Is Krispy Kreme a Sweet Treat for Investors?

Doughnuts and coffee -- these are simple and familiar food and beverage products, but when served up by American companies with tremendous brand strength, they can become popular across the globe.  

Today we focus on Krispy Kreme Doughnuts (NYSE: KKD  ) and also take a look at its competitor Dunkin' Brands Group (NASDAQ: DNKN  ) , as well as the undisputed king of coffee, Starbucks (NASDAQ: SBUX  ) .

Aiming for 60% growth in store count
Krispy Kreme executives presented the company's strategies and goals at the recent ICR XChange conference. The company currently has 812 stores worldwide, and I was surprised to learn that nearly 70% of these locations are outside the United States. From the current count of 563 international locations in 23 countries, the company hopes to expand to 900 by 2017 and hopes to grow its U.S. store count, currently at 249, to 400.

The company has begun experimenting with what it terms a small format free-standing shop, building these primarily in the Southeast. This format requires a smaller capital investment by franchisees. Krispy Kreme intends to open 10-15 of these stores within the next year.

For such an iconic brand, Krispy Kreme has fewer stores than I would have imagined. Dunkin' Brands, by comparison, has more than 7,500 Dunkin' Donuts locations in the U.S. alone. The company owns both the Dunkin' Donuts and Baskin-Robbins ice cream store brands.  

The strategic wisdom of doing a few things extremely well
Krispy Kreme's menu is definitely focused on doughnuts, and its marketing strategy is to make doughnuts more than a breakfast or morning treat but something that is consumed all day and even at night. Special occasions such as holidays and birthdays are also a perfect time for serving them.

The company sells beverages along with the doughnuts, including coffee, espresso, iced beverages, and shakes. Innovative doughnut flavor combinations are added to give customers new items to try; for example a chocolate cheesecake doughnut. The company doesn't chase the latest food-menu trends; it is content to be known for its outstanding doughnuts, which have created as CEO James Morgan expressed it, "a beloved worldwide brand." 

Dunkin' Donuts shops, by comparison, have a more extensive menu, including sandwiches, in order to bring customers in at times other than early morning.

New menu items bring in new customers
Dunkin' Brands attributed U.S. comparable-store sales growth of 4.2% in the third quarter to its continued product and marketing innovation. The Hot & Spicy Breakfast Sandwich, new doughnut flavors such as pumpkin pie and key lime, and what the company calls its "afternoon products," including Chicken and Tuna Salad Wraps, were all contributors to the increased average ticket and higher traffic that drove quarterly revenue growth. 

Earning big dough from those doughnuts
Krispy Kreme reported excellent top- and bottom-line results for its third quarter ended Nov. 3. Total revenue increased 6.7% compared to last year's third quarter, to $114 million. For the 20th consecutive quarter, company same-store sales went up, by 3.7% this time. Meanwhile, operating income increased 27.2% over the year-ago quarter.

A number of factors have combined to cause these impressive results. The company has worked hard to improve the hospitality its shows customers, as expressed through both the friendliness of the staff and the efficiency of each store's operation. As many restaurant chains are doing, Krispy Kreme has built a social media presence to connect with its customers and bring them to the stores.

Meanwhile, at Dunkin' Brands total revenue was up 8.5% compared to the same quarter last year. Profits for the Dunkin' Donuts U.S. segment rose a healthy 10% year over year. For the company as a whole, operating costs and expenses rose less than 1% compared to last year's third quarter, bringing more of the 8.5% revenue increase to the bottom line and demonstrating the efficiency of its franchise-driven operating model.

Brewing up record-setting results
Coffee colossus Starbucks -- with more than 20,000 stores globally -- recently reported super-caffeinated financial results for the first fiscal quarter ended Dec. 29. Net revenue was up 12% from the same quarter last year to a record $4.2 billion.

On a global basis, comparable-store sales rose 5% as traffic increased 4% -- a fine performance for a chain this size. Operating income increased an outstanding 29%, raising the operating margin by 2.6 percentage points to 19.2%.

What we learned
Starbucks' business model is working well across the globe, and the pace of store expansion is accelerating. Of the 417 new stores opened in the quarter, more were in the China/Asia Pacific (CAP) region (209) than in the Americas, with 142 new stores. In the CAP region, the operating margin was an astonishing 30.4%, and comparable-store sales growth was excellent, 8%. The company now has 4,000 stores there.

Krispy Kreme CEO James Morgan said in the earnings release that the company's execution of its strategic plan is allowing Krispy Kreme to "gradually unlock our brand's full potential."

It's clear from the same-store sales growth that the company's menu mix and marketing strategies are working well, giving the company a platform for more rapid expansion in the future. Krispy Kreme intends to open 20-25 domestic franchises over the next fiscal year. But the greatest growth will be internationally, where it hopes to open 85 new franchise locations.

Dunkin' Brands management believes that it can double the number of U.S. restaurants to 15,000, and the fact the company opened 222 net new U.S. restaurants through just the first three quarters of the year shows this goal is realistic. The company has stores in 60 countries.

Krispy Kreme's brand recognition is equal to that of much larger food-service chains. Because of its ability to grow same-store sales, and because it is smaller in store count with ample room to expand globally, Krispy Kreme is my favorite of the three companies.

Are any of these companies the Fool's favorite?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

  


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2014, at 2:22 PM, temenem wrote:

    +1, KKD has the most upside, especially at a price of $18-19. I'm looking at $23 soon, then maybe $26 (depending on the upcoming ER).

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2811272, ~/Articles/ArticleHandler.aspx, 12/20/2014 3:58:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement