-Turn To High Returns.)
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Earnings Up, Revenue Down, Same-Store Sales Improve
Krispy Kreme earned $4.5 million, or 6 cents per share, compared with $1.9 million, or 3 cents per share in last year's same quarter. Revenue was off by 1.4%, from $93.4 million last year to $92.1 million this year's quarter. This was due to the effects of refranchising some stores. Without this effect, revenue would have risen 0.4%.
The key same store sales number rose 3.4%. This was the sixth consecutive quarter for same-store sales' increase. The company raised its outlook for operating income in fiscal 2011 based on these better than expected first quarter results.Where operating income for fiscal 2011 was expected to be $10-13 million, the company now expects operating income of $11-15 million.
Other Donuts, Coffee
Krispy Kreme in the U.S. has certainly not reached the status of Tim Horton's (NYSE:THI), the iconic Canadian coffee and donut experience. Nor has Krispy Kreme found a niche in the U.S. yet anything like Starbucks (Nasdaq:SBUX), the dominant coffee venue. Krispy Kreme is instead in the business stage where it is still trying to work through some of its rough years.
Krispy Kreme's Direction
With its rocky history apparent, Krispy Kreme has been making strides toward what it describes as "a strong foundation." The company has reduced debt over the years, from $118.24 million to $42.6 million from 2006 to 2010. It has improved free cash flow from a negative $8.51 million in 2006 to a positive $11.86 million in 2010. The company is also trying to tighten up its operations by re-franchising and closing weaker stores. This has been an ongoing process. (Learn more about free cash flow; see: Free Cash Flow: Free, But Not Always Easy.)
Leaner, Fitter Krispy Kreme
Although the company's market cap has shrunk over the years to its current $248.83 million, its smaller self is in a much better position to survive and be competitive than before. Other fast food names, burger places such as Wendy's/Arby's (NYSE:WEN), Sonic (Nasdaq:SONC) and Jack In The Box (Nasdaq:JACK) are struggling to find niches, integrate brands or re-franchise stores. This is not uncommon in what is an ultra-competitive space.
Krispy Kreme, like most fast food outfits, has some cross-competition, while it actually has little direct competition with, say, a Tim Hortons. Its competitors are anyone like the private Dunkin Donuts or fast food places that serve breakfast coffee or desserts. When consumers decide whether they're going to eat tacos, pizzas, burgers or other fast food for a meal, their choice obviously impacts the restaurants not chosen. It's the same if a consumer gets coffee at Starbucks, they're not getting it at Krispy Kreme. So with pressure still on industry-wide, it just makes sense to be leaner and fitter to compete.
The Bottom Line
This is still a bit of a high speculative stock. The company has chosen the right path to straighten out its operations and increase efficiency, to consolidate before having any serious thought of growing. It looks like management is on the right track. If so, Krispy Kreme may be a stock worth watching as a solid turnaround play. (Learn more about Turnaround stocks, see: Turnaround Stocks: U-Turn To High Returns.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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