A few years ago, some folks figured Krispy Kreme (NYSE: KKD) was destined for the garbage heap. After overly aggressive growth and the bankruptcy of key Krispy Kreme franchisees, the company was bleeding more red than a freshly bitten jelly donut. But the company has been on a diet for the last few years, cutting costs and restructuring debt. The result has been a steady return to profitability in the last few years — and most recently, a blowout Krispy Kreme earnigns report this morning that sent stock soaring 18% in early trading.
The Krispy Kreme earnings report was the best quarterly performance since fiscal 2004, during the heyday of the donut shop.
Specifically, the company said it made $9.2 million in profits, or 13 cents per share, more than double the $4.5 million, or 6 cents per share, a year earlier. Krispy Kreme sales increased nearly 14%to $104.6 million. KKD stock soundly beat Wall Street expectations of just 9 cents a share. Company-owned stores were a major profit driver, as was the restructuring of Krispy Kreme debt.
Also, domestic KKD sales rose 7.7% while international franchise revenues at Krispy Kreme surged 18.4%.
So is Krispy Kreme back, and does this mean the iconic donut shop is back in favor with consumers and investors alike?
By all appearances, Krispy Kreme has certainly plugged the donut hole in its balance sheet. But after the wild ride this company has had in the last decade, it’s too soon to tell the fate of the company — or whether its out of the woods.
Krispy Kreme is one of those cautionary tales all investors should be familiar with. The donut maker was a cult favorite among foodies, soaring 400% in two years after its 2000 IPO thanks to loyal customers and big growth plans. It was like Wall Street had one of those red neon signs like Krispy Kreme bakeries, announcing shares were “Hot Now.”
Well, eventually things cooled and got stale. The stock went from a high of almost $50 in 2003 to about $3 in 2007. Overexpansion spread the company too thin, sales dropped amid the Atkins diet craze and a focus on reducing carbs, and Krispy Kreme foolishly ignored the specialty beverage market even as competitors like Dunkin Donuts (NASDAQ: DNKN) and McDonald’s (NYSE: MCD) started expanding into coffee, smoothies and more.
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The company seemed on the brink of failure, dropping about 50% in just a week after In one of Krispy Kreme’s largest franchisees, Great Circle Family Foods, filed for Chapter 11 bankruptcy in 2007. The donut shop started closing stores and cutting back, but debt and liquidity issues made it hard for Krispy Kreme to find stability.
Yet amid the financial crisis , Krispy Kreme started to figure things out and get out from under past mistakes. It turned its first quarterly profit in fiscal 2010, and broke even on the year. The company has built on its momentum in recent quarters, and the stock has soared 100% in the last 12 months.
So does this mean that Krispy Kreme is back in growth mode and a healthy investment? Maybe – but don’t expect to see gains like this regularly at home in the U.S. The real potential is that in its most recent report, international franchise revenues at Krispy Kreme surged 18.4%. It’s good to see company-owned stores thrive in the U.S., but that overseas growth is the real future of the donut shop.
And convincing investors that any growth is responsible could be a tall order. Krispy Kreme has learned a hard lesson about over-expansion and irresponsible lending resulted in big losses and dozens of store closures. It will have to tread lightly, but like many other American restaurant brands, KKD could find significant opportunity abroad.
And that could mean that a lean, mean Krispy Kreme will be back in favor with Wall Street.
Jeff Reeves editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.