In Focus

Krispy Kreme

Their product, at least, is pure poetry.
by Chick Cheryl

A donut is a donut, by any other name, it still tastes the same. unless it's a Krispy Kreme! Okay, that may not be Shakespeare, but according to this Chick, it's the truth. Now, I must admit I am a donut lover, even prior to tasting my first Krispy Kreme. It's always my first choice at the craft service table on any acting job, and when I was pregnant. WHOA Bessie! Look out! I could snarf a dozen donut holes between my first and second sip of decaf coffee! However, never would I have driven 15 minutes to sit in a line of 27 cars at the drive-thru (yes, Krispy Kreme has a drive-thru!!) just for a donut.

Back in April 2000, the company had a 63 million dollar IPO (initial public offering: 3 million shares at $21 per share), publicly trading their stock for the very first time in 68 years. It trades under the symbol KREM on the Nasdaq exchange. (Helpful Hint: generally speaking, if a ticker symbol has more than 3 letters, it usually trades on the Nasdaq. If it has 3 or fewer, you'll usually find it on the New York Stock Exchange.) I have two main reasons for being interested in this company: they have an awesome service/product and they're (relatively) young. Granted, the company has been around since 1937. If you're from the South, you've been eating them since you were a child and you're probably giggling at my exuberance over a silly pastry!

At this point, though, California only has a handful of Krispy Kreme locations. I must pass twenty other donut shops to get to my sweet tooth's delight. And when I say there have been as many as 27 cars in the drive-thru line ahead of me (during peak donut-eating time), that translates into waiting almost 45 minutes in the car, while watching the "walk-in" line spill out the door and around the corner! Clearly, my opinion of these donuts is shared! When we finally get our turn at the pick-up window, the clerks are friendly and usually hand my husband and me some silly Krispy Kreme hats to wear (the kids think it's hilarious). We've even been given complimentary donuts with sprinkles for the little ones in the backseat. In another display of stellar customer service, we have even been given coupons for free donuts and coffee on our next visit to apologize for the long lines and show appreciation for our business!

So now we're sold on the establishment, but what about the stock? A company that leaves you feeling this good certainly deserves a little homework.

With the cash raised from their IPO, Krispy Kreme promised to clean up their balance sheet, take care of their long term debt, refurbish existing locations and expand. In looking at their SEC filings from the quarter ending 7/00, we see that they have kept at least one of their promises.KREM boasts zero long term and short term debt! The company is definitely continuing to expand; the growth potential is huge. As of last January, there were only 144 locations in the US. As a comparison, Dunkin' Donuts has over 5000! The company plans to open about 22 stores in 2001 and over 100 stores between 2002 and 2005. There are certain regions that have none, like the Northwest..with all that coffee up there, imagine the possibilities. Apparently, they have. I read that in the midst of all their expansion they are currently testing an alliance with Starbucks to sell their products. I'm just giddy! Coffee and donuts! (Sorry, it doesn't take much for me!) Time will tell if they can keep their growth slow and steady - key for a restaurant stock to succeed.

Just to make sure I'm not sugar-coating anything, I'd like to point out a couple of problems critics have cited. For one, it's in the food service industry. That's a tough one. Capital costs for each new location are substantial, the outlets require a lot of manpower and margins notoriously run thin. Again, looking at their financials, we see that their gross margin and net margins are 16.9% and 5.1%, respectively. Nowhere near our Chick's Dozen standards of 50% and 8%. Lastly, despite having the most delectable donuts around, Krispy Kreme has little pricing power. I mean, really, how much is the public willing to pay for a dozen donuts? Although, sometimes I'm amazed how much I'll pay for my favorite blend at Starbucks! Rest assured, however, there will be no Krispy Kreme clones; their recipe is a secret. Some say its the same old-fashioned ingredient that grandma used to use. Lard!

Investors may not care so much about the lard, but there are other positives. Again, referring to the Chick's Dozen, this stock does meet many of our criteria:

• Buy what ya know (#1) Oh boy, do I know those glazed and chocolate iced donuts.intimately! Keep it Simple Sweetie (#2) Isn't a donut the first thing we learn to draw?
• Leader in its field (#4) It's heads above the competition according to my taste buds!
• Repeat purchase of a low-priced product (#5) You. One dozen hot donuts every Saturday morning for $4.99.

In this "New Economy" climate of high-flying stocks with no earnings, Krispy Kreme prides itself as an "Old Economy" stock that actually makes money! With a flow ratio of 1.29 it also knows how to handle it. I guess, Chickies, I'm going to have to go taste test a few more donuts. I'll get back to you whether I think they're worth it! I just love hands-on research.