Krispy Kreme Doughnuts, Inc. (NYSE: KKD) operates as a branded retailer and wholesaler of doughnuts and coffee. It engages in the ownership and franchising of Krispy Kreme doughnut stores, which make and sell approximately 20 varieties of doughnuts. These stores also offer an array of coffees and other beverages. As of January 31, 2010, there were 224 Krispy Kreme stores operated domestically in 37 U.S. states and in the District of Columbia, and 358 shops in other countries around the world. Of the 582 total stores, 268 were factory stores and 314 were satellites stores.
Krispy Kreme makes and sells over 20 varieties of doughnuts, including the Original Glazed doughnut. Sales of doughnuts comprise approximately 88% of total retail sales, with the balance comprised principally of beverage sales.
In fiscal 2009, Krispy Kreme began initial testing of a new soft serve menu of traditional cones, shakes and sundaes paired with a variety of toppings. In fiscal 2010, Krispy Kreme expanded the testing of the concept, called Kool Kreme soft serve, into all four new Company shops and into most existing shops in the markets in which the new shops are located. The company has also begun limited in-store testing of baked goods, including sweet rolls, pecan rolls, muffins and bagels.
Krispy Kreme's beverage program includes drip coffees, both coffee-based and noncoffee-based frozen drinks, juices, sodas, milks, water and packaged and fountain beverages. In addition, many of the company's stores offer a complete line of espresso-based coffees. Sales of beverages comprise approximately 11% of Krispy Kreme's total retail sales.
First Quarter Fiscal 2011 Results
Krispy Kreme reported revenues decreased 1.4% to $92.1 million from $93.4 million during the first quarter of 2011. Excluding the effects of refranchising Company stores, revenues rose 0.4%. Company same store sales rose 3.4%, the sixth consecutive quarterly increase. Operating income increased 4.8% to $6.1 million from $5.8 million. Net income was $4.5 million, or $0.06 per share diluted, compared to $1.9 million, or $0.03 per share diluted in the first quarter last year. The Company ended the first quarter of fiscal 2011 with a total of 616 Krispy Kreme stores systemwide, a net increase of 34 locations since January 31, 2010. As of May 2, 2010, there were 83 Company stores and 533 franchise locations.
The Company Stores segment is comprised of the doughnut shops operated by the Company. These stores sell doughnuts and complementary products through the on-premises and off-premises sales channels and come in two formats: factory stores and satellite stores. Factory stores have a doughnut-making production line, and many of them sell products through both on-premises and off-premises sales channels to more fully utilize production capacity. Satellite stores, which serve only on-premises customers, are smaller than most factory stores, and include the hot shop and fresh shop formats. As of January 31, 2010, there were 83 Company stores in 18 states and the District of Columbia, including 69 factory and 14 satellite stores.
The Domestic Franchise segment consists of the Company’s domestic store franchise operations. Domestic franchise stores sell doughnuts and complementary products through the on-premise and off-premise sales channels in the same way and using the same store formats as in the Company Stores segment. As of January 31, 2010, there were 141 domestic franchise stores in 29 states, including 104 factory and 37 satellite stores.
The International Franchise segment consists of the Company’s international store franchise operations. International franchise stores sell doughnuts and complementary products almost exclusively through the on-premises sales channel in the same way and using the same store formats as in the Company Stores segment, and also using a kiosk format. A portion of sales by the franchisees in the United Kingdom and in Australia are made to off-premises customers. As of January 31, 2010, there were 358 international franchise stores in 18 countries, including 95 factory and 263 satellite stores.
The KK Supply Chain produces doughnut mixes and manufactures doughnut-making equipment, which all factory stores, both Company and franchise, are required to purchase. In addition, KK Supply Chain sells other ingredients, packaging and supplies principally to Company-owned and domestic franchise stores.
According to a study by Market Force Information, there is still considerable room for growth in the coffee house and snack chain industries. According to a recent survey, most consumers visit a coffee shop around once a week, with 70% reporting that they go to coffeehouses or snack restaurants less than five times a month. Many reported that they use time at a coffee or snack restaurant to reflect, or as an escape. That, coupled with the fact that just 4% of consumers reported trying a new coffeehouse or snack restaurant in the last 30 days, indicates big room for growth for chains.
When asked which coffeehouse or snack restaurants were their favorites, Starbucks was cited by 36%, Dunkin’ Donuts by 28%, and Krispy Kreme by 16%. However, when the number of locations is factored into the results, Krispy Kreme wins 35% of the vote.
Krispy Kreme also outscored competing coffee shops and snack chains on eight of 10 attributes (attributes included Quality of Food, Taste of Food/Coffee, Speed of Service, Friendly Service, Cleanliness, Atmosphere, Accommodating, Overall Value, Healthy Choices, Green/Sustainability). All other competitors clustered together with very little differentiation.
One original Krispy Kreme glazed doughnut contains 200 calories and 12 grams fat. A glazed, raspberry filled doughnut contains 300 calories and 16 grams fat. One apple fritter contains 380 calories and 20 grams fat. An increased level of health conscious people may hurt sales of Krispy Kreme doughnuts. However, obesity in the United States remains high, and a shift towards health conscious diets is not an immediate threat to Krispy Kreme's bottom line.
In fact, Krispy Kreme's international locations are benefitting from a drop in health conscious behaviors among consumers. For example, since opening stores in Japan in 2007, Krispy Kreme saw strong sales in that country. Food writer Mei Hojo says health-conscious eating remains a big trend in Japan, but it has also produced backlash, especially for American-style food.
Krispy Kreme operates within the quick service restaurant (QSR) segment of the restaurant industry. In the United States, the QSR segment is the largest segment of the restaurant industry and has demonstrated steady growth over a long period of time. According to The NPD Group, which tracks consumer usage of the foodservice industry, QSR sales have grown at an annual rate of 3% over the past 10 years. The National Restaurant Association projects QSR sales to rise 3% in calendar 2010 from the $160 billion posted in calendar 2009. Information Resources, Inc. data indicate that, during calendar 2009, doughnut sales rose approximately 5% year-over-year in grocery stores and rose approximately 3% in convenience stores in 2009.
In addition to retail doughnut outlets, the domestic doughnut market is comprised of several other sales channels, including grocery store packaged products, in-store bakeries within grocery stores, convenience stores, foodservice and institutional accounts, and vending. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, is an important factor in successfully competing for convenience store and grocery/mass merchant business. There is an industry trend moving towards expanded fresh product offerings at convenience stores during morning and evening drive times, and products are either sourced from a central commissary or brought in by local bakeries. In the packaged doughnut market, Krispy Kreme competes for sales with many sweet treats, including those made by well-known producers, such as Dolly Madison, Entenmann’s and Hostess, as well as regional brands.
Krispy Kreme's main competitors include: