I guess WSJ cronies are still short KKD. (WSJ "trashes" KKD (again)).
(And, this time, they did it the same morning as KKD's earnings announcement !
Sure sounds like an attempt to manipulate the price of a stock) ...
Jon.
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March 10, 2004
Ahead Of The Tape
By Jesse Eisinger
The Hole at Krispy Kreme
Investors in Krispy Kreme are starting to get that leaden feeling in the pit of the stomach that comes from overindulgence in sweet treats.
Krispy Kreme Doughnuts announces its full fiscal fourth-quarter earnings Wednesday, having already previewed its sales performance three weeks ago. The sales performance was ostensibly solid and the company forecast that it would meet earnings projections for fiscal 2005.
But there have been some cracks in the glaze. And these raise questions among investors about whether Krispy Kreme is the kind of growth story that deserves a stock price that is trading at 33 times the Wall Street estimate of fiscal 2005 sales. The increasingly likely scenarios seem to be that the multiple shrinks over time, which would mean the stock remains flat even if the earnings rise, or the company misses earnings estimates and the stock collapses.
The main concern of the bears -- one that has persisted for about a year now -- is that new stores seem to have lower average weekly sales than the older stores. Krispy Kreme stores no longer are opening with the blockbuster sales of old, nor are they getting the free media attention from the likes of local TV stations. Krispy Kreme had all the hallmarks of a fad. And despite the strenuous objections of the true believers, the frenzy is now looking like it may have been just that.
J.P. Morgan's John Ivankoe, who rates the stock an "underweight," points out that the company plans to open 95 to 100 new stores this year, up from his expectation of 78 stores. He reads that as an attempt to hit earnings targets by accelerating new store development at a time when new stores sales are below expectations.
Investors must worry about the relatively new and therefore untested business model experiments that Krispy Kreme has recently embarked upon. For one, the company is opening increasing numbers of satellite outlets, which don't have bakeries on the premises. The appeal is that the stores cost less to build and the returns should be higher. Unfortunately, the company is rolling this strategy out aggressively before it's been proved. One risk is that the quality of the doughnuts suffers. This is, in fact, the same risk that the company runs as it pushes its sales into places such as supermarkets.
It just may be that investors start to lighten up on the carbs.
• Send comments to tape@wsj.com and check Mondays for some letters at WSJ.com/Tape
Updated March 10, 2004
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