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Sunday, 16 March 2008
Krispy Kreme Doughnuts (KKD) "Long-Term Review #17"

 

 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website. Seeing as I didn't have any stocks to review in my "Weekend Review", it seemed reasonable to take another 'long-term view' on this blog.  

These reviews and analyses have been done assuming a 'buy and hold' approach to investing.  In reality, I practice and advocate a disciplined investment strategy (a link to my podcast on this topic) that involves carefully screening stocks for inclusion into a trading portfolio and then managing those investments by limiting losses by quick sales on declines and preserving gains by selling portions of appreciating stocks at targeted appreciation levels.

Some months ago I decided that it would be helpful to start looking at the very earliest entries on this blog to find out how they all turned out.  Hopefully with these analyses we can identify reasons to be selecting stocks and identifying what were the best prognosticators for success.  And not all of these picks have been successful!  

Last weekend I reviewed Westcorp (WES) which was initially posted on May 27, 2003.  The very next day I wrote up Krispy Kreme Doughnuts (KKD) on Stock Picks Bob's Advice.  Let's review that entry and see how KKD is doing today. 

"May 28, 2003

Krispy Kreme Doughnuts (KKD)


The market paused this morning as if it wanted to correct as the bears came out growling....but the bulls resumed their push and the momentum on the upside continues. As I write (10:43 am CST) market up 45 points.

An old favorite of mine, Krispy Kreme Doughnuts, hit the list today. They had a GREAT earnings report today as they continue their explosive revenue and earnings growth....all on the back of a glazed doughnut! (so much for low carb dieting)....earnings reported today with earnings up a strong 47%, their sales rose 34% to $148.7 million from $111.1 million last year.

As reported by the CEO on CNBC this morning same store sales growth continued in the double digit area up about 11% year over year. (These are the stores that have been open at least a year).

On Morningstar we see sales growing from $80.9 million in 1999, $220.2 million in 2000, $300.7 million in 2001, $394.4 million in 2002, and now with a $148 million for the quarter we have about an extrapolated $600 mnillion level for the year 2003 if everything continues at the same rate.

Looking at cash flow we do see a NEGATIVE 34 million number but with all the rest of the figures so good, I guess we can look over this for a good doughnut or two. Maybe with a cup of their new coffee!

I do not at this time own any shares but have in the past and am not planning at this time to purchase new shares. Nobody in my family owns shares either.

Have a great day investing! Did anybody besides me snag some SYNO? Bob"

Krispy Kreme Doughnuts (KKD) closed at $2.85 on March 14, 2008.  Using Yahoo to get the historical price on Krispy Kreme we can see that KKD closed at $34.18 on May 28, 2003.  Thus, I had a loss on this pick of $(31.33) or (91.7)% on this unfortunate stock pick! I do not currently own any shares nor do I have any options on this stock.

Let's take a closer look at this company and see how we should rate this stock!

What exactly does this company do?

According to the Yahoo "Profile" on KKD, the company

"...operates as a branded retailer and wholesaler of doughnuts. It engages in the ownership and franchising of Krispy Kreme doughnut stores, which make and sell approximately 20 varieties of doughnuts. These stores also offer an array of coffees and other beverages. As of January 28, 2007, there were 395 Krispy Kreme stores operated system wide in 40 states in the United States, Australia, Canada, Hong Kong, Indonesia, Japan, Kuwait, Mexico, the Philippines, South Korea, and the United Kingdom, of which 113 were owned by the company and 282 were owned by franchisees. The company was founded in 1937 and is headquartered in Winston-Salem, North Carolina."

How did they do in the latest quarter? 

On December 6, 2007, KKD announced 3rd quarter 2008 results.  For the quarter ended October 28, 2007, sales declined (11.7)% to $103.4 million from $117.1 million in the third quarter of the prior year.   The net loss for the quarter was $(798,000) or $(.01) per diluted share, improved from a loss of $(7.2) million or $(.12)/diluted share the prior year.

There has been a lot of turmoil at this doughnut maker.  On January 7, 2008, the CEO was replaced by Chairman James Morgan. On the other hand, the underlying value in the company and the brand has not been ignored either; Kuwaiti contractor Mohamed Abdulmohsin Al Kharafi & Sons on February 5, 2008, increased its stake in the company up to a sizeable 13.8%.

