The Tragedy of Krispy Kreme

There’s a truism among investors that you should invest in what you know, understand, and like. It’s a common sense strategy: You spot something new. It’s special. It’s useful or innovative. It’s cool and affordable. Let me buy some of that!

The response to that can be summed up in just two words: Krispy Kreme (KKD).

Krispy Kreme had been a popular doughnut chain in the South since 1937, but remained unknown to the rest of us until about 1996. That’s when the first Krispy Kreme popped up in New York City, on West 23rd Street.

Believe it or not, the town went nuts.

Doughnuts are a major food group in New York, where people eat many of their meals while walking. These fabulous new doughnuts were favorably reviewed by local newspapers. Lines formed when the “Hot Doughnuts” sign was lit. The two young men who owned the franchise were extolled as modern entrepreneurs.

I lived one block away from the store, and thought Krispy Kremes were a much better thing than sliced bread. I was soon as knowledgeable about the product as any potential investor could be.

Krispy Kreme went public in 2000. Luckily, by then I was living out of the country and didn’t hear about it.

After all, what could go wrong? Just about everything.

Krispy Kreme stock hit a high of about $49 in 2003. Then it started on a long downward spiral, losing about 90% of its value.

This company had problems that had nothing to do with its doughnut recipe.

It over-expanded and took on crushing debt. There were allegations of management misconduct. Some franchises went bankrupt. Competition was fierce in the cheap eats category. More people started consuming healthy foods.

In short, Krispy Kreme managed to lose money selling something that is both cheap and delicious.

Now the company is under new management and seems to be on a bit of a roll.

Since February, when its share price hovered around $1, it has climbed steadily, topping $4 a share before settling at $3.49 as of October 8, 2009. It has fewer and smaller stores, but is parking them in strategic locations around the world.