Poking Holes in Krispy Kreme, and Bursting Topps’ Bubble

Krispy Kreme Doughnuts (KREM)

(Jim: Don’t buy)

(Mike: Don’t buy)

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Jim: This Southern-based doughnut chain recently opened its first stores in Southern California, Mike, and by the attendant publicity, you’d have thought the Beatles were reuniting for a concert and the Rolling Stones were the opening act.

Mike: Have you ever tried a Krispy Kreme doughnut?

Jim: I have and, maybe it’s just me, but I don’t see what the excitement is about. They’re fine doughnuts and all, but do they deserve the cult following they enjoy?

Mike: Well, let me start by saying that I can’t think of a more appropriate stock to review today, because everyone on Wall Street is looking for a morsel of comfort food right now.

Jim: And they’re looking for a company that makes money, so Krispy Kreme fits that bill, too. That’s why Krispy Kreme, when it went public at $21 a share April 5, got the kind of publicity usually reserves for newly minted Internet stocks. It’s also why the stock now trades at more than $40 a share.

Mike: By the way, I’ve never tried a Krispy Kreme, because it’s simply doesn’t fit into my high-cholesterol diet. But I must say something: I find the name Krispy Kreme, for a doughnut chain, to be nothing short of repulsive.

Jim: Really?

Mike: Yeah. For me the name evokes the image of a jug of milk that’s been left out too long and gets that hard shell over it, going rancid as you look at it. Somehow it just doesn’t say fresh doughnuts to me.

Jim: Well, like I said, I’m not sure you’ve missed much by not having one.

Mike: Look, obviously Wall Street loves something that’s hot, moist and sticky. But this is the quintessential story stock. And the story is: Gee, cops like ‘em, coeds like ‘em, people on the street like ‘em, so they must be great. But does it really make sense to buy this stock at 64 times its ’99 earnings per share when the food industry overall has a price-earnings multiple of something like 22?

Jim: No, which is just one reason I wouldn’t buy the stock.

Mike: Same here. Now I’ll ask another question: Krispy Kreme is going national and now has around 150 shops in 27 states. So, if you’re Dunkin’ Donuts, are you scared?

Jim: Somewhat. It is one more competitor.

Mike: You are? Dunkin’ Donuts has 5,000 stores worldwide! That’s not all: Remember when bagel shops--which also are competitors--were all the rage? Now that fad is gone and many of those bagel outfits are shutting down.

Jim: Plus, there’s an infinite number of mom-and-pop doughnut shops on every corner. Defies the laws of physics.

Mike: I thought Starbucks had repealed those laws.

Jim: So not only is there competition everywhere you look, there’s also the danger that always comes when a regional chain like Krispy Kreme expands nationwide. In other words, it runs the big risk of becoming just another doughnut house.

Mike: Exactly. Does the name Coors mean anything to you?

Jim: I hear you. For a long time, Coors, based in Golden, Colo., was mostly sold in the West and had its own cult following. But once it went national. . . .

Mike: Everyone found out that there wasn’t that much to be excited about.

Jim: All I’m saying is that when we add up all these factors, Krispy Kreme’s stock to me is simply way overpriced.

Mike: I’ve seen Krispy Kreme’s chief executive, Scott Livengood, talk about the company’s IPO. And when he’s asked about what the company will do with the cash, he reminds me a little of that famous interview with Ted Kennedy when he was asked why he wanted to be president. The fact is, there’s no real answer.

Jim: It’s for Krispy Kreme’s expansion, in part.

Mike: Great, so if it doubles its stores every year, in about a millennium Krispy Kreme will have as many as the big doughnut chains. But, as you said, all that does is raise the prospect that Krispy Kreme’s popularity will get badly diluted.

Jim: I will give Krispy Kreme this: In its fiscal year ended Jan. 30, it earned a handsome 16 cents per dollar of sales after taxes, on sales of $220 million. That’s not bad while you’re spending cash for expansion at the same time.

