08.30.13

The Doughnut Economy’s Fat Profit

Americans are shunning soda and claim they want healthier fast-food options. But they’re still buying plenty of doughnuts and coffee.

Here’s a shocking headline: when it comes to fast food, Americans stick to what they know.

Krispy Kreme, the company famous for its eponymous glazed heart-attack-with-a-hole, on Friday was getting, um, creamed, by investors after missing Wall Street expectations for the second quarter. Analysts were expecting earnings of 16 cents a share, and Krispy Kreme came in at 14 cents a share. The company’s share price plummeted 11.3 percent in premarket trading on Friday, and traded up to 13 percent lower throughout the day.

And yet, Krispy Kreme, along with rivals Dunkin’ Donuts and Tim Hortons, has actually been killing it this year. Even with the recent plunge, Krispy Kreme’s stock price has doubled in 2013. As seen in the chart, the past three months has the company’s stock price outperforming its much bigger rivals. Canada’s Tim Hortons Inc. has a market capitalization of $8.29 billion, while Dunkin’ Donuts is worth $4.57 billion, and Krispy Kreme’s is $1.3 billion.

While Krispy Kreme’s profit may have dropped in the quarter, revenue grew over 10 percent to $112.7 million from $102.1 million the same quarter last year. And it’s not because Krispy Kreme has some crazy new doughnut-like product. Rather, it’s because more customers are coming into locations. In fact, at stores open at least a year, revenue was up 10 percent, meaning that in core locations, the brand is going strong.

Now, Krispy Kreme CEO James Morgan told CNBC Friday the company is looking into its own version of the cronut (a croissant-doughnut hybrid taking the world by storm), the success of the breakfast chains has largely come by staying true to their origins. All three have performed well year-to-date.

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Other fast-food chains are clamoring to appear healthy. But one look at Krispy Kreme’s homepage with its colossal chocolate-and-caramel-covered doughnuts staring back can tell you that the doughnut market isn’t going lean. 

And Dunkin’ Donuts, whose munchkins have long been a guilty pleasure, is planning to take on crunchy California—in large part because its in-store coffee bags are the No. 1 seller in the state. Tim Hortons, while it has far less cultural cachet, saw a year-over-year increase in profit of 14 percent in the second quarter.

The continued strength of these chains makes sense. In an era when incomes are barely budging, frugal customers are sticking to cheap basics that satisfy primordial cravings for sugar and fat. McDonald’s recently saw an uptick in sales not because of its latest salad, but rather because of the Big Mac.

The message is loud and clear: stay away from our doughnuts!