Novice Investing - Sour News From Krispy Kreme

Date: Tuesday 13th 2008f May 2008 07:02:08 AM

Sour News From Krispy Kreme - 09/13/2007

By: Hari Wibowo

With its accounting scandal resolved, Krispy Kreme Doughnuts Inc. (KKD) faced yet another setback. It reported disappointing second quarter earning on 6th of September 2007. Krispy Kreme reported net loss of 47 cents per share or $ 27.0 Million on sales of $ 104.1 Million. It has been trying to cut its losses by closing underperforming stores and other divestments.

Without ways of stemming its losses or improving its store performance, you would expect Krispy Kreme to continue its recent losses. Krispy Kreme already has more debt than it has cash with negative net cash of $ 69 Million. Assuming another $ 25 Million quarterly losses, Krispy Kreme net cash position will be negative $ 119 Million, which is roughly equal to its quarterly revenue.

That is one of the main reason why the stock plummets 30% over the past week. We have came across many companies with significant negative net cash over the year but not to the extent that it equals to the company's quarterly revenue. Take a look at General Motors Corp. (GM)'s balance sheet. It spotted a whopping negative net cash of $ 19 Billion. However, GM itself has a quarterly revenue of $ 50 Billion. While we realize that revenue won't necessary a guarantee of survival, this is just another way of investors looking the dire situation of Krispy Kreme.

Looking at the hard number, Krispy Kreme around $ 40 Million in gross profit with around $ 28 Million of Selling, General and Administrive cost. That leaves it $ 12 Million to pay interest expense and others. With $ 119 Million in negative net cash, that will wipe out the $ 12 Million remaining gross profit. This is the situation for Krispy Kreme if it were to report another similar loss next quarter. At that point, bankruptcy will be better for Krispy Kreme as a whole.

Back in June, we expect Krispy Kreme to incur $ 25 Million of net loss annually. The latest earning report includes $ 22.1 Million of non recurring expense. Thus, the run rate for Krispy Kreme is stil $ 25 Million anually, not quarterly. But investors seem to expect a recurring non-recurring charges for Krispy Kreme in the future. We are more concerned of Krispy

Kreme's inability to increase its revenue base. While Krispy Kreme can endure similar performance for another two more years, revenue has been steadily declining for the past three fiscal years. Management failed to entice investors with their plans to revive the company. As a result, many investors decide to take the loss and leave. An adventurous investor may stick his neck with Krispy Kreme for several more quarter while buying the share for $ 3 a piece. If Krispy Kreme can start turning around in the next few quarters, share price will follow. But, we must caution you that the risk of bankruptcy is equally big now.

END

Have questions or want to comment on this article? Proceed here

Distributing your own investing content is easy. Simply, click here.

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.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]