Krispy Kreme Is Still on the Rise

Krispy Kreme Doughnuts (NYSE: KKD  ) recently reported its third-quarter results, which showed that its remarkable turnaround continues. This is good news for consumers and office managers looking to bring a box of delights to the office during the holidays, as well as for long-term investors.

Krispy Kreme's sales growth
It seems like a short while ago back in 2008 when some were writing Krispy Kreme off as another flash in the pan, so to speak. But the doughnut maker's most recent third-quarter report showed same-store sales growth has rolled on as the company continues to bake. In fact, Kripsy Kreme has reported 20 consecutive quarters of positive same-store sales growth.

The doughnut maker's chieftain, CEO James H. Morgan, attributed this success story to the company's long-term strategy to turn the brand around by unlocking its full potential. Moreover, the company was able to continue its remarkable revival in what Morgan described as a "tepid consumer spending environment."

In particular, Krispy Kreme's revenue rose 6.7% to $114.2 million, and adjusted operating income was up 25.7% to $11.6 million. Finally, adjusted net income rose by 34.9% to $11.2 million -- $0.16 per share -- as same-store sales grew 3.7% to $74.9 million. Moreover, coffee and beverage sales showed a 4.2% gain, which is something for the company's rivals to beware of.

Even though the stock has taken a hit this week, based on what may be underdone earnings guidance for fiscal year 2015, Krispy Kreme plans to expand its brand by capturing market share with increased beverage sales.

Krispy Kreme's competition
Krispy Kreme's main rivals are Dunkin' Brands Group  (NASDAQ: DNKN  ) and to some extent Starbucks (NASDAQ: SBUX  ) , although Starbucks caters to higher-end consumers with its line of specialty drinks and baked goodies.

In November, Dunkin' also posted solid third-quarter numbers where overall growth in systemwide sales was 5.8%, and 5.5% year to date as of Sept. 28. Dunkin' attributes these figures to 371 new stores that opened since September 2012.

In addition to its stores attracting more coffee lovers, its customers were buying more premium coffee drinks, doughnuts, and other snacks with each order -- despite the challenging consumer-spending environment mentioned above.

And Dunkin' Brands has a long-term growth strategy to expand its brand in the Western half of the U.S. The company also aims to venture into London, where afternoon tea is more customary. In the second quarter of 2013, Dunkin' announced agreements with two franchise groups to develop 50 Dunkin' Donuts shops in greater London over the next five years.

Moreover, with additional strategic alliances, the company hopes to develop a total of 150 Dunkin' Donuts restaurants in the U.K. over the next five years.

Dunkin's dip into the London market could be an effort to compete with Starbucks internationally, where the Seattle-based brewer already sells its lattes, specialty baked goods, and merchandise in 60 countries. Starbucks has had a great run this year, and its share price has risen by about 40%. While there has been some profi- taking this week, the company will continue to see strong long-term earnings growth based on its solid revenue.

For the third quarter, Starbucks saw same-store sales growth of 8%. And with revenue climbing by 13%, there's only one way for earnings to go -- up, like the steam from its latte, taking the share price along for the ride.

The bottom line
In such a crowded field, and with Tim Hortons making a bold move into the U.S. market, one has to wonder if there is enough coffee and doughnuts to go around. And some analysts might be inclined to compare the recent third-quarter results of the three coffee shops or fret over the pullback in Starbucks' share price.

However, given the fact that Krispy Kreme, Dunkin' Brands, and Starbucks have performed so well in a tight consumer market, each looks set to perform even better as the economy improves in the coming year.

In sum, Krispy Kreme seems poised to continue its storybook turnaround while meeting the challenge of its rivals. And if the doughnut maker can attract more customers to its beverages, there will be more than enough coffee for customers with varied tastes, and investors with a long-term view.

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