Holes Galore In Krispy Kreme's Financials

As expected, Krispy Kreme (KKD) came out with its 10-K for fiscal 2006 – that is, the fiscal year ending nine months ago.

This was the filing of financials that Prudential Equity analyst Howard Penney, in a stock-moving report last week, said would be more important than then numbers and reason for investors to own the stock. (By now, if you’ve read my earlier posts, you know how I feel about that.)

Those numbers were as “ugly” as Penney said they’d be, with non-stop losses, rising debt and plunging shareholder equity.

But now hear this: While the company filed its 10-K, it didn’t yet file the 10-Qs that were supposed be filed before the 10-K. (Shouldn’t you file the parts before you file the whole?) It says they’re coming “shortly”, as will be the quarterly report for the third quarter of fiscal 2005 and the quarterly reports for the first and second quarters of 2007, which Krispy Kreme says it’s “diligently” working to complete. It then added that the obvious boilerplate that “there can be no assurance as to when the company will be current in its reporting obligations.”

Boilerplate, maybe, but it’s the “current” part that investors should be monitoring. Without them no analyst can remotely create an earnings or stock price forecast without simply guessing. All anybody knows is what the company said in a September 11 press release regarding the quarter ended July 30: that quarter-over-quarter sales are sliding and that it expects to report a loss for the second quarter; it said something similar in the first quarter.

There’s something else that wasn’t in the 10-K but is perhaps more ominous: Earlier in the day Krispy Kreme filed an 8-K showing amendments to its lending agreements. For the second time in less than 12 months lenders, in the face of a steadily deteriorating balance sheet, have given the company more breathing room on covenants. Might as well see if management can turn around a business that without any accounting shenanigans appears to be getting less economically viable -- not more.

Meanwhile, the company also settled a class-action lawsuit. I didn't mention it on the first go-round of this post because class-action lawsuit settlements at companies don't tend to be as newsworthy as Krispy Kreme's press release on the settlement made it out to be. In retrospect, the settlement is significant to the extent payment comes, in part, in the form of Krispy Kreme's stock, which I needn't remind regular readers was coincidence of coincidences puffed up in the days before the settlement by Penney's report.

P.S.: One winner from this, no doubt, is Kroll Zolfo Cooper, the turnaround firm that was hired to run Krispy Kreme from early 2005 until earlier this year. According to the 10-K, in the first quarter it received a warrant to purchase 1.2 million shares at $7.75 per share; they became exercisable in April. Now that they’re deep in the money, will they sell or won’t they? Inquiring investors should be on the lookout to find out.

UPDATE: Krispy Kreme, which supposedly was going to soar on the news of having filed its 2006 annual earnings, is down 6% as I write this. But let's not forget this is a company whose stock is up from a low of around $4 a year and a few days ago -- up on nothing but the news going from bad to worse; up on no relevant financials; up on hype about a future via an earnings forecast by a single analyst created out of whole cloth.

The beat goes on...