Krispy Kreme Is Back

Krispy Kreme Doughnuts Inc.  (NYSE: KKD), which until recently was seen by investors as being staler than a day-old crueller, is on the verge of a remarkable comeback.

The maker of doughy, delicious and fattening treats today reported better-than-expected second quarter results, earning $2.2 million, or 3 cents per share, compared to a net loss of $157,000, or o cents, in the second quarter of last year. Revenue for the three-month period ended Aug. 1  increased 6.3% to $87.9 million.  Wall Street expectations were for  a break-even quarter on $84.4 million in revenue.

“Our financial results improved from the year ago period, as we realized revenue growth in all business segments, increased our consolidated operating income by roughly half, and delivered positive net income for the third consecutive quarter,” said CEO Jim Morgan in the earnings press release.

The company, which also posted a remarkable 5.7 percent gain in same-store sales,  sees fiscal 2011 adjusted operating income between $13 million and $17 million, an increase from a prediction it made in June of between $11 million and $15 million.

These results are not surprising.  Even in tough economic times people want to splurge on themselves and there are fewer things cheaper and more decadent than a donut.  It’s the same idea behind the continued success of McDonald’s Corp.  (NYSE:MCD).   Campbell Soup Co.  (NYSE: CPB), which today gave a disappointing outlook,  is nonetheless uo more than 6 percent this year. Wall Street, though, does not expect empty calories from Krispy Kreme.  Shares of the Winston-Salem, North Carolina company are up more than 49 percent this year, surpassing the 19.6 percent gain enjoyed by the Golden Arches.  Most analysts see Krispy Kreme as a “buy.”

The stock has surged since it hit $7.15 in 2005 after it admitted that it had inflated profits by a whopping 17 percent from 2001 to 2004.  In August 2003, the stock reached a fever pitch level of $50, becoming one of the biggest cult stocks of its day.  A special investigation into the company summed it up well:

“While some may see the accounting errors discussed in our summary as relatively small in magnitude, they were critical in a corporate culture driven by a narrowly focused goal of exceeding projected earnings by a penny (per share) each quarter.”

The report placed the blame on CEO Scott Livengood, one of the best brand cheerleaders corporate America has ever seen, and his cronies.  In 2004, he told CNN that his biggest mistake was “underestimating the popularity of Krispy Kreme when we began to expand outside the southeastern United States.”  He also blamed the popularity of the low-carb Atkins diet and his Chief Operating Officer John Tate for his company’s woes.  The SEC thought that the company’s accounting was half-baked.

MarketWatch columnist Herb Greenberg crowned Livengood as the Worst CEO of 2004 through his destruction of shareholder value and “greed, questionable dealings with insiders and falling into the trap of believing his own press clippings rather than paying attention to the details of the business.”

Krispy Kreme has wisely left Livengood’s success at all costs philosophy behind it.  Now, it spends less time making negative headlines and more time making donuts.