Krispy Kreme: Not the Healthiest Choice (KKD)

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 |  About: Krispy Kreme Doughnuts, Inc. (KKD)
by: Daniel Andres Jacome

Shares of beleaguered confectionery specialist Krispy Kreme Donoughts (NYSE:KKD) have soared by as much as 30% to $12 ever since the firm released its 10K for F2005 on April 28th.

We just have one question- Who is buying this stock? All we see are stale goods.

1. Krispy Kreme has the following on its docket for 2006: lawsuits, SEC investigations, more store closures in addition to franchisee bankruptcies. Even if management returns this bleeding business to profitability, we have a hard time visualizing how it will drive the topline story back to its halcyon days.

2. Investors have yet to see the 10Qs for subsequent quarters. In other words, we have no idea how the company is doing. KKD could easily wipe out over-enthusiastic shareholders and leave' em for dead.

3. It is hard for companies to rebound from cannibalized sales. In 2004, KKD sealed its fate when it announced its first profit miss. Management's decision to shelve its branded goods in gas stations and grocery shops backfired and the stock began its long downward journey. KKD buried its image and now it wants to dig it up, wipe off the worms and pretend nothing happened.

4. KKD remains highly leveraged. Amid slowing same store sales, Krispy Kreme has just $21M in cash but $122M in debt. Morningstar thinks KKD may even be liable for almost $40M worth of more debt stemming from some blown up joint-ventures (JVs). Thanks, but no thanks.

5. Funds are avoiding it: A little over a year ago, 77 mutual funds owned KKD for their accounts. Today, that number is 44. Ideally, you want to see stocks gain institutional ownership, not lose it. If anyone wins here, it'll be the day traders.

The Bottom Line: Hey, don't get us wrong. We've read our Whitman front and back; we know America's the land of self-reinvention. But Krispy Kreme looks more Dead Man Walking than it does legitimate turnaround story. You can keep the shrapnel -- Krispy Kreme is not for us.

KKD 1-yr chart: