Pop the champagne, drop the balloons, and throw the confetti. We're celebrating an anniversary. One year ago today, our Motley Fool Income Investor newsletter service launched. Twenty-four picks later, analyst Mathew Emmert is beating the S&P 500 by 5.8%, all the while trying to help investors get paid to invest.

If you like the idea of adding a dividend component to your portfolio, take a free trial to Income Investor. If it's not everything you want it to be, just let us know, and we won't bill you.

In today's Motley Fool Take:

What's Eating Krispy Kreme?


Tim Beyers

It's official: The sugar high is over.

This morning, Motley Fool Stock Advisor pick Krispy Kreme Doughnuts(NYSE: KKD) announced that second-quarter 2005 net income dropped by 56% from last year despite higher sales. Investors fled the stock upon hearing the news, sending the shares lower by more than 11% as of this writing.

CEO Scott Livengood summed up the stickiness of the situation by admitting Krispy Kreme wasn't getting the job done on the fundamentals. I appreciate the hit-me-between-the-eyes honesty, but this may be the understatement of the year. Sales rose 11% from last year's second quarter, but operating costs rose 21% over the same period. Comparable store sales were up less than 1%. So what accounted for the revenue growth? Capital spending to open new stores. No wonder net income suffered.

Unfortunately, this isn't even the worst of the news. Krispy Kreme said it wouldn't provide earnings guidance for the third quarter and that it can no longer provide an accurate prediction for the full fiscal year. In other words: Remember when we said we'd earn between $1.04 and $1.06 per stub in May? Sorry, we were wrong. We can't tell you how long it will take to right the ship. And this after the Securities and Exchange Commission has decided to go out for a box of classic glazed.

Part of the problem, according to management, is the low-carb phenomenon. The company says its research shows that more than 1,000 low-carb products have been introduced during 2004, and -- get this -- media coverage of carb-conscious diets is apparently up more than 200% over last year. The alternatives, and the media blitz, may be forcing some of Krispy Kreme's normal constituency into the gym.

But is the ever-expanding appetite for all things low-carb really what's killing Krispy Kreme's business? Uh, no. The company continued to spend like a hyperactive teenager on a $10,000 shopping spree at Nordstrom(NYSE: JWN) even as it saw minimal new demand for its gooey products in existing stores. CEO Livengood says that's about to change and suggested this morning several ways in which the firm can improve, including being more efficient with deliveries, introducing a reloadable cash card apparently modeled after Starbucks'(Nasdaq: SBUX) version, and opening new, smaller-format stores that are less costly to operate.

You can call it irony, or maybe just desserts, but it turns out that Krispy Kreme is headed for a diet of its own. And that's probably a good thing. Investors are much more likely to appreciate a slimmer, sexier doughnut king.

For more jelly-filled Fool coverage:

  • Chief Operating Officer John Tate traded in sweet treats for stained tables at Restoration Hardware(Nasdaq: RSTO).
  • Motley Fool co-founder David Gardner provides some perspective on Krispy Kreme's business.
  • The SEC has decided to go out for a box of doughnuts.
  • Fool Bill Mann says it's folly to blame low-carb diets for Krispy Kreme's problems.

Fool contributor Tim Beyers loves a good jelly doughnut as much as the next guy, but he doesn't frequent Krispy Kreme. He doesn't own any of its stock either, nor any of the other companies mentioned. You can view Tim's Fool profile here.

Discussion Board of the Day: Olympic Games

Do you know the Olympic anthem by heart? Have you been groggy at work after staying up late watching swimming, wrestling, or table tennis? What will you do when the games are over? Discuss these issues and more at the Olympic Games discussion board. Only on Fool.com.

Berkshire Digs ServiceMaster


Bill Mann (TMF Otter)

In a Securities and Exchange Commission filing, Warren Buffett's insurance conglomerate Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) disclosed that it had bought $45 million worth, or 3.7 million shares, of ServiceMaster(NYSE: SVM).

Mathew Emmert made ServiceMaster -- a lawn care, maid service, and pest control company -- a selection for his Motley Fool Income Investor due to its rock-solid business, its strong corporate culture, its discount to intrinsic value, and its 3.5% dividend yield. Berkshire most likely bought ServiceMaster for the same reasons.

Berkshire also disclosed that it had purchased $138 million worth of Comcast(Nasdaq: CMCSA). As ServiceMaster and Comcast have market capitalizations of $3.5 billion and $63.2 billion, respectively, these transactions are small fractions of the total outstanding shares at each company.

