Market Overview

Which Restaurant Could Be a Delicious Addition to Your Portfolio?

Who doesn't love donuts? Every once in a while, I enjoy stopping by a store, picking up a donut for myself or even bringing a box to share with the office. Stores like Dunkin Donuts (NASDAQ: DNKN) and Krispy Kreme Donuts (NYSE: KKD) are extremely popular for purchasing donuts and coffee, but are either of them interesting investments? In a troubling global economy, one of the few industries that will not be extremely volatile is the food services industry.

Certain restaurants may not be appropriate for investors, because they have become extremely mature and represent the luxurious facet of consumer discretionary spending. However, companies like Krispy Kreme Donuts may interesting to consider. The primary reason is that its product offerings are very cheap and easily available. Millions of Americans drink coffee in the morning, and many of them enjoy complementing their drinks with a donut.

What should investors consider when looking at Krispy Kreme? The company is in the small-cap range, with a market capitalization of about $484.4 million. It operates in 37 states and in several nations worldwide. It controls its own supply chain, distribution channels, and franchising. What are the pros and cons for the company, based on historical performance?

Over the last several quarters, Krispy Kreme's revenues have been fairly volatile. Ranging from $88 million to $105 million, Krispy Kreme's experience appears to be following the overall health of the equity markets. As mentioned earlier, it is not as volatile as other restaurant chains that are more tied to luxury spending. Along with changing revenues, cost of goods sold changed and so did operating expenses. It is always good to see companies that are able to morph their activities in order to maintain their bottom line. In the last two quarters of 2011, Krispy Kreme was able to maintain a net income of $9 million. As expected, the company was able to maintain an EPS of $0.13 for each of the quarters as well.

As we have all heard before, cash is king. This age-old adage Looking at the cash flow from operations, 2011 cash flows seems like they will be in line to beat the cash flows in 2010. Over the last few quarters, cash flows have been volatile, but primarily due to non-cash charges like depreciation and amortization. Net income figures have continuously increased, and despite the frequent changes in working capital, cash seems like it will continue its positive uptrend. Apart from operational cash flows, capital expenditures and acquisitions have eaten up a bit of cash for the company. However, it seems likely that these cash outflows are simply attempts to maintain growth and increase outreach. Lastly, Krispy Kreme has been paying back debt diligently. In the last five quarters, it only issued debt once: in the first quarter of 2011. It has also not issued equity, therefore preventing equity dilution of all shareholders. Ultimately, the net change in cash has consistently been positive.

As expected, currents assets like cash, receivables, and inventories have increased over the last multiple quarters. This appears to represent growth rather than an inability to turnover assets and receive money from debtors. What may counter this observation is that property, plant, and equipment have stayed stagnant over the last several quarters. This may mean that the company has not increased its store presence in the last year or so. However, it does not tell us if franchisees increased, decreased, or stayed the same. Liabilities such as payables increased in the short-term, but the company has been able to pay short-term and long-term debt. This may mean that Krispy Kreme is trying to hoard cash in the short-term or that it is focusing on paying down certain debt first. Lastly, the company has been able to increase retained earnings over time, meaning that it is progressively increasing its shareholders' value.

Krispy Kreme may or may not be a delicious addition to investors' portfolios. Depending on what investors believe to be their future outlook, Krispy Kreme could be an interesting investment in restaurants. Investors should learn more about the company's outreach, its future plans for expansion, and the macroeconomic outlook in the industry.

Krispy Kreme Donuts is currently trading at about $7.30, up almost 3.6% for the year.

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