Kreme of the Krop: The Doughnut Stock You Should Own

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Doughnuts are small, sugary rings that Americans consume roughly 10 billion times a year. The delicious indulgence is one of the most popular breakfast items, and fast-growing doughnut maker Krispy Kreme (NYSE: KKD) is taking advantage of this both domestically and internationally. Founded in 1937 in Winston-Salem, NC, Krispy Kreme has had its ups and downs since its IPO in 2000. Under the leadership of CEO Jim Morgan, the doughnut dealer has been growing steadily. Recent earnings reports have shown quarterly revenue increase of 11% and same-store sales increase of 11.4%. This is the 18th consecutive quarter of same-store sales growth. It was a good start to the company’s fiscal year; let’s look at Krispy Kreme’s plans for the future and see if the company is as good as its doughnuts.

Filling the world with doughnuts

Krispy Kreme hopes to keep up its impressive growth in sales and profits with five strategic points. First, the company is promoting doughnut use occasions throughout the day and night. Krispy Kreme has 36% of its sales between 6am and 11am. By promoting nighttime doughnut consumption, the company can tap into a market that is not associated with breakfast foods. Second, Krispy Kreme is continuing doughnut innovation by adding limited time offers and seasonal doughnuts as well as new flavors and shapes. The company recently launched Key Lime treats and frozen beverages for the summer. The success of these promotions is evident in the company’s impressive revenue growth. Third, the company is expanding its beverage marketing program. The end goal for this is to have more add-on beverage purchases with doughnuts. This has been a weak point for the doughnut maker but beverage sales recently increased 16%. Fourth, the company will leverage the brand’s presence on social media and local marketing. Finally, the company will continue to enhance guest experience and improve shop atmosphere and hospitality.

The company has also been experimenting with new, smaller doughnut factories. The shops will not participate in wholesale doughnut manufacturing for grocery stores and other wholesalers. There are currently three small shops in operation with seven or eight more on the way in 2013. The reception of these shops has been good but it is still too early to tell how this innovation will impact the company.

International expansion will also play an important role in Krispy Kreme’s future. With 360 current international shops, the company hopes to have 900 by the end of January 2017. This will happen by expanding in current markets as well as entering new ones like Taiwan and Russia.

Competitive breakfasts

Competing against Krispy Kreme for doughnut domination is Dunkin’ Donuts. Owned by Dunkin’ Brands (NASDAQ: DNKN), this company sells doughnuts, breakfast sandwiches, and most importantly coffee. Roughly 65% of Dunkin’s $667.67 million revenue is from coffee, which shows the potential of a good brew. Dunkin’ is a larger company than Krispy Kreme, but has experienced slowed growth in the recent past. Last quarter earnings dropped 8.30% after bad weather kept consumers from their morning routines.

Another breakfast competitor is Einstein Noah Restaurant Group (NASDAQ: BAGL), which owns, operates, and franchises bagel restaurants across the United States. Bagels are a little like doughnuts, but with some major differences in cost and quality. Bagels have more nutritional value and can be made into breakfast sandwiches, but doughnuts are cheaper and can act as a breakfast, desert, or late night snacks. Like Dunkin’, the bagel company has had a recent dip in growth. Its most recent earnings report missed Wall Street expectations when earnings per share decreased 33.33% to $0.14 last quarter. In hopes of recovering, Einstein is introducing a new garden-fresh themes menu that will include a Tuscan Bagel, a Tasty Turkey Sandwich, and a Denver Omelet Sandwich.

Of these two competitors, I think the most threatening for Krispy Kreme is Dunkin’. If Krispy Kreme’s increased focus on coffee and other beverage sales is a success then it could take customers from Dunkin’.  

Conclusion

Krispy Kreme has had rapid growth over the past few years and with its international and domestic expansion plans, I think the doughnut maker still has a lot of growing to do. With a forward P/E of 24.58 and a PEG of 1.15 I think Krispy Kreme would be a good buy as it continues its well-calculated expansion in the future.

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