Analyst Conrad Lyon in “Krispy Kreme is hot stuff once again” with the Charlotte Observer

Krispy Kreme, back in growth mode, plans more locations locally, nationwide

By Victoria Guida, .(JavaScript must be enabled to view this email address)

Krispy Kreme, after years of financial losses and store closures, is once again expanding, with three planned stores in the Charlotte area and up to 25 proposed nationwide through the end of next year.

The expansion marks a change of course for the 75-year-old Winston-Salem chain that closed its last Charlotte store on Woodlawn Road in 2008.

Friday morning, customers were steadily streaming in and out of the new store in Indian Land, S.C., which opened June 12 in a shopping center just south of the state line.

Courtney Belk, 43, had come up from Lancaster with her mother and two sons for a midmorning treat. “We’re thrilled this is here,” Belk said. “The boys love to watch the doughnuts being made.”

As the family watched the conveyor belt of doughnuts run underneath the dripping glaze, Belk’s mother, Anna Carothers, 70, said going to the store reminds her of times long gone.

“And the doughnuts really are very good,” she said.

Krispy Kreme hopes to tap into that loyalty as it plots its comeback. After a period of strong growth, the company ran into financial troubles stemming in part from legal problems and a tough economy. It eventually closed more than half of its stores.

Now the company is recording profits again and is ready to expand, said Brian Little, spokesman for Krispy Kreme Doughnut Corp.

“There is energy and excitement around the brand as we begin to re-engage with consumers and re-engage with our fans around the world,” he said.

Conrad Lyon, an equity analyst from B. Riley Co. who follows Krispy Kreme, said the company has taken its time with expansion to better ensure it can deliver on its promises, given past failures. But the doughnut chain finally has its head above water.

“They’re going back into growth mode,” he said.

Boom to bust

Krispy Kreme opened its first store in 1937 in Winston-Salem, growing gradually during its first decades. But by the ’90s, Krispy Kreme was ready to be more ambitious.

Expansion picked up rapidly, and the company spread north, causing a bit of a sensation when it hit New York. GQ magazine rhapsodized about the company’s signature doughnut in 1996, calling it “the Appalachian love child of the soufflé and the croissant.”

More growth followed after the company went public in 2000. At its height in the middle of the decade, it had opened more than 400 stores, according to securities filings. But the rapid expansion proved unsustainable.

Krispy Kreme’s earnings suffered from a 2005 lawsuit that accused former management of hiding evidence of dropping sales and profits. The company had to shell out $4.75 million to settle the case.

Healthy living trends and competition from other chains, such as Dunkin’ Donuts and Starbucks, also took a toll. More than 240 U.S. stores closed between 2004 and 2009, according to securities filings.

With such a decrease in its U.S. presence, the company turned to international markets, where it has since begun growing in places like Japan, Mexico, the U.K., South Korea and the Middle East.

“Over the past four years, we’ve done quite a few things to put the company in a position for growth,” Little said. “We stabilized the business, strengthened our balance sheet. We’re continuing to grow in international markets and have started to grow domestically.”

Looking ahead

Transparency has also been a big factor in the company’s revitalization, said Lyon, the analyst. The doughnut chain’s securities filings are extensive, as opposed to those written by the management team that ran into legal trouble in the mid-2000s, he said.

“I think they do that intentionally to let the investment community know they’re not trying to hide anything,” he said.

Since 2010 the company has been in the black. Last quarter, the corporation reported a net income of more than $6 million.

Despite its budding growth, though, Krispy Kreme still faces tough competition.

One of its biggest competitors, Dunkin’ Donuts, had a net income of $25.9 million during its most recent quarter – more than four times that of Krispy Kreme. Dunkin’, which went public last year, has maintained profits during the recession and continues to grow. It has at least 12 stores in Charlotte.

Dunkin’ Brands, which also owns Baskin Robbins, expects to open up to 280 stores this year, according to a securities filing.

Lyon said even though Dunkin’ is Krispy Kreme’s most significant competition, the marketing strategies for the two companies are different.

“The philosophy with Krispy Kreme is they intend to sell a doughnut and hope you buy a beverage, whereas with Dunkin’, they intend to sell a beverage and hope you buy a doughnut,” he said.

Because coffee is such a driver for consumers, Dunkin’ has managed to perform better during tough times when doughnuts might seem like a frivolous commodity, he said. Krispy Kreme, therefore, is hoping to increase the focus on coffee as part of its brand, as well as eventually add non-breakfast products to increase sales later in the day, he said.

“It’s the coffee. That’s gonna be a big driver,” Lyon said. “To get people thinking about the (brand) differently could be a game-changer for these guys.”

Back in Charlotte

With profits has come U.S. expansion, bringing Krispy Kreme once again to Charlotte’s front door.

Construction is set to begin on a new shop at North Sharon Amity and Randolph roads in July, Little said. That store, as well as a Rock Hill location, are due to open by the end of the year.

The company also hopes to open shops in the Huntersville and University City areas, Little said. All of the locations in the Charlotte area will be Krispy Kreme-owned, as opposed to franchises.

Kenny Herbst, an assistant professor of marketing for the Schools of Business at Wake Forest University, said the company might be hoping to capitalize on Charlotte’s growth and customers’ long familiarity with a well-established N.C. company.

“Krispy Kreme’s history also has significant ties to North Carolina, and so it makes sense to create a larger splash in one of the state’s, and the Southeast’s, best and most exciting markets,” he said.

Growth for Krispy Kreme now means jobs for Charlotte. The three new shops could create as many as 150 positions, and the Indian Land store is hiring up to 60 employees.

Krispy Kreme has more than 690 stores, of which 142 are in the U.S. The company hopes to grow its line of branded products, as well as the number of grocery and retail locations where the doughnuts are sold, Little said. Last year, sales to wholesale customers brought in roughly $145 million, about 54 percent of the company’s total revenue, according to securities filings.

Shares of Krispy Kreme closed at $6.11 a share on Friday, up 1.16 percent.