From: Linda (firstname.lastname@example.org)
Date: Thu Aug 24 2000 - 20:01:36 PDT
Cindy wrote: <<God, yes. Especially if the little light is on that
means there are hot ones inside!>>.
Intrigued, I just had to research this further on the company website:
"Our Hot Doughnuts Now sign, when illuminated, is a signal to our
customers that our signature product, Hot Original Glazed doughnuts, is
being made. The Hot Doughnuts Now sign is a strong impulse purchase
generator and an integral contributor to our brandís mystique."
So that's how they draw in repeat business! A Pavlovian conditioned
And from last month's Barron's:
"The Krispy Kreme product and experience are magical," the company
baldly states in its latest annual report. "Even the name
'Krispy Kreme' has a magical quality, like 'abracadabra.' "
JULY 10, 2000
Dollars to Doughnuts
Like its signature product, Krispy Kreme's shares are
By LAUREN R. RUBLIN
To its legions of fans, Krispy Kreme isn't a doughnut.
It's practically a religion. Acolytes speak of the fluffy
confection in quasi-mystical terms, as though a light,
smallish doughnut, baptized in a river of glaze, were a
bite out of heaven itself. Fittingly, ground zero in Krispy
cultdom is the Winston-Salem, North Carolina, headquarters
of Krispy Kreme Doughnuts, the 63-year-old, Nasdaq-traded
company that gave birth to this storied sweet. The original
multitasker, Krispy Kreme procures all the ingredients that
go into its doughnuts; manufactures the machines that
churn them out by the millions; runs a thriving
wholesale/retail bakery chain and manages a growing
network of franchisees who hope to dot the landscape
in coming years with hundreds of Krispy Kreme shops, or
as the company calls them, "doughnut theaters."
And why wouldn't they? "The Krispy Kreme product and
experience are magical," the company baldly states in its
latest annual report. "Even the name 'Krispy Kreme' has a
magical quality, like 'abracadabra.' "
Krispy Kreme's magic, which gourmands at Barron's can
vouch for (see "Glazed and Confused"), extends to Wall
Street as well. "We believe nothing compares with a hot
Krispy Kreme doughnut," John Ivankoe, J.P. Morgan's
restaurant critic -- oops, analyst -- wrote in a May 1
But not even doughnuts can compare with Krispy Kreme's
red-hot shares, which nearly quadrupled after their
April 5 offering at 21 apiece. Late last week, those
shares were trading furiously near 80,
which meant investors had bestowed upon the company a
price-to-earnings multiple of 94 times estimated fiscal
2001 (ending January 31) earnings of 85 cents a share,
and 77 times First Call consensus estimates of $1.04 a
share for fiscal 2002. Not bad for a doughnut vendor,
even one that is expected to grow its annual
earnings by 25%.
Krispy Kreme's explosive rally nevertheless has put
its brokerage-firm friends in a pickle. Consider:
Dain Rauscher Wessels analyst David Geraty slapped a
Buy rating on the stock in mid-May, with a price
target less than 50 cents above where the shares then
were selling. Morgan's Ivankoe still maintains a
Long-Term Buy, and a 12-month price target of 45,
notwithstanding the obvious contradictions in that
stance. Krispy Kreme "arguably has a lot of the
future priced in," he admits a bit sheepishly.
To say the least. Even if Krispy Kreme earns a
sweeter $1.10-$1.20 in fiscal 2002, as some observers
suspect, the company's shares, like its doughnuts,
still are wondrously rich. Krispy Kreme's $1 billion of
market value is equal to 20% of the $5 billion U.S.
doughnut market. Yet the company's fiscal 1999 sales
of $220 million accounted for less than 5% of industry
Viewed another way, Krispy Kreme trades at about a 60%
premium to Starbucks, the Cadillac of "concept"
restaurant stocks. Unlike Starbucks, however, which
already has built its U.S. empire, Krispy Kreme, with
only 151 units, stands on the cusp of a potentially
risky national expansion.
So, why the run-up in the company's shares? Krispy
Kreme's post-deal performance owes in part to scarcity
value. With an assist from underwriters led by Deutsche
Bank Alex. Brown and J.P. Morgan, the company issued
only 3.45 million shares to the public in April, out
of 12.9 million outstanding. A possible secondary offering
later this year would help correct the supply/demand
The stock's latest spike also smacks of a short
squeeze. As of mid-June, nearly a third of the public
float had been sold short, presumably by traders
expecting the shares to tumble. But their subsequent
surge likely has sent more than a few shorts scrambling
to cover their positions.
Yet the root of Krispy Kreme's investment charm probably
lies in the simple fact that it's not a profitless dot.com.
