The Sweet Return of Krispy Kreme Doughnuts
Carlos is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I love doughnuts. In my opinion, they're possibly the second best food to have been invented in the USA (the title of "best" belongs to cheeseburgers, to which I believe Warren Buffett would agree).
So it is with great pleasure that I observed Krispy Kreme Doughnuts (NYSE: KKD) make its incredible return from the (near) dead over the past few years. You see, back in the early 2000's after the company IPO'd, Krispy Kreme was the hottest company around. FORTUNE magazine quite literally named it "the hottest brand in America."
Sadly, the good times did not last. The company began to stumble due to a multitude of reasons: opening too many new stores, failure to keep up with franchise marketing, and rival competitor Dunkin' Doughnuts (NASDAQ: DNKN) remade itself as the best place to get coffee and snacks, giving even coffee giant Starbucks (NASDAQ: SBUX) a run for its money.
By 2009, the company was in dire straights. Short-sellers had squashed the stock into oblivion, quarterly losses were regularly occurring, accounting irregularities were being investigated by the SEC (never something you want to hear as a shareholder), and talk of bankruptcy was rife. Its share price hit an all time low of $1.01.
Thankfully, the company engaged in a massive turnaround. New management came in and engaged in severe cost-cutting measures and slimming its business by reducing the number of physical stores. As a result, the company's balance sheet was rebuilt, lessons were learned, the business was made more cost-effective, and the share price slowly began to rise once more. The company is now profitable once more after 14 quarters of losses.
As of this writing, the share price sits at around $14.73, which is up almost 80% compared to one year ago, and continually beating its 52-week high. I believe the company is poised to continue this trend, so long as they keep on delivering their sugary goodness.
Stores, stores, stores
To understand Krispy Kreme's potential, one needs to look at its growth story.
The company currently has a total of 740 stores in 21 countries, with the majority (506) being stores outside of the United States (Saudi Arabia with the most stores, 95 total). But this isn't nearly enough: Krispy Kreme is planning a massive overseas expansion, with a particular focus on emerging markets. There have been hints that Russia, the Philippines, India, the UK, and new locations in Singapore are on the list. The doughnuts appear to be particularly popular in the Middle East and Asia
This still isn't enough. At home, the company hopes to expand to 400 US stores from 240 by 2017. At the same time, the company also seeks to expand franchises abroad to a total of 900 (compared to the current 506) by 2017. We're talking of increasing the number of stores from a current 740 to a new total of 1,300 by 2017. So clearly, the company has big plans. I suppose it helps that the Al Kharafi family in Kuwait, owners of M.A. Kharafi & Sons and the 29th richest family on Earth, own a 12% equity stake.
So there is still plenty of room for growth (and apparently, demand). The company has very little presence in Latin & South America and Europe. Asia and the Middle East just straight up want more. Africa is just sitting there, ripe for the taking for when the appropriate time comes. And the US is rediscovering the joy of eating the classic glazed American doughnut.
If Krispy Kreme can keep up its promised pace, the long-term future does indeed look very tasty.
War between coffee & snack giants
Of course, things are never so easy. We have to worry about competition! And in this case, the competition is quite large.
According to the market research firm IBISWorld, Krispy Kreme holds a mere 2.1% of the coffee & snacks industry in the US. Dunkin' Doughnuts holds 24.5%, almost ten times as much. Starbucks, the coffee colossus, holds a whopping 36.6% of the market. In order to compete with these two firms, Krispy Kreme is also entering the world of coffee. Let's take a brief look at these companies and what investors should expect from them.
First is Dunkin' Doughnuts. The Massachusetts based giant has around 10,000 stores, which includes outlets for its subsidiary Baskin-Robbins, an ice cream parlor. Like Krispy Kreme, it is also rapidly expanding and continually making its business more cost-effective. The company's share price has risen 23.78% over the last three months, and its growth still seems secure. In fact, it could also possibly rival Krispy Kreme's growth.
However, Krispy Kreme is relatively cheaper than Dunkin' Doughnuts, and trades with a more favorable PEG ratio, price-to-sales-ratio, price-to-book ratio, and P/E ratio versus Dunkin' Doughnuts (normally I dislike using all those ratios, but I figured they were worth a mention).
Next there is Starbucks, the coffee colossus of the world. With 18,000 stores worldwide and instant brand recognition, the company is indeed an entity to be feared. It too is planning to expand, opening 1,300 stores next year. It has also recently acquired tea company Teavana for $620 million, so the company is clearly looking for further sales via that outlet. And finally, its "Verismo" single-serving coffee maker is selling like crazy (as well as a few jokes along the way).
So all this information, along with some data provided by IBISWorld, tells us that the entire coffee & snacks industry in the US is probably going to do pretty well in the comings years. Their exact analysis:
The Coffee and Snack Shops industry will continue its growth trend through 2017, with revenue anticipated to jump 3.6% in 2013 to total $28.8 billion. Coffee and snack shops will benefit as the economy improves, unemployment rates decline and consumers begin to spend money again on luxuries like eating out. Furthermore, over the five years to 2017, consumer spending is expected to increase at an average annual rate of 2.8%. As a result, revenue is projected to increase at an average annual rate of 4.0% to $33.9 billion over the period.
So really, all three of these companies are likely to do well in the next few years. Picking any of them is a decent bet.
However, I'm placing my hopes in Krispy Kreme.
Carlos Roa has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!