Mike: Even so, I see limited potential here. Sooner or later, the fascination is going to ebb, Americans are going to go back to looking more critically at their waistlines and Krispy Kreme’s popularity is going to look as alluring as a month-old Noah’s Bagel. Then you’ll just be left with sticky hands that you can smear on your Krispy Kreme stock certificates so you can paste them on the wall.

Jim: One thing I will note, though. Even when the stock market took that drubbing in early April, Krispy Kreme’s stock held up quite well.

Mike: I noticed that, too. But it’s not enough for me to bite.

Topps (TOPP)

(Jim: Don’t buy)

(Mike: Don’t buy)

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Jim: Given Krispy Kreme and this stock, Topps, we’re really off the high-tech Internet bandwagon this week, wouldn’t you say?

Mike: We should subtitle this column, “Everything Your Local Dentist Wants to Know.” Because Topps not only makes sports and entertainment trading cards, it’s also a big maker of lollipops and other candies. Bazooka bubble gum is one of its brands.

Jim: But talk about a story company right now. Topps is thriving because it’s producing trading cards based on the Pokemon cartoon characters that are all the rage among the preteen set. And I put the emphasis on “right now.”

Mike: Ah, you’re getting to the heart of the matter. Fact is, Wall Street is less concerned with right now than with what’s coming, and that’s evident by Topps’ lackluster stock price.

Jim: Yes, here’s Topps currently turning a handsome profit and its stock has tumbled 25% so far this year to under $8 a share.

Mike: Plus, it’s got one of the cleanest balance sheets I’ve seen.

Jim: Zero long-term debt, I know. I also like the company’s strategic balance. Its sports and other mainstream trading cards, its candy group and its so-called entertainment unit that makes the Pokemon cards are all kicking in about one-third of Topps’ sales, which were $374 million in its fiscal year ended Feb. 26.

Mike: But the central question, again, is whether Pokemon can hang on long enough for anyone to make money on this stock.

Jim: The answer to that is no--and I wouldn’t buy it--but it’s only one of two questions about Topps.

Mike: The other?

Jim: Well, Topps also can look forward to a second Pokemon movie this summer, along with a live-action film based on the popular X-Men comic-book heroes. It will be churning out cards for both. But will Wall Street pay any attention?

Mike: In this business, you’re on a treadmill. One hit dies off and you better be ready with the next one. Now recently, Topps, to its credit, has been ready to exploit the next fad. I know, Jim, because I’ve asked some industry experts.

Jim: Meaning your kids?

Mike: Yes. And like other kids their age, they were fanatic Pokemon fans.

Jim: That’s redundant.

Mike: It is. But they’ve watched the Pokemon TV show, seen the movie, played the video game and collected the cards. And from the last report, they’re still interested--but a lot less so. So it’s clear to me that the Pokemon fad in this country is starting a long, slow fade into oblivion.

Jim: But what about the X-Men factor? It’s been a popular series for a long time.

Mike: Even if that movie is a hit, can you really build a strong trading card franchise around it for any length of time? I don’t think so.

Jim: Well, it’s a different situation. The first Pokemon movie came out after Topps’ cards were around but, with X-Men, it’s going to be the other way around.

Mike: Yes, and the Pokemon movie was the endgame. The cards took off after the TV show had been established as hugely popular.

Jim: Point is, this stock just can’t gather any momentum on Wall Street. And to make matters worse, it’s core sports trading-card business . . .

Mike: Is really flat.

Jim: Not flat, it’s dwindling, and Topps has said it expects the business to stay soft all year. I’m not surprised. If you look at any store that sells these cards, the competition is ferocious.

Mike: I must admit I was on the fence about this stock, but no more. I wouldn’t buy it either. Pokemon is fading in the U.S., although overseas it seems to be taking off and that might give Topps a bit of a run. Maybe X-Men will be the next hot item for the company, maybe not.

Jim: So when you look long term, you wonder what Topps’ future will be.

Mike: I do. Right now, it’s crossing your fingers and hoping it catches the next big fad. But it’s not guaranteed.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).