Nor has the doughnuts' celebrity status hurt. Thanks to
a tireless corporate promotion machine, Krispy Kremes
reportedly have crossed the appreciative lips of movie
stars and famous politicians.
Krispy Kreme dates back to a single Winston-Salem
doughnut shop opened by founder Vernon Rudolph in 1937.
By the time Rudolph died in 1973, the company numbered
50 shops scattered through the Southeast, most of which
were -- and remain -- just as plain as the neighborhoods
they served. Three years later, Rudolph's family sold
the chain to Beatrice Foods, which ultimately sold it
back to a group of franchisees. The new owners spent the
1980s paying down Krispy Kreme's debt, and then began
to ready the company for national, and ultimately global,
As a result, Krispy Kreme's revenues are up about 85%
over the past five years, while earnings, exclusive of
special charges, were relatively flat until last
year. In fiscal 2000, however, net income excluding
charges more than doubled, to about $6 million, as the
company leveraged its infrastructure over additional
stores. Krispy Kreme currently operates 57 stores;
franchisees run another 94.
Franchising the Future
Krispy Kreme's growth has stemmed from a three-pronged,
vertically integrated strategy focusing on company stores,
franchise sales and support operations, which sell doughnut
mix, equipment, coffee, retro signage and other supplies
to franchisees. The company-owned doughnut stores, which
accounted for 75% of last year's sales, in turn derived the
bulk of their volume from wholesale doughnut sales to local
supermarkets and convenience stores.
Krispy Kreme's future growth will depend far more on
the higher-margin business of licensing stores to area
developers, selling them equipment and collecting franchise
fees and royalties. The virtues of the franchise model
include minimal capital investment and a stable income
stream, so long as the company eschews Boston Chicken's
ruinous practice of lending money to troubled franchisees.
The downside, natch, is curtailed participation in profits,
although Krispy Kreme hopes to take an equity stake in
its franchisees. Although a spokeswoman confirmed only
that the company plans to open 22 units in fiscal 2001,
analysts believe Krispy Kreme can add at least 500
stores within the next 10 years.
Perhaps. The company's success ultimately will depend
on the quality of its franchisees, beginning with their
skill in picking real estate. According to Joe Field,
majority owner of LaMar's Donuts, a Lincoln,
Nebraska-based chain, Krispy Kreme's Denver developer
recently purchased a two-acre plot for $2 million, on
which it will build that city's first Krispy Kreme. "You
have to sell a lot of doughnuts to cover that kind of
overhead," Field says. If the company's wholesale business
were to hit a snag or face a stiff competitor, its retail
trade, he says, would be hardpressed to support its
More ominous, Krispy Kreme's same-store sales, which
have enjoyed robust double-digit growth in recent years,
likely will slow by the end of this year to about 5%-6%,
right in line with comparable-store sales for U.S.
industry leader Dunkin' Donuts, a unit of Britain's
Allied Domecq. According to Morgan's Ivankoe, much of
the recent growth in stores open at least a year
stemmed from an aggressive build-up of wholesale
Nor is the history of food fads in the U.S. especially
pretty. In the past 15 years countless yogurt stands
have melted down; prominent bagel chains have been
devoured by losses, and sundry coffee bars have
been reduced to dregs. The humble doughnut shop
just might escape this woeful fate, given the pastry's
historic tug on American tastebuds. Indeed, the doughnut
business has even undergone a bit of a renaissance, says
William Kussell, a top North American executive for
Allied Domecq, who notes that industry sales probably
will grow by 4%-5% annually in coming years.
Still, barriers to entry are few, and Krispy Kreme
won't have the field to itself. LaMar's Field aims
to erect up to 850-1,000 stores over the next 10
years, and relishes going doughnut a doughnut with
Krispy Kreme in Las Vegas, where LaMar's Donuts
opened a store last week.
Nor is industry behemoth Dunkin' Donuts, with 3,600
units worldwide, sitting on its crullers. In recent
years the company has shifted its focus to coffee and
bakery items, but doughnuts still will ring up $670
million in fiscal 2000 sales. "I have a lot of respect
for Krispy Kreme," Kussell says. "They've done a lot
of work in re-concepting their business, and have
helped to energize the category. But when they came
to Florida about five years ago, we were able
to stop them in their tracks."
Undaunted, Krispy Kreme has maintained that its best
years lie ahead. If the company delivers the healthy
growth in sales and earnings that analysts expect,
its shares may indeed merit a high-calorie
P/E. But in the event it misses a beat or two --
abracadabra! Krispy Kreme will become just another
doughnut, and its corporate parent a colorful footnote
in a notoriously unforgiving market.
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