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On May 26, 2006, I blogged about the decline of what was once a solid brand -- Krispy Kreme Doughnuts (NYSE:KKD). At the time, I said it was full of holes -- closing stores, franchisees bankrupted, a government investigation starting. But I also pointed to the new CEO, Daryl Brewster, who analysts were hoping might revitalize the company. KKD was $10 a share then. Today, nearly a year later, it is still floundering at nearly the same price.
In The Business Journal earlier this month, Brewster was reported as saying, "We kind of call it going from survival mode, which we were clearly in a year ago, to stability, which we think we're approaching .... But at the same time, (we're) really building and driving toward sustained growth as we go forward."
Out of survival mode, maybe, but out of the weeds? I'm not so sure. That said, Krispy Kreme is trying -- in February, it announced a new whole wheat donut. (I'd argue that if you're buying a donut, you aren't really thinking about health foods to begin with, so this is pretty misguided product development!) It is expanding through franchises abroad and designing cheaper, smaller stores. It has recently refinanced its debt as part of an overall cost-cutting mission, and it's resolved most of its accounting and legal problems.
Wall Street analysts are not walking away yet -- many of them see ongoing hope under Brewster. I still don't see too much hope in Krispy Kreme though -- there's simply too much competition with places like Dunkin' Donuts, and what had made KKD unique was its boutique, hard-to-find feel -- which was long ago destroyed. In fact, Dunkin' Doughnuts has hired Rachel Ray, the "hip" celebrity chef, to appear in ads for Dunkin' Doughnuts and the chain is making a concerted effort to grow its appeal with a fresher look. All of this will make it harder for Krispy Kreme to make a comeback.
What I see is KKD as a possible acquisition target. This is the savior for Krispy Kreme. Also, Brewster is very smart and he is a young guy who will look to maximize value which could only be found these days by saying "yes" to a private equity firm that wants to deploy cash on a known brand. In fact, there are funds dedicated to finding and buying "distressed" and underperforming assets. Krispy Kreme could easily be included in that category.
Type of stock: A small-cap stock with slow growth and competitive pressures. A once "darling" stock that has fallen on rough times.
Price target: Keep in mind that a number of analysts on Wall Street think that Krispy Kreme could rise from $10 to $15. I'd only recommend picking this up if you can stomach a bunch of risk -- there is a possible, very sweet upside if Krispy Kreme is acquired. Otherwise, I wouldn't bother because it will be too challenging for Krispy Kreme to regain its appeal.
Hilary Kramer is a financial editor and money coach for AOL and an authority on investing. Visit her at www.hilarykramer.com.
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Reader Comments (Page 1 of 1)
3-26-2007 @ 11:19AM
Randy said...
The problem is KKD doesn't make money. It's domestic operations are still a disaster, franchises are still closing. The existing stores will never be profitable, they are too large and too expensive. KKD really needs to either a) rebuild all the stores in cheaper locations in smaller formats, costing hundreds of millions in capex that KKD doesn't have, or b) retrench to the small group of older stores that are consistently profitable.
KKD is a bakery, I don't have to tell you how thin the margins are in that business. The glow of expatriate southerners mobbing newly opened locations may have hidden the poor economics of the business, but once the charm wears off sales fall 90% at every location. Repeat business is measured in months, if that.
Dunkin Donuts makes it's money selling coffee at much higher margins than donuts. Repeat customers come back 5x times a week. It's locations are smaller, cheaper, better suited to the economics of the business.
The old management team tried to sell a story of a great "brand" and a growth company, but it was all a potemkin village. A great brand keeps customers coming back, it doesn't shoot it's load in a store opening.
They used the story to get franchisees to build hundreds more uneconomic stores, and now the Brewster is stuck with the mess. Sure he says great things, but he's got no options. He's talked up foreign franchising, but he has to, as they are the only suckers left. The U.S. franchisees are all either bankrupt or nearing the court house. You can't run KKD as an asset-lite franchiser if you can't recruit new franchises in the U.S and you are stuck owning hundreds of your own stores.
And there is only one analyst with a buy rating that I'm aware of covering this sorry mess. It's Penney, and KKD has missed every forecast he's made in the short time he's covered it. He thinks KKD is going to make mad cash flow, but it's not clear how.
Look back to the prospectus for KKD's IPO. It barely made money for the five years previous, margins were less than 5%. Then it went public and the scheme hit high gear, creating fake "profits" that were later reversed. Penney somehow believes the fake business, not the real one that ran for decades before.
And no one is buying this mess. There isn't any cash flow for private equity. Any business that likes collecting great brands that generate high margins will run away when they see KKD's margins. Even if KKD's debt was magically paid off, it would be break even right now.
3-29-2007 @ 10:33AM
Mariel McDonald said...
Fish may flounder but horse, ships and companies founder.
You appear to enjoyed a donut or two in your recent life.
4-10-2007 @ 2:52PM
Ken Beech said...
Rachael Ray is a flash in the skillet. I wouldn't place too much hope in her upending Krispy Kream. That is still a wonderful product; Dunkin D is boring. It's the same old donought with a few colorful sprinkles on top and lots of money to pour into unreliable advertising.