The size of these transactions suggest that the person at Berkshire who made these purchases was not Buffett, but rather the equally astute investor Lou Simpson, who runs the investment portfolio at Berkshire subsidiary GEICO. Although a combined $180 million is a great deal of money, it isn't enough to move the needle in the Berkshire portfolio, which exceeds $80 billion, including uninvested cash.

Berkshire, like many investment companies, can request that investments like these be treated as secret for as much as a year -- the SEC will keep such filings confidential. Last week Berkshire disclosed that it had purchased 9% of Pier 1 Imports(NYSE: PIR) in its regular quarterly filing. Berkshire had shielded these new purchases at the time, but decided to file an amendment to its June 30 holdings disclosure, as it believed that confidential treatment of the holdings was no longer necessary. This means, most likely, that these purchases had still been ongoing through the filing, so in the next quarterly filing, it could be that Berkshire's positions in ServiceMaster and Comcast will be larger, even substantially larger.

But that's just conjecture: There are plenty of other reasons why an investment company would want to keep a purchase confidential for a period of time after its transactions are complete.

The purchase of ServiceMaster and Comcast, along with Pier 1 seem to fit into a pattern of Berkshire purchases of the last few years -- all seeming to focus on the home. With these new purchases, we have lawn care, air conditioning, and pest control at ServiceMaster, entertainment provided by Comcast, not to mention the assorted Pier 1 knickknacks and furnishings. Then there are the Berkshire subsidiaries that make Carpet (Shaw), brick (Acme Brick), paint (Benjamin Moore), insulation (Johns Manville), kitchen stuff (Pampered Chef), and so on. You can even just buy the home from Berkshire outright, through Clayton manufactured homes, or through HomeServices of America, one of the nation's largest residential real estate companies. It's owned by MidAmerican Energy, which is majority owned by Berkshire.

Now, if only Berkshire had a place -- a big place -- where one could buy all of the furniture for a house....

Bill Mann owns shares in Berkshire Hathaway.

Quote of Note

"Never discourage anyone...who continually makes progress, no matter how slow. " -- Plato

Starbucks Takes a Slide


Jeff Hwang

Sell Starbucks.

I'm just kidding. But everybody else is doing it.

Starbucks (Nasdaq: SBUX) shares are getting smashed, trading down 7% to $42.72 this morning after the coffee retailer posted a strong but relatively disappointing August. The company said that revenues for the four weeks ended Aug. 22 were up 25% to $418 million over last year, with same-store sales growth clocking in at 8%.

There isn't actually anything wrong with those numbers; it's just that investors have been spoiled. Starbucks has been projecting long-term same-store sales growth of 3% to 7% and then has simply blown that figure away month after month. August represents the first time in 2004 that the company hasn't registered a double-digit gain in same-store sales, as well as the lowest gain since May 2003.

While Starbucks remains a Fool favorite, it's worth noting that the stock still commands a healthy premium at 45 times this year's earnings. The stock has also reflected the company's performance, gaining 58% over the past year and 110% over the past two.

Despite competition from other specialty coffee retailers such as Peet's Coffee & Tea(Nasdaq: PEET), as well as competitive aspirations from the likes of McDonald's(NYSE: MCD) and Motley Fool Stock Advisor pick Krispy Kreme Doughnuts(NYSE: KKD), and even Wal-Mart(NYSE: WMT) to some mild extent, Starbucks maintains the dominant brand -- enough so that it should be able to withstand a price hike, perhaps later this year. The company has also been successful in reaching more and more customers beyond its core high-end coffee drinkers by introducing new products, including sandwiches, desserts, light versions of its Frappuccinos, and noncoffee beverages.

That said, while the current stock price offers zero margin of safety for a buy, Starbucks remains the kind of company that every Fool should aspire to own.

For more Foolish coverage of the company, see:

Fool contributor Jeff Hwang owns shares of Starbucks.

More on Fool.com Today

How much of your retirement savings is consumed by your mutual funds? Robert Brokamp discusses the issue in My Fund Manager Ate My Retirement!... There's hope for the next generation when teens begin investing their money, Selena Maranjian says in How Millionaires Are Born.... Cyclical stocks are not your buy-and-forget holdings. So what are they? Jim Mueller finds out in Ride the Cyclical Wave.

In other news:

For a list of all our stories from today, see our Today's Headlines page.