Today, many Wall Street analysts compare Krispy Kreme to McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX), due to their similar focus on coffee and desserts. This is a problem that Krispy Kreme Doughnuts (NYSE:KKD) CEO Jim Morgan recently acknowledged, noting that shifting more of his company’s top line to beverages would help boost the company’s bottom line. “We are 87% donuts, and unfortunately 13% beverage,” he stated. “If we could get to 80% donuts and 20% coffee, that would be game-changing for us in terms of profitability.”
Sticking with the basics
In response, Krispy Kreme is offering more beverages, such as its new summer drinks, to be identified as both a coffee and beverage house as well as a doughnut shop. However, Morgan has stated that he doesn’t plan to completely emphasize Krispy Kreme Doughnuts (NYSE:KKD)’s beverages to remain competitive with McDonald’s and Starbucks Corporation (NASDAQ:SBUX). Morgan’s main philosophy is grounded in the core business that has defined the company for 75 years — its “Original Glazed Doughnuts.” He doesn’t seem particularly worried by Starbucks’ wider variety of drinks and pastries, or McDonald’s Corporation (NYSE:MCD)constantly shifting McCafé offerings.
For now, Morgan’s simpler strategy appears to be paying off. Last quarter, McDonald’s reported a same-stores sales decline of 1%, while Starbucks Corporation (NASDAQ:SBUX) reported a 6% gain. This could indicate that Krispy Kreme’s focus on a simple menu of doughnuts and coffee can generate more sales growth than more diverse offerings from McDonald’s and Starbucks.
The Foolish bottom line
While Krispy Kreme Doughnuts (NYSE:KKD), Dunkin’ Donuts, McDonald’s Corporation (NYSE:MCD), and Starbucks Corporation (NASDAQ:SBUX) are all following different growth strategies, we should compare their fundamentals to understand which stock is likely to keep rising.
Forward P/E | Price to Sales (ttm) | Return on Equity | Debt to Equity | Profit Margin | Qty. Revenue Growth (y-o-y) | Qty. Earnings Growth (y-o-y) | |
Krispy Kreme | 22.78 | 2.59 | 9.04% | 9.44 | 5.08% | 11.20% | 32.70% |
Dunkin’ Brands | 21.94 | 6.32 | 19.24% | 532.05 | 15.90% | 6.20% | -8.30% |
Starbucks | 23.94 | 3.37 | 28.97% | 10.32 | 10.80% | 11.30% | 26.00% |
McDonald’s | 15.58 | 3.50 | 36.59% | 84.04 | 19.79% | 0.90% | 0.30% |
Advantage | McDonald’s | Krispy Kreme | McDonald’s | Krispy Kreme | McDonald’s | Starbucks | Krispy Kreme |
Source: Yahoo Finance, June 3, 2013
Although each of these three companies has specific strengths, Krispy Kreme is not terribly expensive from a fundamental perspective, despite its year-long rally. The company also boasts the lowest debt and strongest year-on-year bottom line growth. It’s clear that Krispy Kreme Doughnuts (NYSE:KKD) has left its dark days of over-expansion and accounting problems far behind it.
The new Krispy Kreme is a more robust business than before, and this time, it is well positioned to hold its own against its much larger rivals. Krispy Kreme has now reported 18 consecutive quarters of rising same-store sales at its company stores. I believe that this trend will continue throughout the rest of the year, as it rebuilds its brand through new social media initiatives, more beverage offerings, and a slow but steady expansion into new markets.
Leo Sun owns shares of Starbucks. The Motley Fool recommends McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX). The Motley Fool owns shares of McDonald’s and Starbucks.
The article Will Krispy Kreme’s Sugar Rush Last? originally appeared on Fool.com.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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