What about longer-term results?

Examining the Morningstar.com "5-Yr Restated" financials, we can see that revenue actually increased along with earnings from 2003 to 2004 when revenue climbed to $649 million from $491 million and earnings jumped from $.52/share to $.78/share.  However, in 2005 these results diverged with revenue continuing to grow to $708 million but the company turning in a large loss of $(3.22)/share.  Since 2005 revenue has slipped sequentially down to $461 million in 2007 and $431 million in the trailing twelve months (TTM).  Earnings have shown consistent although decreasing losses with $(2.20)/share reported in 2006, $(.70)/share in 2007 and $(.90)/share in the TTM.

Free cash flow has fortunately been positive recently with $18 million in 2007 and $8 million in the TTM.  The balance sheet is also adequate with $23 million in cash and $54 million in other current assets reported.  This total of $77 million in total current assets yields a current ratio of 1.69, an 'acceptable' current ratio imho. The company is reported to have an additional $114.7 million in long-term liabilities.

What about some valuation numbers?

Reviewing the data on Yahoo "Key Statistics" we find that Krispy Kreme (KKD) is now a 'micro cap' stock with a market capitalization of only $186.77 million. Since the company is losing money there is no trailing p/e. However, there are estimates of a return to profitability allowing us to estimate a forward p/e (fye 28-Jan-09) of 40.71.  Again, no PEG ratio is possible.

Using the Fidelity.com eresearch website, we can see that valuation-wise, with a Price/Sales (TTM) ratio of only 0.43, compared to the industry average of 3.06, this represents an outstanding value.  Also, with all of the recent losses, the return on equity (TTM) amounts to a (65.03)% compared to the industry average of 19.03%.

Finishing up with Yahoo, we can see that there are 65.53 million shares outstanding with 55.83 milion that float.  Currently, there are 8.14 million shares out short representing 17.5 days of trading volume, a significant short-ratio imho using my own '3 day rule' of significance on short interest. 

No dividends are paid and the last stock split was a 2:1 split back on June 15, 2001.

What does the chart look like?

Looking at the StockCharts.com 'point & figure' chart on KKD, we can see that the stock actually moved higher from October, 2002, when it was at $28 until my 'pick' and then peaked at $49 in August, 2003.  The stock has had a dismal track record dipping first to $4.00 in October, 2005, rebounding up to $13.50 in January, 2007, only to dip down to a low of $2.25 in January, 2008.  The stock is struggling at its current price, but it appears that most (?) of the damage may already have been done. 


Summary:  What do I think about this stock now?

First of all, in a Peter Lynch sort of fashion, I really like Krispy Kreme Doughnuts....ok they are fattening and all, and I am on a diet, but they are a nice treat.  


The fundamentals on this stock are dismal.  The only good thing I can say is that they are losing less money, are free cash flow positive, and have an adequate balance sheet.  Revenue has been declining and the chart looks horrendous.  It is just that so much of the damage has been done and the value of the stock is starting to look compelling with the Price/Sales ratio under 0.5. 

Now if they could just turn profitable and start growing their revenue once again.

In general, I would like to say this is rated a "SELL" but with so much of the damage done, and the Kuwaiti investor starting to accumulate shares, I am forced to rate this differently:

KRISPY KREME DOUGHNUTS (KKD) IS RATED A HOLD

O.K. I hoped I didn't wimp out on this one.  Just cause I love thouse doughnuts and am still in mourning after our own local Krispy Kreme outlet closed up.  It has been easier to diet since then :).  It just seemed that it would be 'too late' to start advising a sale on a stock that is this beaten up already!

Thanks again for visiting!  If you get a chance, be sure and visit my Covestor.com website where my actual trading portfolio is reviewed, my SocialPicks Page where my stock picks from the past year or so are examined, and my Podcast Page where you can download mp3's of me discussing some of the many stocks I write about here on the blog.  Good-luck next week investing.  Be sure and maintain trading rules whatever you do!  Limit your losses and exercise caution; it is getting ugly outside.

Yours in investing,

 

Bob 


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