Passionate customers drive business at perennial investment all-star Starbucks
So, get it right like Starbucks, and there is fantastic money to be made in a fast-serve food stock.
Kreme of the crop
Krispy Kreme Doughnuts
Thursday night, I waddled into the local Krispy Kreme when the "Hot Now" neon sign was blazing red, the signal that the famed original glazed doughnuts were being made fresh. A small crowd was forming for "doughnut theater" -- the on-site, fully viewable doughnut machine making the delectable treats.
Think about this. It was after 7:00 in the evening, and a doughnut shop was getting customers to come in by turning on a sign. While most doughnut shops would have trouble selling their fare past 10 in the morning, Krispy Kreme has a Pavlovian method for driving business in the off-hours.
One knock on the company has been its coffee. At a time when everyone, even McDonald's, is trying to brew a better cup of java, Krispy Kreme got the message and has updated its coffee offering -- espresso, too. Like the dough for the doughnuts, the company now centrally blends, roasts, and grounds its coffee to insure a fresh, consistent quality.
The company hasn't ignored the fast-growing frozen beverage market either. A year ago, it started offering four flavors -- latte, raspberry, double chocolate, and Original Kreme. The later is based on the flavor of its famed glazed donut. Ah, innovation with a unique twist.
Hot doughnuts for everyone!
There are 400 Krispy Kreme stores located in 45 states, Australia, Canada, Mexico, the United Kingdom, and South Korea. For comparison, Starbucks has 9,671 locations. So here is a company with a well known brand name that sells a premium product but hasn't reached anything close to massive scale.
It's easy to get lost in all the negative press about fourth-quarter sales being down 16%. Yes, that is bad news. Same-store sales look bleak. And, yes, the stock has cratered 60.2% over the last 52 weeks. But the company's enterprise value of $564.1 million is $120 million less than trailing annual sales for fiscal 2005 (which ended in February). Quality fast-food brand names selling at a discount to enterprise value are rare.
In April, the company secured $225 million in financing. The money was used to repay $90 million in existing debt and put cold cash on the balance sheet. There are no longer any near-term credit repayment deadlines.
The company is hiring new executives, has slowed its new-store growth to a trickle, and is focusing its efforts on getting the existing stores back on track. While it would be nice to have hard financial data to drive home where to find future value, let's use what we know. Krispy Kreme's market capitalization is just 65% of sales. Fast-growing Starbucks' multiple is 3.4 times and giant McDonald's weighs in at 2.0 times.
When Krispy Kreme recovers, and it will, the tiny company's growth prospects should muster a price-to-sales multiple far above today's, which is based on depressed sales figures. It is a multibagger in the making.
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