After seeing its popularity peak some years ago in the United States, donut and coffee shop operator Krispy Kreme Donuts (NYSE:KKD) has shifted its attention to overseas expansion. This and a renewed emphasis on coffee could help the company sustain its current profit momentum, though much upside is already priced into the stock.
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Full-Year Recap
Krispy Kreme's sales increased 11.4% to $403.2 million. Same-store sales at the company-owned locations improved 5.2% to mark the third straight year that comps have been in positive territory. As of year-end, Krispy Kreme owned 92 stores while 602 were franchised locations, bringing the total system of stores to 694.

Reported operating income jumped 68.7% to $25.6 million but included a number of impairment charges in both years. Krispy Kreme also recognized a gain of $139.6 million from the reversal of previous deferred tax asset allowances to bring reported net income to $166.3 million, or $2.33 per share. Backing out one-time charges and to better reflect management's thoughts on the earnings of its operations, net income was 31 cents per share. This was well ahead the 11 cents it estimated for 2010. Free cash flow came in at $22 million, or approximately 31 cents per diluted share. (To know more about income statements, read Understanding The Income Statement.)

Outlook and Valuation
For the coming year, analysts anticipate sales growth of nearly 10% and total sales north of $442 million. Krispy Kreme expects to continue to rely on the roll out of franchised locations outside of the U.S. The company plans 75 international franchises, as well as five-to-10 company-owned stores and another 10-15 franchised stores in the U.S. Management expects this to result in earnings in a range between 21 cents and 24 cents per diluted share. But, again adjusting for one-time items, the company sees 35 cents to 41 cents per diluted share from its recurring operations. Analysts are currently targeting earnings of 27 cents per share.

At a recent share price of just over $7 per share, Krispy Kreme trades at a forward P/E of 21 and trailing free cash flow multiple of about 23.

Bottom Line
Krispy Kreme looks to have successfully pared down debt and returned to a sustained period of profitability. It also appears to have found a steady stream of international locations to open in the coming years. However, it remains to be seen whether it can return to posting consistent profit growth going forward. At the lofty earnings and cash flow multiples, this consistency is already a foregone conclusion. On an earnings basis, Dunkin' Brands Group (Nasdaq:DNKN) looks like a bargain at 21.3 times, though this is still quite high on an absolute basis.

Potential upside exists from Krispy Kreme's ambitions to sell its own coffee. It aims to have coffee represent 12% of retail sales by 2015, up from 4% currently. McDonald's (NYSE:MCD) has seen great success in emphasizing its coffee and related drinks and Wendy's (Nasdaq:WEN) is also looking to boost its drink sales. There is also the potential for off-site coffee sales, which is what Caribou Coffee (Nasdaq:CBOU) is pursuing through relationships with outside retailers and Keurig operator Green Mountain Coffee Roasters (Nasdaq:GMCR). (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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