When Scott Livengood took his company public last year, he had two distinct advantages over most other issuers. First, he wasn’t a technology or internet company: shares in many of these companies were in near free fall, and would remain volatile for the rest of the year. But Krispy Kreme Doughnuts is a well-established company – it was founded in 1937 – with two distinct characteristics often missing from tech and internet companies: earnings and profits.
And the timing of the IPO, in retrospect, could not have been better. Just a month before the Nasdaq Composite index peaked at over 5000 points, but within a couple of weeks was dropping rapidly. Investors’ blind infatuation with internet and tech stocks was coming to an end. And here was a well-established franchise with solid revenues and a good growth story to tell to take up some of the slack.
That’s easy to say now, of course. At the time there was serious thought given to postponing the deal as the market seemed to be too volatile. The deal was priced on April 4, the worst day of the year for the equity markets. The Nasdaq, where Krispy was due to list, fell over 600 points that day, while the Dow Jones fell 500 points. “We had to consider postponing the offering,” says Mark Goodman, head of consumer investment banking at bookrunner Deutsche Banc Alex Brown. “But after talking to the company and some key investors we decided there was strong support for us to continue with the IPO.”
So that evening the deal was priced at $21, above the pricing range of $18 to $20, a confidence boost in itself. When it launched the following day it was an instant success, closing the day over 70% up at $37.
Some of the success must be due to the firm’s other advantage: investors could actually sample the product for themselves, and Livengood made sure that there were more than enough doughnuts to go round during the roadshows.
Krispy Kreme is based in Winston-Salem, North Carolina, former home to a more infamous US corporation, RJR Nabisco, which was finally broken up last year. Krispy Kreme has been through nothing like the public traumas of its old neighbour, however. Its biggest sin was not to develop its franchise sooner. At the time of the IPO the 63-year-old company had just 150 stores. But Livengood and his team have been putting an expansion plan into action, making it a growth story to appeal to investors. “We demonstrated to the IPO investors that whereas before 1995 they concentrated primarily on selling to other retail stores,” says Goodman. “Livengood and his team have been turning Krispy Kreme stores into exciting consumer experience and an important part of the business.”
And they have also been opening up more stores: over 50 new locations have sprung up since the IPO, often with customers queuing up overnight just to be the first to sample the new store’s offerings.
But the company did not go public to fund the expansion. “The company wanted to create a public currency for its franchisees, some of whom have held stock in the company for 20 years or more. The company also wanted to be able to pay down some of its debt,” says Goodman.
Since the IPO the stock has risen as high as $108, perhaps fuelled by its status as a safe stock, but now trades at around $65. A follow-on offering is being prepared by Deutsche for February.
