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Analyst: Krispy Kreme prospects getting sweeter

An analyst with Roth Capital Partners says Krispy Kreme Doughnuts may have a foot on the road to recovery, crediting the company’s planned introduction of a new coffee platform and efforts to bolster sales during the lunchtime daypart.

Anton Brenner also wrote recently that Krispy Kreme is focused on improving store margins and developing a new set of international and domestic expansion plans.

“We continue to believe that Krispy Kreme is at an early stage in its turnaround,” Brenner wrote.

RELATED: CNBC: Krispy Kreme vs. Dunkin' Donuts

The Winston-Salem, N.C.-based chain, which operates or franchises 652 locations, has been struggling to reverse declining sales and profitability trends.

Revenues for the doughnut brand have declined steadily over the past several years, falling to $347 million in fiscal year 2010. In 2011, however, Krispy Kreme managed to reverse the downward momentum when it reported revenues of $362 million.

Brenner outlined several areas in which Krispy Kreme is attempting to make improvements:

Coffee. Coffee sales account for only 4 percent of Krispy Kreme’s overall sales, but a new coffee program set for rollout around Labor Day is expected to increase coffee sales to 10 percent.

“It seems ridiculous that coffee accounts for only 4 percent of sales, with only one out of 10 customers ordering it,” Brenner wrote. “Management attributes this to the fact that it has never marketed or promoted coffee, and store crews have not been encouraged to offer it to customers. Margins on coffee generally are high, although that is not the case currently for Krispy Kreme because waste is high [coffee is thrown out because of the lack of sales].”

Dayparts. Krispy Kreme is seeking to boost sales at lunch. The busiest dayparts in Krispy Kreme stores are 6 a.m. to 11 a.m., which accounts for 34 percent of sales; and 6 p.m. to 11 p.m., which generates 28 percent of sales. The slowest daypart, however, is lunch, from 11 a.m. to 2 p.m., which accounts for 13 percent of sales.

“So, optimally, the stores should be fully staffed in the morning and evening, with a smaller crew present at mid-day,” Brenner wrote. “The problem is that approximately 70 percent of store personnel are full-time employees and only 30 percent are part time. Ideally, this proportion should be reversed, but many employees in the company's older stores have been on the job for many years and such a change in schedule is not easily accomplished, although we do expect improved scheduling to be implemented over the next several years.”

Management is looking to add lunch products such as pocket sandwiches or pull-apart baked items and considering new savory items, he wrote.

International. Brenner said that Krispy Kreme’s rate of decline in international same-store sales has slowed in recent quarters as the pace of its international store expansion has eased. But “Krispy Kreme likely will accelerate expansion beginning in 2012, as the company begins to franchise Continental Europe, Latin America, India and China,” he wrote.

Sales declined for international franchisees during fiscal 2011, to 8.8 percent. That decrease came on the heels of a 24.2-percent decrease in fiscal 2010, 23.4-percent drop in fiscal 2009 and 11.0-percent dip in fiscal 2008.

Japan. Brenner said sales in Japan dropped more than 30 percent, but he noted the tsunami effect was not the major factor. Brenner said there are only 26 Krispy Kreme shops in Japan, yet it is one of the company's five largest international markets in revenues. Average weekly sales of many new stores in Japan have been close to $300,000 during the initial honeymoon period, with two- to three-hour lines outside the stores.

“After a couple of years, average weekly sales for many stores have subsided to approximately $70,000, which still is twice as large as the average U.S. factory store retail business,” Brenner wrote.

Domestic scene. The biggest opportunity for margin improvement lies with company-operated stores and an obvious target for improvement is the off-premise business, he said. Profitability here declined steadily over the past decade as the company expanded geographically, building huge 4,500-square-foot factory stores, in part to service off-premise accounts.

“The off-premise business is problematic, with a number of competitive products on the shelves and pricing is an issue,” Brenner said. “A fleet of trucks and drivers must be maintained, and rising fuel costs have hurt margins. In addition, with a one-day shelf life, 30 percent of deliveries come back as stales and are tossed.”

Brenner noted, “Off-premise profitability has improved over the past two years as a number of unprofitable accounts have been dropped, and we believe that in fiscal 2011 this business was nominally profitable.”

Neither Brenner nor Krispy Kreme spokesman Brian Little were available for comment Wednesday.

Contact Alan Snel at [email protected].
Follow him on Twitter: @AlanSnelNRN

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