Krispy Kreme Growing Again After Fall From Grace

The stock flopped in the mid 2000s and slashed stores, but is expanding once more

   

The first of a proposed 14 new Dominican Republic Krispy Kreme (NYSE: KKD) doughnut shops opened its doors in Santo Domingo on Tuesday. For investors, this KKD stock move may be a sign not only of global expansion but of a perhaps slow and marked return to the former glory days at Krispy Kreme.

Krispy Kreme franchisee Dominspec, S.A is operating the store, the first in the country, in the center of Santo Domingo on the popular and tourist-trafficked Winston Churchill Avenue. The additional 13 stores are planned for the next five years, according to the franchisee, to feature 17 varieties (its signature glaze included) of the freshly made doughnuts.

While Krispy Kreme stores can be found in more than 600 locations in 20 countries worldwide – including Indonesia, Lebanon, Mexico, Saudi Arabia, Turkey and even the United Arab Emirates – the store known for its red-light, made-fresh morning pick-me-ups has struggled significantly since 2005, after a decline that was shockingly steep and quick.

Founded in 1937 and headquartered in Winston-Salem, N.C., Krispy Kreme began booming in the late 1990s with rapid-fire store expansion. By early 2000s, the store not only challenged Dunkin’ Donuts, but rose through the ranks at a breakneck pace. The company, known mostly in the South, added new locations in the U.S. and worldwide in aggressive fashion.

But that rapid expansion was a large reason for the gut-wrenching drop in KKD stock several years back. Company shares that once sold in the $40s at its peak in 2003 fell to $5 in early 2005. Financial strain ensued and under-performing store closures became a regular occurrence for Krispy Kreme.

Observers point out the company expanded too quickly, relying on a single product while refusing to offer others (a quality coffee being one of them). Around roughly the same period, the Atkins Diet had taken off – promising waif thin bodies at the avoidance of carbs, which Americans took to by ditching tasty sweets in droves.  The result was that in fiscal 2005, the company lost roughly $198 million. Scandal followed, as several executives were forced out of the company after internal inquiries found they may have inflated earnings. Despite the fact that supermarkets and convenient stores began to carry the products by the truckloads, the store’s novelty was already wearing thin with consumers.

Privately held Dunkin’ Donuts, on the other hand, had already shown a willingness to grow not just in number of stores but internally as well. Knowing donuts aren’t for the health-minded – even donut-lovers won’t have one each day – the company branded itself as a coffee store, adding bagel and breakfast items to its menu. And Dunkin’ Donuts also made new franchises accessible. It’s a near $2 million investment to open a local Krispy Kreme, compared with $500,000 for a Dunkin’ Donuts. That allowed stores to open both at home and in overseas markets.

Krispy Kreme may be down, but it’s not out. KKD slowly saw additional international market growth and some stability in the U.S. in recent earnings reports. With many of the executives who got the company into trouble gone, there is baked-fresh feeling to the company’s image. The stock is outperforming this year, up about +20% year-to-date.

And if Central American expansion plans are any indication, it’s a sign that KKD is perhaps on the rebound; a good sign for investors. KKD plans to release its financial results for the second quarter of fiscal 2011 on September 2.

As of this writing, Burke Speaker did not own a position in any of the stocks named here.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/08/krispy-kreme-growing-again-after-fall-from-grace/.

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