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Krispy Kreme Hits the Big 21. Guess What?

By Nickey Friedman – Mar 22, 2014 at 4:00AM

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Hint: 21 is not Krispy Kreme’s age.

With the release of the fiscal fourth-quarter report from Krispy Kreme Doughnuts (KKD), the company became the fourth and final major coffee and pastry chain to report great results. Starbucks (SBUX -0.08%), Dunkin' Brands Group (DNKN), and Tim Hortons (THI.DL) have been selling coffee and doughnuts like hot cakes. With Krispy Kreme's report came a 21st that bodes quite well for its future.

Source: Krispy Kreme

The Krispy results
Krispy Kreme Doughnuts reported its fiscal fourth-quarter results on March 12. Revenue rose 3.3% to $112.7 million. Company-owned same-store sales bumped up 1.6% despite the negative effect of "harsh winter weather in several key markets." Franchise same-store sales soared 6.7%. Adjusted net income leaped 37% to $8.3 million or $0.12 per share.

It was the fifth full year and 21st quarter in a row of same-store sales gains. What's particularly important and impressive about this is that Krispy Kreme is now in aggressive growth mode after coming closer to perfecting the concept that it plans to duplicate. The company plans to expand in a way similar to that of Dunkin' Brands Group.

Source: Krispy Kreme

The Kremey outlook
Both chains have ambitious growth plans. Dunkin' Brands Group believes it can double its Dunkin' Donuts store count to around 15,000 in the United States alone. Krispy Kreme has 800 stores worldwide and it has set a target of 1,300 by 2017. If Krispy Kreme's new Dunkin' Donuts-like model can get even close to the popularity of Dunkin', the potential growth is off the scale.

CEO James H. Morgan's "long-term strategic plan" to "unlock [the] brand's full potential," as he described it, appears under way with this earnings release. Morgan had also added, "We are positioning ourselves for accelerated growth domestically with our new small factory store model and internationally by signing new franchisees, as well as follow-on development agreements with existing partners."

Krispy Kreme expects to expand its store count by another 10% this year after expanding it by 10% last year. The forecast calls for adjusted earnings per share to jump between 20%-30% to $0.73-$0.79 per share for the current fiscal year. This forecast came as an increase over the $0.71-$0.76 per share called for by the previous forecast.

The raise in guidance shouldn't have come as much of a surprise though. Last quarter you might recall that in regard to the guidance CFO Douglas Muir "emphasize[s] that this is very preliminary." CFOs tend to be cautious by their nature, and it's hard to imagine how much visibility a coffee and doughnut chain has a year out when considering that same-store sales makes up a vital part of its ultimate top- and bottom-line results. As the year progresses so will the visibility, which could potentially lead to more guidance raises.

Source: Krispy Kreme

Healthy doughnuts
Okay, maybe the sugary pastries aren't the healthiest thing for your body, but these pastries and doughnuts have been quite healthy for companies' bottom lines. Based on the decisions of others in the industry, Krispy Kreme picked the opportune time to expand.

Even while mall traffic dropped by 15% last quarter, Starbucks reported a same-store sales jump of 5% and a traffic jump of 4%. Starbucks' revenue soared 12% and its operating income skyrocketed 29%.

Dunkin' Brands Group saw a surge in guest traffic as well despite the decline in traffic at the malls. Revenue at Dunkin' Brands Group jumped 13% with US same-store sales popping 3.5%. Its operating income leaped 21%.

Tim Hortons saw similar results to those of Starbucks and Dunkin' Brands Group. Revenue popped 10.7% while U.S. same-store sales bumped up 3.1% and adjusted earnings-per-share grew 6%. While these growth numbers look more modest than those of Starbucks and Dunkin' Brands Group at first glance, it's important to note that Tim Hortons has been experiencing lackluster growth in comparison with the other three. These improvements are remarkable, especially considering that Tim Hortons' restaurants have a more northern concentration than the restaurants of the other guys, so they had far more exposure to the negative effects of the harsh winter weather.

Foolish final thoughts
Krispy Kreme Doughnuts seems to finally have its act together and it looks ready for prime time. The company reported its most profitable quarter since 2004, over 10 years ago. Now that the chain seems to have perfected the individual store model with 21 quarters in a row of growth, Fools should look for continuation of this rapid expansion to make Krispy Kreme Doughnuts once again a more serious player in the coffee and pastry game.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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