Novice Investing - Krispy Kreme Doughnuts

Date: Tuesday 13th 2008f May 2008 07:31:14 AM

Not-so Krispy Kreme 01/17/2005

By: Hari Wibowo

Sugarless Doughnuts

Things are not going so great with our watchlist Krispy Kreme Doughnuts Inc. (ticker: KKD) since our last article. First, on November 22nd it reported disappointing earning with gross margin that deteriorates year over year. To add insult to the injury, on December 15th 2004, Krispy Kreme missed its 10Q quarterly filing deadline. For those of you folks who are not familiar with the term, 10Q filing is what the company reports to Securities and Exchange Comission (SEC). A publicly traded company is required to file 10-Q no later than 40 days after the quarter's end. So, after a disappointing earning report, Krispy Kreme now has to delay its 10-Q filing. There is only one conclusion to this and it is not as delicious as original glazed Krispy Kreme doughnuts. If things went as reported (which is already bad), then KKD would not miss filing its 10-Q report. So, the only conclusions I can make is that there are more dead fish behind the closet. For news about KKD's deadline miss, click here.

Smelly cat Smelly cat....

So, how smelly is the dead fish? From the look at it, it smells pretty bad. First of all, Krispy Kreme said that it will miss its 10Q filing deadline. Then on Jan 4th , the company further announced that they are going to restate the results for fiscal year 2004. (For the news click here ). At the same time, the company added that it will default its $150 million credit facility due to its inability of filing the 10Q report by January 15th 2005. Is it bad enough? Apparently not. On January 7th 2005, Reuter reported that one director of the company sold $2.5 million worth of stock. At this price? Yes! You heard it right. Even after dropping from $40.00 to $10.00, insider still made the sale. It is never a good thing when insiders sell at a price that is hovering near 5 year low.

When I first wrote the article about Krispy Kreme here, I was hoping that management will someday stop expanding and focus on increasing profitability on existing stores. So far, their plan says otherwise. Even then, our calculation shows that the stock is fairly valued at around $10, meaning buying the stock now is not a good investment. So far, the condition has deteriorated while stock price is off another 10%. For long term conservative investors, I think that it is best to avoid Krispy Kreme for now. It does not give sufficient margin of safety to provide decent investment return.

Conclusion: Avoid!

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Krispy Kreme Doughnuts Inc. (KKD) or other securities.

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