Krispy Kreme's (NYSE: KKD ) doughnuts may seem like heaven on earth to those who eat them. But that doesn't mean that success for shareholders is in the bag.
The batter-blaster has seen its fair share of headwinds in recent years, as it faced fluctuating agricultural commodity costs and other common eatery challenges. Some companies, such as Yum! Brands (NYSE: YUM ) and Chipotle (NYSE: CMG ) (NYSE: CMG-B ) , have faced the challenges and turned in strong quarterly growth recently. Others, such as 2008 recession standout McDonald's (NYSE: MCD ) , have experienced erosion in their bottom lines. Krispy Kreme lands in the middle of the doughnut hole, with a slow, steady recovery, as it stays focused on stabilizing profitability and growth for the long run.
The company brought in $82.7 million in revenue -- down 12% from last year's quarter -- during the traditionally slow summer months, although same-store sales at company-owned stores grew by 5.9% after falling last year. Impairment charges and lease cancellation costs dragged its bottom line just into the red. Still, the company's near-breakeven results were better than last year's $0.03-per-share loss.
Baby steps
At first glance, nothing about these results would convince anyone that Krispy Kreme will become one of the great investment stories of the next decade. But its strong cash flow and improvement of its debt position lend support to the notion that Krispy Kreme is inching its way closer to its long-term goal of superior, sustainable, and predictable returns.
Over the quarter, operations generated more than $10 million in cash. Even after allowing for capital expenditures, Krispy Kreme had positive free cash flow. That money helped the company retire outstanding debt and lower its long-term debt-to-equity ratio to 0.86 from 1.27, which significantly improves its risk profile.
Glazing a bright future
A warm, sugary softness permeated Krispy Kreme's results beneath a lackluster surface. And while doughnut sales are typically down during the hot summer months, the company has another trick up its sleeve that should help to curb those seasonal effects and allow it to compete with McDonald's McFlurry as well as Starbucks' (Nasdaq: SBUX ) Frappuccino: Its new Kool Kreme soft-serve treats are gaining acceptance.
People aren't going to stop eating doughnuts and ice cream. So while it still has its work cut out for it, once it works out some kinks, Krispy Kreme could be a keeper.
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