(FORTUNE Magazine) – They begin lining up in the cold darkness, hours before the store opens. Some come wearing pajamas, some lug couches and TVs, others bring beer. And when dawn finally breaks and the ribbon is cut, the rabid customers bolt through the doors. Many of them, in what must be an anticipatory sugar rush, scream at the top of their lungs: "Krispy Kreme doughnuts, yowweeee!" Last year it happened in Fargo and Philadelphia and Amarillo and dozens of other cities in North America. This year it will happen in Boston, Sydney, and elsewhere. All for a simple doughnut. Consider that for a moment: With so many companies today desperate for customers, here is a business--remember, we're talking doughnuts--that has shrieking fanatics lining up around the block in the middle of the night to buy its product.

If you've never sampled a Krispy Kreme, we should get one thing straight: These doughnuts--particularly the original glazed served hot--are amazingly good. (My older daughter says they taste like glazed fluffy clouds.) They are loved equally by 5-year-olds and 75-year-olds. By whites, blacks, Asians, and Hispanics. By New Englanders and Southerners. By Californians and New Yorkers. (Never mind by junkies and cops.) I say only three types of people claim they don't like Krispy Kremes: nutritionists (your basic glazed has 200 calories and 12 grams of fat), Dunkin' Donuts franchisees, and compulsive liars. Fortunately for the company, that's not a large group.

Sure, Krispy Kreme is still relatively small. It has just 292 stores (Dunkin' Donuts has 3,600 in the U.S. alone) and last year did $492 million in sales and earned $33 million (that includes a one-time charge of $9 million). But, boy, does it have oomph. For starters, get a load of KKD's stock: up four times since its IPO three years ago. Net income per share has compounded at more than 45% since 1998. Significantly, Krispy Kreme's same-store sales are still growing by more than 11%. It has operating margins of nearly 16%--and growing. Systemwide revenues, which include sales by franchises, were $779 million last year and should cross $1 billion this year.

Then there's the power of the Krispy Kreme brand. No, it's not as recognizable as Coke or McDonald's--yet. Still, despite the fact that it is a fraction of the size of those icons and spends zilch on national advertising (more on that later), the company's retro red, white, and green logo is rapidly becoming part of American popular culture.

No question that Krispy Kreme is hot, but is the company for real? Is it a great American growth story or merely a culinary flash in the pan? Those are not idle questions. Not for the 7,000 folks who have been hired by the company over the past three years, nor for the companies that supply Krispy Kreme, nor for those who have invested in its yeasty stock. But the question of Krispy Kreme's viability touches on something more significant than all that. It has to do with the American dream. It may seem grimly amusing that in a time of economic pain, corporate scandals, and troubles overseas, this company should be growing so explosively. But the Krispy Kreme story is about far more than comfort food--the company's wild success in this hard environment is a tale of shrewdness, original thinking, and brinksmanship. The yarn is part Southern gothic--as in long (try six decades) and tortured, replete with heroes and even Yankee villains--and part sophisticated yet homey marketing that helped create the hottest brand in the land (think about it: Can you name a hotter one?).

The man behind Krispy Kreme's dramatic ascent is its CEO, Scott Livengood (pronounced Saturday Night Live-ngood). The unassuming Livengood, who grew up in Krispy Kreme's buttoned-down hometown of Winston-Salem, N.C., has been with the company for 26 years, coming up through its human resources department. During the long, strange trip that is Krispy Kreme, Livengood, 50, has seen just about everything. Yes, he's at the helm of a high-end growth company, but to hear him tell it, his job is actually easier now. "Running a public company growing like this--that's nothing," he says. "I'm enjoying myself." And who wouldn't be? Here is a guy coining money selling doughnuts.

It's a rainy June morning in Winston, and the Krispy Kreme faithful have gathered for the company's annual meeting in the Adam's Mark Hotel. The religious overtones are unmistakable. First of all we have doughnuts. And for lovers of this food group, KKD's annual meeting is sacred ground. There are hundreds of doughnuts laid out before you. All you can eat. (Easy! Easy! Pace yourself!) That may explain the unusual number of kids--who may or may not be shareholders--in attendance. Before long, Livengood marches through the company's financial vitals. Then the fun begins. Livengood gives a year's supply of doughnuts to the oldest and to the youngest attending shareholders, and to the shareholder who has traveled the farthest (from Finland). But he spends even more time talking about the company's charitable works and, in long citations, singles out six employees who've helped their churches, Little Leagues, and communities. To the folks at Krispy Kreme, this isn't just about doughnuts; it's a calling.

