Krispy Kreme Freezes Up

It may be National Doughnut Day, but it's unlikely that the people at Krispy Kreme (KKD) are doing much celebrating.

The company that was once able to attract TV news crews simply by opening a new outlet has been in a tailspin for years, and it doesn't seem likely it will right itself any time soon.

That hasn't stopped investors from periodically believing that the company will bounce back. Witness the stock's volatility over the past year: $5.50 in June 2008; $1.08 in February; $4.32 in April. After the company reported dismal first-quarter (2010) results on Thursday, the stock has plummeted by nearly 10 percent, to about $3.50.

In April, in the midst of the stock's latest rally, Seeking Alpha columnist Mark Krieger wondered why would "a stock held in so much disdain, for such a long time, produce a rally of such magnitude?" His answer was that it had been "beaten down beyond recognition and Wall Street eventually identified it again." But although the company in fiscal 2009 produced its first profitable year in a half-decade, there was no good reason for shares to have quadrupled in the preceding six weeks.

At that point, the situation could only have improved from the company's nadir: a series of corporate scandals that led to the ouster in 2005 of several executives, including the CEO. And even as Krispy Kreme was trying to climb out of that hole, the competitive landscape was changing, with Dunkin' Donuts muscling in on Krispy Kreme's markets and with McDonald's (MCD) introducing its McCafe initiative.

Krispy Kreme was left with not much more than its doughnuts to offer. But people are trying to eat healthier, and the raw-materials costs for doughnuts have continued to rise.

The company has tried some promotions in some regions like "Depression-era pricing," selling cups of coffee for 10 cents as a sort of loss-leader. So far, not much luck with that. And really, who, just now, wants to be reminded of the Great Depression when they're ordering their morning coffee and doughnut?

The company's profitability has continued. It earned $1.9 million in its fiscal first quarter. But that's only half of what Krispy Kreme earned in the first quarter of fiscal 2009. And revenues fell by nearly 10 percent. The company says much of that is due to currency fluctuations (nearly 60 percent of the company's presence is overseas), but any shortfall in revenue is bad news. One minor bright spot: Same-store sales were up by about 2 percent.

Looking forward, the company says it is preparing for its typically slow summer period by putting focus on its mini-donuts, iced drinks, and soft-serve ice cream.

A new line of frozen drinks might help shore up revenues in the warm months, as might the introduction of several iced-coffee beverages.

This is the kind of thing Krispy Kreme has to do, though it might not be nearly enough. As I noted in December, the chain is heavily reliant on doughnuts. But as Dunkin' Donuts, Starbucks (SBUX), and McDonald's strengthen their positions as "destination venues," Krispy is competing from a position of weakness.