Retail Investors Looking to Get Fat on the Krispy Kreme IPO

One IPO this spring is sure to have Homer Simpson's blessing.

Krispy Kreme, a Winston-Salem, N.C., purveyor of hot-off-the-conveyor belt doughnuts, is scheduled to raise up to $60 million next month in an offering of 3 million shares. The deal is being backed by J.P. Morgan, Deutsche Banc Alex. Brown, Dain Rauscher Wessels and Scott & Stringfellow.

	The entrance to the temple of doughnut nirvana
	Source: Catherine Valenti

Fans of Krispy Kreme doughnuts are legion, which should mean the deal has some retail backing. But Wall Streeters aren't wholly sanguine about the stock, saying Krispy Kreme may find itself lumped in with the poorly performing quick-service restaurant sector. They add that Krispy Kreme will enter a market in which companies that aren't dot-coms haven't fared well compared with highly sought-after tech IPOs.

'Because They Can'

The 63-year-old company declined to comment for this article, citing quiet-period concerns. But in its favor, it is entering an IPO market as hot as one of its doughnuts.

"Let's face it, why are they going public? Because they can," says Kevin Callaghan, managing director at Berkshire Partners, a Boston-based private equity firm that owns Fresh Start Bakeries, a McDonald's (MCD) supplier. "The public market has a fascination with tech and Internet stocks these days. But at the same time, they also continue to like things that they can understand and relate to."

But it seems that in the IPO market, familiarity breeds contempt. Nontech IPOs with household names such as Martha Stewart Living Omnimedia (MSO), the World Wrestling Federation (WWFE) and even United Parcel Service (UPS) are all trading more than 20% off their first-day closes, despite solid results and operating histories longer than the lifespan of a typical dot-com fruit fly.

That suggests brands, while appealing to consumers, mean little to investors searching for the next hot tech stock. "Investors could care less for brand," says IPO analyst Tom Taulli of internet.com (INTM).

Expanding in Your Stomach

The original glazed gleam in the window
Source: Catherine Valenti

Founded in 1937 and long a mainstay in the South, Krispy Kreme has expanded in recent years to the Northeast and West. Today, Krispy Kreme operates 137 shops in 26 states -- a drop in the bucket compared with rival Dunkin' Donuts' 3,500 U.S. shops. Still, its hot, glazed doughnuts have developed an almost cultlike following, even earning a spot in the Smithsonian's National Museum of American History in 1997.

The company is profitable, racking up $6 million in net income on $220 million in revenue for the year ended Jan. 30, 2000. But although sales have increased since 1995, earnings haven't shown the same consistency, and margins remain thin.

That instills doubt on the Street. "With a very thin bottom line, pressure on commodity and labor costs, and Wall Street expectations, I just wonder how they'll cope with the demands for consistent quarterly growth," says Walter Stackow, senior research analyst at the Henssler Equity Fund. Stackow expects the restaurant industry to grow around 2% to 2.5% this year, a fraction of the growth seen in the technology sector.

And the company risks losing its novelty appeal when it expands. "There's a fine line between being really special -- having an almost cult following -- and being mainstream," says Ron Paul, president of Technomic, a Chicago restaurant consulting firm. The firm hasn't consulted for Krispy Kreme.

Not Fast Enough?

Krispy Kreme also faces a challenge in going public when the quick-service restaurant industry is struggling. "They have a differentiated product, but their biggest challenge is not to be valued as a restaurant company, which aren't being valued" richly, says Paul. Rubio's (RUBO), a fish-taco store that went public on May 20, is 43% below its IPO price. McDonald's, the industry giant, is off some 25% this year and has lagged behind broader-market gains in recent years.

"Is this Starbucks (SBUX) or is this Boston Chicken?" asks Callaghan, referring to Boston Chicken, which came public in a hot IPO in 1993 but failed to deliver on its early billings. The company filed for bankruptcy protection in 1998 and subsequently sold its assets to McDonald's.

Regardless of whether the Street embraces Krispy Kreme, the company still makes a killer doughnut. "It doesn't eat like anything you've ever eaten before," says Paul. Just ask Homer Simpson.

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