2013 has been the year of the doughnut. The deep-fried treats have been rediscovered by a hungry nation looking to start its day with a tall cup of coffee and 300 calorie sugar bomb. In the last six months doughnut fever has expanded around the globe as corporations rush to serve the sudden hunger for high-end pastry. Last summer in New York customers were waiting in line all night to get their hands on cronuts. Less than two months later Dunkin Donuts was selling knock-offs in its South Korean stores. There seems to be no end in sight. History suggests that’s exactly why we should be worried.
Doughnut fever is global but Winston-Salem, North Carolina based Krispy-Kreme (KKD) lies at the heart, or stomach of the craze. It’s a familiar spot for a 75 year old company with a Zelig-like knack for capturing the zeitgist of American culture. In 2000 Krispy Kreme capitalized on the stock market bubble by going public just three weeks after the NASDAQ peaked. The stock rocketed up 76% on its first day of trading. Three years later shares hit their all-time high of $49.75. Less than a year after that the company found itself in trouble with the SEC over some questionable accounting and soon thereafter reported its first quarterly loss, blaming its troubles on the low-carb craze then sweeping the nation. Five and a half years after hitting those highs shares of the company had fallen to embarrassing low of $1.15. By 2009 Krispy Kreme was on the brink of extinction. It’s Australian division went bankrupt and the continuing accounting scandal had derailed turnaround efforts in the US.
America had lost its taste for both high risk investments and high calorie doughnuts just as the broader market was taking a nose dive itself. Upon the bedrock of the March 2009 panic Krispy Kreme and the country would mount a legendary comeback. The only difference in the fortunes of Kripy Kreme and the U.S. over the last five years is the magnitude of the recovery. Where the U.S. continues to wrestle with the after effects of its brush with catastrophe, Krispy Kreme is back and better than ever.
The biggest cause might simply be that doughnuts came back into vogue as a food. According to the American Institute of Baking the top ten brands of doughnuts brought in $508.7 million in sales in 2009. Two years later that number was up to $563.4 million.
Since the darkest days of 2009 Krispy Kreme’s operating income has gone up 8x, the number of stores has overall has gone up by nearly 50% with international franchises rising from 204 at the end of 2008 to more than 500 today. The best reflection of how levered Krispy Kreme is the American sense of gluttony is measured by share price. Since March 2, 2009 the Dow Jones Industrial Average (^DJI) has rallied an impressive 150% while the shares of America’s favorite high-end Doughnut specialty shop have gained moved from $1.15 to $20; a gain of more than 1,600%.
That steep ascent is no doubt contributing to a 20% drop in the stock this week after the company warned that 2014 wouldn’t see the same sort of aggressive expansion to which investors have become accustomed over the last five years. Given the company’s track record, having 1/5th of its market cap shaved off in one day may be nothing to Krispy Kreme shareholders, but it might be cause for concern about the U.S. economy as a whole.
Doughnuts as economic indicator
To get a feel for just how levered to the luxury market Krispy Kreme is, its useful to compare it to competitor Dunkin Donuts. Dunkin is a chain of 2,000 square foot diners offering doughnuts, coffee and 30 different permutations of hot breakfast and lunch sandwiches. Krispy Kreme provides “doughnut theater.” Its stores are as big as 6,000 square feet. Krispy Kreme customers looking warm food that isn’t a fresh doughnut should be prepared to pour coffee on a muffin. Krispy Kreme does doughnuts. Everything else is an afterthought.
Krispy Kreme would argue otherwise but doughnuts are commodity. They can be purchased anywhere and, unless its fresh, one doughnut tastes pretty much like any other. There is nothing on earth more discretionary than taking in doughnut theater. If Americans are feeling flush we’ll spend a little extra time and go upscale but during hard times anything from the gas station will suffice. Last year the convenience store doughnut market contracted more than 2% while Krispy Kreme’s revenues rose 7.4%. The economic recovery may be slow but our tastes for luxury pastry is expanding rapidly (along with our waistlines).
Perhaps it’s healthy for Krispy Kreme to slow its growth rate and, ahem, digest the improvements made since 2009. Then again, as happened in 2000 and again in 2005, maybe Krispy Kreme and its specialty doughnuts are better forecasting tools than all the other economic data combined.