Krispy Kreme Gets Back to Basics

Recent times have been anything but sweet for Krispy Kreme Doughnuts (NYSE: KKD), which saw its stock plunge 24% in 2015. Not that Krispy Kreme is going completely to pieces, but missing analysts’ estimates in six of the past eight quarters is never good for share prices.

Key stumbling blocks of late include the relentlessly strong dollar, a distinct disadvantage for Krispy Kreme right now because the majority of its 1,084 locations are overseas. It’s a lot tougher to increase the bottom line with lousy foreign exchange rates offsetting profits. Plus, sales have been soft in the packaged goods segment, a newer growth endeavor in which Krispy Kreme-branded items are marketed to grocery stores and other retailers.

There’s not much to be done about exchange rates but wait for the dollar to fall, which it will eventually. But management can always commit to the smartest-possible business strategy, which for Krispy Kreme means focusing on its traditional strength: reaching customers through the iconic doughnut shops.

To that end, the company is aggressively expanding. During its 2016 fiscal year ended in January, Krispy Kreme spent $31 million to build about 20 new domestic franchises and 100 international franchises. There are plans to add that many more of each in fiscal 2017, with capital expenditures again expected to be in excess of $30 million.

To better compete with Starbucks (Nasdaq: SBUX), Krispy Kreme also intends to get much more into coffee, a growth opportunity it has long neglected. CEO Tony Thompson elaborated on this during the December conference call:

During the quarter, we took a huge step with the opening of a newly designed test shop that is allowing us to experiment with the new in-store guest experience with the intent of driving higher beverage attachment. The guest experience in this new store includes a new ordering process and customer flow. The shop has a more contemporary, warmer and inviting dining area with Wi-Fi and much more pronounced coffee presentation as well as exterior improvements. This is still a test but we are pleased with what we are seeing.

Assuming this catches on with consumers, coffee could double its contribution to Krispy Kreme doughnut shop sales to 10% of the total from 5% currently, Thompson recently told Bloomberg.

Investors wondering how Krispy Kreme will be able to afford all the new growth initiatives needn’t worry. Despite unusually hefty capital outlays, it still finished fiscal 2016 with $31 million of free cash flow, and that amount has since increased. The company’s balance sheet shows historically high levels of cash, rising stockholders’ equity and no debt.