Little Rock's Stephens Inc. upgraded Krispy Kreme Doughnuts (NYSE:KKD) January 6 from "Equal Weight" to "Overweight," boosting its stock price by around 10% on the day, closing at $7.12 a share. Stephens believes Krispy Kreme management is being very conservative in their revenue and earnings guidance, and as a result has the potential to top consensus estimates in the coming year. You can't blame it for hesitating to be anything but conservative given its fall from grace in recent years. Krispy Kreme's slow and steady approach to its business is in stark contrast to the go-go days back in 2003 when its stock price flirted with $50. It's this kind of humility that will allow it to win the race, which is a marathon, not a sprint. (For related reading, see Can Earnings Guidance Accurately Predict The Future?)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Now And Then

At the height of its success in fiscal 2004, Krispy Kreme had an operating profit of $102 million on $666 million in revenue and 357 stores of which 141 or about 39% were company owned. In the first nine months of fiscal 2012, Krispy Kreme earned $5.6 million in operating income on revenues of $98.7 million and had a total of 678 stores in its system with 230 in the United States and 448 internationally. Besides a greater reliance on franchisee stores these days, it is also leaning on international markets for continuing growth. International stores now account for approximately two-thirds of its stores. Having less corporate stores, more franchise stores and a far bigger international presence, has allowed it to clean up its balance sheet while laying the groundwork for future growth. It's a recipe that's slowly taking hold. Good things take time.

The Tipping Point

For Krispy Kreme, it came in the second quarter of fiscal 2012 when operating income for the first six months of the year were around $15 million, about 50% higher than in the same period a year earlier. More importantly, its operating profit for the first six months was equal to fiscal 2011 in its entirety. Fiscal 2012 will produce the second consecutive year with revenue gains after four down years. That's something to celebrate if you're a long suffering shareholder. The bleeding has stopped and people are starting to take notice. For instance, in August, Robert Stiller, founder of Green Mountain Coffee Roasters (Nasdaq:GMCR) filed a schedule 13G notice that he owns about 10.8% of its stock. It's probably not a coincidence that Krispy Kreme launched a new national coffee program in August. With all the excitement over Green Mountain's Keurig brewers, people forget that Green Mountain also roasts a lot of coffee. (For more information, read A Look At Corporate Profit Margins.)

What's Next

Krispy Kreme appears to be focusing on four things:

1. New Locations - It plans to open five to 10 company stores, between 10 and 15 domestic franchise stores and more than 60 international franchise stores. Countries with more than 40 stores include the U.S., Saudi Arabia, Mexico, South Korea and the United Kingdom. It's hard to believe but Saudi Arabia has 84 locations compared to just five in Canada. I guess Tim Horton's (NYSE:THI) and Starbucks (Nasdaq:SBUX) were too much for it north of the 49th parallel.

2. Small Store Strategy - Not only does it want to open more stores, but it wants to leverage marketing costs by increasing store density. One of its mistakes in Canada was not putting a large cluster of stores in one area before expanding. That's something that occurs quite a bit when American retailers come to Canada. To avoid making this mistake a second time, it will focus on clustering its company stores in smaller markets in the Southeast (home market) using smaller shops closer together. The efficiencies gained should result in higher profits in its company stores.

3. Debt Reduction - It continues to chip away at its debt. Its annual interest expense in fiscal 2007 was about $20.3 million. Last year it was near $6.4 million and is estimated to be $1.7 million in 2012. In fiscal 2007, its long-term debt was approximately $108 million. At the end of October it was less than $28 million. By restricting the number of corporate stores it opens each year to 10 or so, it goes a long way to avoiding another financial mess.

4. Cash Flow - Profits are important, but cash flow is critical. By continuing to focus on preserving cash, it can self-finance its franchising programs both here and abroad. In addition, it will have more money to return to shareholders in the form of dividends and share repurchases. I'm generally not a fan of buybacks, but Krispy Kreme has a huge number of outstanding shares for its size so a reduction in its share count would be a good thing. (For related reading, see A Breakdown Of Stock Buybacks.)

The Bottom Line

If you have a three to five year time frame for owning stocks, in my opinion, you couldn't ask for a better opportunity.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!