It's also an increasingly big business that is attracting some blue-chip names. "I did a lot of homework on Krispy Kreme," says the company's newest board member, Erskine Bowles, a North Carolina banker, onetime U.S. Senate candidate in the Tar Heel state, and President Clinton's former chief of staff. "I didn't want to join a company in my home state that was going to flop. But I've got to tell you, I've never seen another company like it. It's clean, it's conservative, and I love the margins." Ah, yes, those sweet, fat margins. In part they are a reflection of how the company is run. While Coke makes money selling syrup, and McDonald's is about selling real estate, Krispy Kreme's business model is something altogether different.

On the east side of Winston-Salem, in an old industrial neighborhood that looks as if it could be the setting for a Lucinda Williams video, sits the original Ivy Avenue Krispy Kreme mix plant. Walk in the door and a sweet floury powder greets your nose and covers your clothes in a fine dust. Then you hear that sound. Whomp! Whomp! Whomp! Every seven seconds a 50-pound brown paper sack is filled with Krispy Kreme doughnut mix. This is the heart of the Krispy Kreme Doughnut company. The bagged mix, of course, goes to Krispy Kreme's doughnut shops, where doughnuts are made on the premises. So what's in the bag, man? "I could tell you, but I'd have to shoot you," says Fred Mitchell, head of manufacturing. Now, Fred's an affable guy, but he doesn't look as if he's kidding. In fact, the secret formula is kept in a vault upstairs from the bagging room. Mitchell later shows me the recipe--from a distance. Last year the Ivy Avenue plant was running 24 hours at 110% capacity, but since the opening of the Effingham, Ill., plant, where a bag is filled in three seconds, the Winston plant is operating only 18 hours a day.

Krispy Kreme brings in money three ways. It makes 65% of its revenue selling doughnuts directly to the public through its 106 company-owned stores. Another 31% of its sales come from selling flour mix, doughnut-making machines, and sundry doughnut supplies to its 186 franchised stores. And it gets about 4% of its revenue from franchisee licenses and fees. Though the last category is tiny, it has operating margins (before corporate general and administrative costs) upwards of 74%, vs. the high teens for their bigger businesses. "This company has its act together," says Ron Paul, president of Technomic, a Chicago food consulting company. "All kinds of companies sell sweet products, but Krispy Kreme has been very smart about their operations and how they exploit their brand."

That may be true now, but for much of the company's 66-year history, "smart" and "Krispy Kreme" rarely appeared in the same sentence. The company began in the mid-1930s, when a doughnut maker named Vernon Rudolph bought a secret recipe for yeast doughnuts from a French pastry chef out of New Orleans. (Yeast doughnuts are the fluffy glazed concoctions. The denser varieties are cake doughnuts.) Rudolph moved from Paducah, Ky., to Nashville to Winston-Salem and on July 13, 1937 (go ahead and celebrate the day if you want to), he opened up a wholesale business selling to local grocery stores. If you know Krispy Kreme doughnuts, you know their wafting aroma is worth ten times more than any fancy Madison Avenue ad campaign. Folks walking by Rudolph's plant began pounding on his door asking whether they could buy hot doughnuts. So Rudolph cut a hole in the factory wall and sold 'em out on to the street. Voila! Krispy goes retail.

Over the next few decades Rudolph opened other stores--some his, some franchised--in the Carolinas and contiguous states, and a regional chain was born. The red, white, and green colors and the wide scripted logos were chosen, as well as the twin "walking KK" letters. (After a few cocktails Scott Livengood has been known to do a little dance number called the walking KKs, which is kind of a cross between Michael Jackson's moonwalk and the goose step.) As for the Krispy Kreme name itself, it just came on the recipe from the French chef, suggesting perhaps a language problem, since the doughnuts are neither crispy nor creamy. Most important, though, Krispy Kremes became the treat of choice for millions of Southern boys and girls. "I grew up eating Krispy Kreme doughnuts," singer and Atlanta native Gladys Knight told Rosie O'Donnell a while back. "My dad used to bring them to me at two in the morning. So now I bought stock ... so I gotta eat them."

Vernon Rudolph may have been a great doughnut man, but poke around Winston-Salem--where doughnuts are quickly replacing cigarettes as a major employer (hmm)--and you hear stories about the man. That he was a heavy drinker. And a little over the top. There's one legend about Rudolph's gathering all his store managers in the basement of the long since torn-down Robert E. Lee Hotel in downtown Winston-Salem and reveling in an extended night of drinking. After hours of this, and with the contingent bleary from smoke and drink, Rudolph called for the men to push aside the big table in the middle of the room. Then ripping his shirt off, he yelled, "Come on! Let's wrassle!" And so the doughnut men did.

