Novice Investing - Krispy Kreme Sweetening

Date: Tuesday 13th 2008f May 2008 07:34:09 AM

Krispy Kreme Sweetening - 06/13/2007

By: Hari Wibowo

Wow. After several years of looking in the dark, investors can finally view public filing for Krispy Kreme Doughnuts (KKD), a stock that we avoided. It last filed its filing back in 2004 when stock price were getting creamed. Meanwhile, losses were mounting. We avoided the stock for those reasons.

What has Krispy Kreme now become? Viewing its financial statement would help. For one, revenue has been greatly reduced from $ 707 Million in fiscal year 2005 to $ 461 Million in fiscal year 2007. (Ending on January). Net losses for 2007 was $ 42.2 Million. However, cash flow from operation was $ 20.7 Million, barely covering depreciation cost of $ 24.0 Million. There are significant non-recurring charges that increase net losses during this latest fiscal year.

Fiscal year 2007 seems to be the turning point for Krispy Kreme. Krispy Kreme produces revenue in three different sources; Company stores, Franchise, KK Supply Chain. For fiscal year 2007, 70.7% and 24.7% of revenue came from Company stores and KK Supply Chain respectively. Company stores total sales decrease 18.1%. However, same store sales went up 10.9% mainly due to the closure of low performing stores. Franchise revenue, meanwhile, rose 14.6% from the previous fiscal year. Similarly, gross margin shows improvement during 2007, due to the closure of poorly performing stores, increase of same store sales, reduced provision for uncollectible.

All looks good for Krispy Kreme, right? Well, the company has impaired more than $ 60 M of its long term asset to reflect current value. There still $ 28.1 Million of goodwill which, we never like. Also, cash on hand is around $ 36 Million, 55% of which would be used to pay down interest. That is not that dangerous. However, Krispy Kreme does not have a solid balance sheet on the first place, with $ 69.7 Million ($1.07 per share) of negative net cash.

With current sales and no recurring charge, we expect Krispy Kreme to incur $ 29 Million of net loss each year. Unless of course, the company slashed cost further which alone cannot bring Krispy Kreme to profitability. One way to reach profitability is by increasing revenue while not sacrificing gross margin. The company seems to improve its performance for the fiscal year 2007. If it can deliver good quality doughnuts, I am sure profit is not that far ahead. Looks like we can take Krispy Kreme out of our avoid list and put it in our case study instead.

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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 any other securities.

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