Late last week, Krispy Kreme Doughnuts (NYSE:KKD) reported strong first quarter results while raising its full year guidance. If you are not familiar with the iconic brand, Krispy Kreme is an international retailer of premium-quality sweet treats, including its signature hot Original Glazed doughnut. Since 1937, the company has developed and produced delicious doughnuts around the world. Today, Krispy Kreme Doughnuts (NYSE:KKD) is found in 22 countries, from the United States to Australia. In this article I would like to take a look at some highlights from the first quarter, as well as offer some insight going forward.
Highlights
During the quarter the company reported that same store sales increased by 11.2% year over year. This increase represents the 18th consecutive quarter the company was able to grow same store sales. In line with this growth, the company saw top line revenues increase by 11.2% to $120.6 million for the quarter. Adjusted net income rose 37% to $14.1 million,$0.20 per share, from $10.3 million,$0.14 per share, reported last year. The Chairman, President and Chief Executive Officer James H. Morgan attributed the recent success to the company’s global strength of brand as well as renewed dedication from management staff.
Growth Potential
Management has outlined a strategy going forward that should bode well for the long term growth prospects of the company. As of late, executives have launch a series of advertising campaigns in order to drive more consistent revenues throughout the day. When we think of doughnuts we think of breakfast, as the morning is the conventional home of the doughnut. The company is using a combination of new products and advertising to change this image in the eyes of consumers and make the doughnut an all-day snack option.
Similar to Dunkin Brands Group Inc (NASDAQ:DNKN), Krispy Kreme Doughnuts (NYSE:KKD) is working on developing innovative, perhaps unconventional, breakfast offerings for limited periods of time in order to generate higher ticket sales as well as to pull new consumers into their locations. This will be key for the company going forward as to sustain its long term growth rates. Being a monopolistically competitive market, doughnut companies must differentiate their products from competitors to ensure economic profits over the long term. Dunkin’ Brands has already proven to be successful with its launch of over 70 new products to market last year. Dunkin’ recently announced that over the next two years the company will be releasing and trying out over 100 new products in locations across the country. This innovation is key for both companies because it drives repeat business and consumer loyalty.
In the coming months, new beverage offerings will be released to complement the conventional food products. Up to this point, the company has lacked the beverage menu of its competitors. Should Krispy Kreme Doughnuts (NYSE:KKD) begin to offer beverages similar to Dunkin’, expect to see Dunkin’ lose some of its traffic as a result. In addition, Krispy Kreme Doughnuts (NYSE:KKD) should see rising profit margins as typically breakfast beverage offerings carry over 75% profit margins due to very low input costs. Falling coffee costs should continue to help beverage margins for the entire industry in applicable future.
Krispy Kreme Doughnuts (NYSE:KKD) has altered its expansion plans to include more efficient smaller outlets. The freestanding factory stops will have the full doughnut-making capability of traditional stores, but are substantially smaller than a traditional doughnut factory. The company plans to open 8 more of these locations later this year in addition to the 10 franchise agreements set to open as well. Internationally, the company is set to expand both in existing and new markets such as Taiwan and Moscow. There are currently 360 shops in the international pipeline, and management has made it clear it will make progress in Europe and South America in the years ahead.
Conclusion
Management has made substantial progress so far this year. Executives have developed a plan to grow market share and earnings for years to come through a combination of marketing campaigns, store growth, menu growth, and product innovation. I fully expect consumers will respond well to the new initiatives and the company will steal market share away from its main competitor Dunkin’ Brands.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Finding Strength in Doughnuts originally appeared on Fool.com.
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