Rudolph died in 1973. He had a family but apparently no estate planning, so Krispy Kreme would have to be sold. It took some time, but finally Beatrice, the Chicago conglomerate that owned everything from Tropicana orange juice to Samsonite luggage, bought the company in 1976. A year later young Scott Livengood, who worked for the Winston-Salem fire department after graduating from Chapel Hill, joined the company as a trainee in personnel. "I made $1,000 a month," says Livengood, "but what I remember more than that was Krispy Kreme was a mess."

Turns out that Krispy Kreme and Beatrice made one horrible marriage. Let Livengood count the ways: "Beatrice didn't care so much if the stores made money, as long as we sold doughnuts to supermarkets," he says. "They didn't want to invest in stores or grow the company, they just wanted cash. Then they changed the logo to a tacky '70s look. And they actually messed with the doughnut formula. They made it cheaper." And there were the dreaded days when the boys from Chicago came down to go over the numbers. "There was trauma around reporting time, that's for sure," says Livengood. Beatrice soon made it clear that Krispy Kreme was for sale. That was just fine with the franchisees, who were by this time livid.

Liggett & Myers looked at the company, and so did Bowles Hollowell, Erskine Bowles's old investment banking firm, but neither struck a deal. Finally, in 1982, the franchisees themselves, led by a man named Joe McAleer of Mobile, decided to acquire the company for $24 million in a leveraged buyout. (Today the McAleer family owns 6.3% of Krispy Kreme's stock, worth $129 million.) The buyout was a welcome change. But there was bad news too. Part of it was obvious: Krispy Kreme was saddled with a ton of debt. Another bugaboo was less clear at the time: McAleer's group of purchasing franchisees numbered 21, and they decided that all votes on significant company financial matters must be determined unanimously, instead of by a simple majority. The intentions were noble, but it was a structure that later drove Scott Livengood to the brink of insanity.

The very first move under McAleer was to revert to the original formula and traditional logo. Then they started tweaking. "A lot of people think that all our traditions go way, way back, but not all of them do," says company marketing chief Stan Parker. Take the famous HOT DOUGHNUTS NOW sign. Everybody knows that when a Krispy Kreme store flips on its neon HOT DOUGHNUTS NOW sign, the doughnuts are coming right off the line. Around 1980 the folks in Winston noticed sales at the Chattanooga store were going through the roof. HQ decided to send a man up to Chattanooga for a look-see. Turns out the store manager, Bob Glidden, had printed up an ordinary block sign that read HOT DOUGHNUTS NOW. But his customers complained that he kept the sign up all the time, even when his doughnuts weren't hot. So Glidden went down to J.C. Penney and bought a window shade. When he wasn't making doughnuts he pulled the shade closed; when he was cooking, he pulled open the blind and customers streamed in. Bingo, a sales tactic was born!

By the mid-1980s Joe McAleer retired to Mobile, and his son Mack took over. "One day Mack walked in my office," recalls Livengood, "and said, 'I need a partner to run this thing, and I want it to be you.'" So as the debt was gradually paid down, Mack McAleer and Livengood focused on bringing marketing to the fore of the company. Many a long night the two men brainstormed, margaritas in hand, while listening to Jimmy Buffett, who later became a franchisee (see box).

It was Mack who came up with the concept of "doughnut theater." They put the doughnut-making equipment in stores so that people could see the doughnuts cook for exactly 115 seconds in 365-degree vegetable shortening, after which the precious confections plow through a glaze waterfall before curving 180 degrees around to the counter so that a salesperson can pluck a hot one right off the line and hand it to the drooling customer. McAleer and Livengood also decided their doughnuts were too small for retail, so they increased their size by 40%. They made the Ivy Avenue mix plant more efficient and began to expand outside the Southeast. Then came the biggest switch. "One day Mack walked in my office again and said, 'I want to go back to running stores, and I want you to be the CEO,'" says Livengood.

In 1996 Krispy Kreme opened a store in New York City, and the company pulled off a publicity coup, delivering boxes and boxes of doughnuts to the Today Show (this occurred during Al Roker's binging days), garnering huge national exposure. To this day the company has no traditional media advertising budget. It's simply much cheaper and more effective to give away doughnuts. Before entering a new market, such as Boston at the end of June, Krispy Kreme inundates TV and radio stations and newspapers with free doughnuts.

