Krispy Kreme's Sweet Growth Surge (KKD, THI, PNRA, SBUX, KFT, NATH)

Krispy Kreme Doughnuts' (NYSE:KKD) stock bolted to a new high on the days following release of its third quarter fiscal 2011 earnings report. The company, which had battled operational problems for several years until recently, continues to make major headway. Long-term investors may want to take a closer look at the stock.

Donut WorldCoffee and donuts are fairly simple items, yet the industry of restaurant chains which deal in these goods is highly competitive and there are some strong players. The stock of the Canadian-based chain Tim Hortons (NYSE:THI) recently hit an all-time high. Panera Bread (Nasdaq:PNRA), though not a coffee-and-donut shop per se, also saw its stock price reach a new high. Panera, with its specialty sandwiches, cappuccinos and breakfast pastries, had a 21% jump in year-over-year quarterly profits. Its growth prospects remain strong. 

Krispy ProfitsKrispy Kreme made a three cent per share profit in its third quarter, compared to a net loss of four cents per share last year's same quarter. Net income was $2.4 million versus a net loss of $2.4 million in the 2010 third quarter. These seem like modest figures, but Krispy Kreme has traveled a long road to get back to profitability. Revenue was up to $90.2 million from $83.6 million. Company same store sales showed an increase for the eighth consecutive quarter, this time a 5% increase.

Sustaining Operations MomentumAs recently as its second quarter, analyst projections had Krispy Kreme pegged for a loss, but an earnings surprise instead showed a profit for the company. The company also raised its full year guidance at the time to 14 cents for FY 2011, compared to the six cents earned in FY 2010. While the earnings beat and the raised guidance show confidence built on improving operational results, the numbers shouldn't cloud the picture that Krispy Kreme, though profitable, still needs to solidify this performance on a quarter-to-quarter basis. Simply put, Krispy Kreme needs to continue to post profit increases several quarters in a row to convince the Street it's truly back.

Krispy Kreme's FutureNoted coffee shop chain and coffee retailer Starbucks (Nasdaq:SBUX) is currently embroiled in a spat with Kraft Foods (NYSE:KFT), as Starbucks seeks to end its distribution relationship with the food giant. It's not likely either of these two companies will be hurt in a significant way. Krispy Kreme, on the other hand, smaller, with less margin for error, has to watch commodity prices carefully. The company admits as much and continues its prudent management so as not to slip back into the habits which helped lead to its many years of red ink.
Krispy Kreme needs to and is managing itself more like a tightly run micro-caps such as Nathan's Famous (Nasdaq:NATH). Nathan's, though much smaller than Krispy Kreme at an $88 million market cap compared to Krispy Kreme's $500 million cap, has no long-term debt. Krispy Kreme has lowered its long-term debt from $42.85 million to $34.77 million, so that's a good sign. Even better is that this is the fifth consecutive year of lowering its long-term debt, which stood at $118.24 million in 2006. 

Krispy Kreme StockKrispy Kreme stock has been a potential turnaround play which is now making that potential come to life. One report used the word "transformative" for its business. Krispy Kreme still sells at a rich valuation, at roughly 50 times its projected FY (1/11) earnings of 14 cents per share and 30 times its FY (1/12) earnings, so investors need to realize the stock price is assuming a lot of growth now and in the near term, growth which is neither assured nor automatic. The company is performing better and the stock is attracting new interest, but long-term investors need to keep seeing solid fundamentals and real growth as the quarters roll by. Then, when the valuation is more reasonable, the stock will be a better buy. 

By Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see