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His Doughnut Stores Are His "Children"

Krispy Kreme has been the sugar-coated star of the restaurant sector. Its doughnuts sell like, well, hot cakes, and its stock has outperformed nearly every other in the market since the outfit's IPO in April, 2000 (see BW Online, 12/09/02, "The KREMEY Warning for Krispy Kreme").

Not even the most irresistible treat stays fresh forever, however, and the remarkable earnings growth strikes many as unsustainable. While Krispy Kreme (KKD) posted 64.5% earnings growth in fiscal 2002 (which ended last January), it's expected to see 45% profit growth in fiscal 2003, which ends next month, and 33% growth in fiscal 2004. Yet the stock has been climbing in recent weeks, from a low of $27.40 in July to $37 on Dec. 6.

BusinessWeek Online's David Shook spoke to Krispy Kreme CEO Scott Livengood on Dec. 6. Livengood, who joined the company 25 years ago in Winston-Salem, N.C., and has been chief exec since 1997, talked about the ability to continue growing, credibility on Wall Street, and the chain's improved coffee. Following are edited excerpts of their conversation:

Q: What was your first job at Krispy Kreme? And what was the company like when you joined in 1977?

A: My first job was as a trainee in human resources. It was a totally different cultural environment when I started. We were well-known in the South, but we were a regional company, owned by Beatrice Foods. We had very little autonomy. The overall corporate strategy was a moving target. It took many years before we radically changed to a national consumer-brand strategy.

Q: The company has outperformed nearly everybody's expectations. How do you deal with the widely held view that the stock is overvalued?

A: I don't address it. But I will say that we've been at this for a while, and I would hope that we've earned some credibility in the investment community. We've been very consistent each year in delivering more than what we've said we would accomplish.

Q: Would you compare your company's experiences and position in the marketplace to any other?

A: Yes, Starbucks (SBUX). We're both specialty retailers. We both took a product that had been around for a long time and redefined and repositioned it, with strong results.

Q: You have just over 250 stores in the U.S. Do you think there's room for hundreds more -- or thousands more?

A: We've talked about hundreds more. We've said there's potential for 750 stores in the U.S. and Canada. Beyond that, we've announced initiatives internationally. This fall, we said we'd begin looking at smaller stores, as well as U.S. markets that we didn't consider before.

And we've said we can reduce the cost of developing each store from about $1.4 million to just over $1 million, using less square footage, smarter engineering, and economies of scale in our purchasing.

Q: How do you know that people in foreign countries will love Krispy Kreme doughnuts?

A: I don't know it. But I feel strongly that we can be successful globally. Anecdotally, we see people from all walks of life and different nationalities coming into our stores and waxing rhapsodic about the doughnuts. Our product doesn't really skew toward any particular demographic group. We're a reflection of America, a universal product. It's a pretty simple experience.

Q: Where are the highest-grossing stores?

A: I love every store. They're my children. But in terms of financial success, the markets that have really set records most recently include Toronto, Seattle, and Minneapolis.

Q: Any thought to expanding the product line, or are you happy with keeping it simple?

A: We have expanded to include a premium drip-brewed coffee. We acquired a coffee-roasting business and have built a coffee-roasting factory. We're buying beans from the top regions in the world. We already have our distribution in place, and we're making weekly deliveries.

Q: How many doughnuts do you eat a week?

A: It'll vary week by week. I don't eat one every day, but I may eat three in a day, which I did yesterday. My advice is to eat everything in good measure. If you eat a doughnut or two a day, you've probably earned it.

Q: What's your favorite kind?

A: Mine is just a hot original glazed. It reminds me of my childhood, makes me warm all over.

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