The company also provides millions of doughnuts at a discount to charitable organizations, which then sell them for fundraising. That is partly a reflection of Livengood's leanings (the calling part)--which are Southern-religious-progressive, a la Jimmy Carter--and partly good business, as in great exposure. And speaking of exposure, it's hard to think of a brand that's been in more movies and TV shows--How to Lose a Guy in Ten Days, Bruce Almighty, The Sopranos, Will & Grace--than Krispy Kreme this decade. "This is a marketing company," says Bowles. "Scott Livengood once told me if a finance guy ever gets ahold of Krispy Kreme, sell every share."

By the late 1990s, Livengood had a major problem on his hands. Employees were clamoring for stock, while old franchisees wanted to sell out. "We looked at a private market for our stock like UPS had, but it was too clunky," he says. "We needed to go public." And here's where Joe McAleer's group of 21 franchisees and the unanimous voting protocol came back to haunt the company. Because of inheritances and gifting of stock, that group of 21 had mushroomed to 183 shareholders, each with veto power. "It was," says Livengood, grimacing, "an absolute nightmare."

The group of 183 included all sorts of people: old widows, young hotheads, ornery types, and even a few sensible folks. "Some were interested [in an IPO], some were skeptical, and some were downright hostile," recalls Livengood. "It was like getting a vote through the United Nations." By early 1999, after a year of lobbying and meetings and phone calls, Livengood finally had everyone onboard. Everyone except a single crusty stockholder with about 5,000 shares. Tension was building. Wall Street was expecting the IPO, the S-1 registration statement was drafted, and the road show was only months away. The whole offering would be torpedoed if the shareholder didn't move off the dime. "This was a person who was just saying no for the sake of saying no," Livengood says. "Finally I said, 'We are going to do this IPO whether he is with us or not,' and I just walked away." It was the ultimate game of chicken with the whole future of the company in the balance. Then the recalcitrant shareholder blinked. And Livengood never heard from him again.

Krispy Kreme's IPO in April 2000--right at the peak of the tech boom--has been a sweet success. The stock ended the first day of trading at $9.25, split adjusted, and today sells for $37 and change. As we mentioned, that's up four times, while the market is off some 30% during the same period. Not that there haven't been a few bumps in the road. The company got major grief for entering into a $35 million synthetic lease to fund the new Illinois mixing plant back in 2001. This off-balance-sheet financing raised eyebrows during the days of Enronitis, and the company terminated the lease a year later. There have also been governance problems, like partnerships that allowed company management to invest in its stores, not enough outside directors, and loans to managers. (Those issues have since been rectified.) And Livengood has been criticized for selling some $15 million of company stock since the IPO (he still owns about a million shares).

None of that has been a big concern to those who follow this company. Instead they ask two related questions: Is the stock too high? And where does the company go from here? "This is a stock that people will always say is too expensive," says John Glass, a restaurant analyst with CIBC in Boston, "but on a P/E basis, it's priced the same as peers like Starbucks and Panera Bread." On Glass's projected 2004 earnings of $1.15, shares of KKD have a P/E of 32. Starbucks has a P/E of 30 on Value Line's 2004 estimate. Significantly, though, Krispy Kreme's earnings per share are growing faster than Starbucks'. Yes, at some point growth will slow for Krispy Kreme, but probably not for a good while. "Sure there are some folks on Wall Street who want us to move faster, but we're not going to apologize for 25% [revenue] growth," says Krispy Kreme CFO Randy Casstevens. Glass of CIBC says the company could grow to 1,000 stores, and that doesn't include expansion outside the U.S., which could be significant. What about same-store sales growth? Can that stay above 10%? Not forever. But the company just rolled out its own branded roasted coffee in October. Right now coffee, a high-margin product, accounts for only 10% of sales. That number will probably rise, which down the road could lead to an intriguing run-in with Starbucks, whose founder Howard Shultz has given counsel to Livengood.

Whether you think Krispy Kreme is a buy or a sell at $27 or $37 or $57, here's the thing: Unless the fat police run riot across this land, Krispy Kreme is here to stay. It isn't some fly-by-night dot-com. There's 66 years of history here. It's a product that people not only love but understand. (Quick, what does InfoSpace do?) The world is always filled with unknowns, never more so than right now. With all that's wrong out there, sometimes it's easy to lose focus on the big picture. So take a second and ask yourself: Is the American dream still alive? Is Krispy Kreme for real? Don't bet against it.