Did you know that
Krispy Kreme Doughnuts (NYSE: KKD)
just reported its first profitable year since 2004? Do you care?
Well, you should.
A number of years ago, the Winston-Salem based doughnut maker
went from growth darling to near oblivion. But, after a few major
changes the company seems to be moving in the right direction and
could once again gain the adoration of investors.
The small cap stock has nearly doubled over the past twelve
months and has rallied over 24% this week alone. As their tag line
suggests, the stock is indeed 'hot now'.
The surge in the stock this week has come on the back of a
stellar first quarter earnings report in which the company beat
consensus analyst projections on just about every measure. Fiscal
first quarter sales increased 14 percent to $105 million, beating
projections by 8.5 percent. Adjusted earnings saw a staggering
increase of 86 percent, to 13 cents a share, and beat projections
by 48 percent.
It was a heck of a report that the market loved - but it hasn't
always been this good for the doughnut maker.
The old Wall Street darling, whose stock peaked around $108
shortly after it went public in April 2000, saw it shares tumble
quickly only a few years later. It finally bottomed at an intraday
low of $1.01 in February 2009, losing 99.1 percent from its high,
and wiping out many investors.
The sharp decline into futility was a result of bad business
development decisions. The company over-extended itself through
expansion. It paid ridiculous sums to buy back stores from
franchisees. As a result, sales tumbled and the overextended
company closed 240 stores during a five year span. It lost over
$300 million during that period.
To add insult to injury, Krispy Kreme suffered from poor
accounting practices that eventually led to SEC investigations and
numerous lawsuits. The company was moving ever closer to being
Krispy Kreme needed a major overhaul. The old CEO was tarred and
feathered after a horrific performance. Then in 2008, enter the new
CEO Jim Morgan and, well, most shareholders think he has been a
Mr. Morgan decided that the company needed to get back to
basics. He focused on the core product, doughnuts, and its
uniqueness as a freshly-glazed cultish pleasure. He also began to
expand the company internationally. The company now has 646
stores, 417 of which are internationally-based. The company intends
to grow its stores by 55 percent over the next 5 years.
Mr. Morgan's plan has worked so far. The company just reported
its best quarterly net profit since the fourth quarter of 2004.
Much of the record quarter can be attributed to growth in the
international market as international stores increased sales 18.4
percent during the quarter, doubling domestic sales.
Investors have taken notice. Recently the CEO and founder of
Green Mountain Coffee Roasters (Nasdaq: GMCR) purchased
approximately 3.5 million shares and now holds a 5.1% stake in the
company. Given Green Mountain's tendency to gobble up smaller
niche-based companies, you have to wonder if a merger is in the
Based on America Market Surveys, Krispy Kreme is third only to
Starbucks and Dunkin' Donuts among the most popular coffeehouses
and snack restaurants. This signifies a strong market position that
could be advantageous to Krispy Kreme and potentially, Green
According to data from Capital IQ, Krispy Kreme currently trades
with a forward P/E of 19.8 and a PEG ratio of 0.46. This signifies
a small cap value investing opportunity, even despite the recent
I would wait to see a pull-back in shares before buying,
preferably one that fills the gap at roughly $6.50. From that
point, I would want to move into a position and then wait to see if
the stock can push through major resistance at $8.46.
If it does, I would most likely add to my position because if
the company continues to move in the right direction on a
fundamental basis, which I think it will, a move to $13 is not out
of the question.