Krispy Kreme Rolls Toward Better Days

After a series of disappointing quarters, Krispy Kreme (NYS: KKD) has been on a road to recovery lately. What's contributing to the long-awaited turnaround?

The doughnut maker's second-quarter net income jumped fourfold to $8.8 million -- driven in part by a one-time gain on the sale of its stake in its Mexican franchisee for $4.7 million -- and shares surged in response. Revenues for the second quarter rose to $98 million, from $87.9 million a year ago. Krispy Kreme also posted a modest increase in same-store sales and a sharp increase in franchise revenue. While domestic franchise revenues rose by 13.3%, to $2.3 million, international franchise revenue posted an exceptional 33.5% growth to $5.4 million, mainly driven by increased royalty income.

The company also managed to keep costs low. Selling and administration expenses fell slightly, and interest expenses took a 75% nosedive on the back of favorable lending rates and reduced debt.

Despite mounting fuel and commodity costs, Krispy Kreme managed to improve its gross profit margins slightly, from 12.3% to 12.5%. The company's supply-chain division that makes doughnut mixes and doughnut makers turned in a solid 12% revenue increase on the back of product-price increases.

The company is also looking at more liquidity, with a consistent increase in its cash and equivalents, from $21.2 million in the second quarter last year to an impressive $32.3 million. Long-term debt of $27.7 million is down about a third from year-ago levels.

Krispy Kreme has plenty of competition, though. If it wants to regain its past glory, it needs to catch up with rivals such as Dunkin' Brands (NAS: DNKN) and Starbucks (NAS: SBUX) . Krispy Kreme CEO Jim Morgan must breathe some life back into his still-somewhat-stale brand.

The Foolish bottom line
Krispy Kreme appears to be gaining momentum in terms of revenue and profitability. Given the trend over the last two quarters, I think the company will see brighter days ahead under Morgan's leadership. However, it will still have to grapple with Dunkin' and other competitors as it continues its turnaround.

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At the time thisarticle was published Fool contributor Keki Fatakia owns no shares in any companies mentioned in this article. The Motley Fool owns, andMotley Fool newsletter serviceshave recommended buying, shares of Starbucks. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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