My wife and I travel to Iceland fairly regularly, and in every town, we're always looking out for a good "bakari". Sauðárkróksbakarí is THE bakery in Sauðárkrókur, and we are regular customers when we are there. They have a consistent and high-quality variety of pastries, cookies, and breads. They have ready-made sandwiches and wraps for lunch. The coffee is always fresh, and their dining area is bright and cheerful.
When you've just got to have a chocolate-covered snúður, they're ready for you.