Krispy Kreme Doughnuts (NYSE: KKD ) recently reported second-quarter earnings, and boy were they sweet. Notably, company same-store sales were up for the seventh consecutive quarter, and operating income is up a whopping 41.2% from the same quarter last year. The company swung to a net profit, too. After an accounting scandal and years of losses, it looks like this ship is finally starting to turn around.
You might be skeptical of these results, though, and with good reason -- the company does not have a stellar reputation for honest reporting. Indeed, in the recent third edition of Howard Schilit's book Financial Shenanigans, Krispy Kreme is cited at least four times for three different "earnings shenanigans," including improperly inflating revenue and same-store sales.
I'm tempted to give Krispy Kreme the benefit of the doubt, though. While growth in revenue per store hasn't been quite as consistent as same-store sales, there haven't been any alarming drops, either. This is a method Schilit uses to confirm that same-store sales isn't being redefined in favorable ways in order to inflate the metric. If same-store sales were truly increasing, one would expect systemwide revenues per store to also be increasing.
Similarly, the huge growth in operating income can be explained by simple math -- because operating margins are relatively tight, a small change in expenses can easily have a large percentage change on net income. The company has been closing fewer stores, and so there have been fewer lease-termination charges, which had contributed significantly to narrower margins in previous quarters.
While less dramatic, relatively stable free cash flow over the last several quarters lends more believability to Krispy Kreme's results. Fellow over-expander Starbucks (Nasdaq: SBUX ) has seen similar gains, as it winds down its own turnaround, spending far less on lease exit fees than it did a year ago, when it closed a large number of its stores.
Fortunately, Krispy Kreme isn't just closing its stores. It has been taking a page out of Jamba's (Nasdaq: JMBA ) playbook and refranchising a number of them, focusing its company stores more on its core market in the Southeastern United States, and using cash from the sales to pay down its long-term debt. Krispy Kreme is in an even better position than Jamba, and the company has a large cash position, so there's no need to refinance away from the brink of bankruptcy with costly preferred stock, as Jamba had to do.
While skepticism is understandable given Krispy Kreme's sordid past, the company appears to be taking part in the Great Restaurant Turnaround going on. I'm tempted to take a bite out of this one, but I'd stay cautious about any undue fluff.
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