Barrons piece trashing KKD some more.
By the way ... regarding this guy (mentioned near the end of the article) :
"hedge-fund manager David Rocker, of Rocker Partners, which is short the [KKD] shares" --
I have vaguely followed him over the years (because he is on CNBC occasionally; and has also been written up in things like Barrons or the New York Times) ...
I think (if I remember correctly) he has (from time to time) been spectacularly WRONG on several stocks he has heavily sold short.
I am not sure that this is necessarily an indictment of him.
Lots of short-selling hedge funds get things wrong in a big way on certain bets, but still eke out okay returns.
Jon.
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Monday, September 13, 2004
Follow Up
Full of Holes
Krispy Kreme may get cheaper
FOR KRISPY KREME DOUGHNUTS, the center didn't hold. Plagued by decelerating sales growth and slumping profit margins, the company that once made calories a status symbol has seen its shares sink to 11.50 from nearly 50 a year ago. Nor is the selloff apt to be over, given Krispy's cloudy outlook and a pending regulatory probe.
Krispy Kreme has two problems: its products and finances. Both stem from efforts to feed Wall Street's appetite for fast-growing profits. Since selling stock to the public in April 2000, the Winston-Salem, N.C., outfit has expanded to more than 400 owned and franchised stores, which turn out 7.5 million doughnuts a day. Familiarity has bred indigestion, however, and robbed the product of cachet, as Barron's suggested early on would be the case ("Dollars to Doughnuts," July 10, 2000.)
For a while -- a long while -- our concerns about the stock's valuation seemed half-baked. Shares sold for nearly 80 times earnings as recently as last year. In late August, however, Krispy reported its second consecutive wan quarter. Operating income slid 54%, to $6.2 million, or 10 cents a fully diluted share, on weak growth in sales. Management cut its new-store target for the second time this year, doubly troubling as sales of doughnut-making equipment to new units had become an important source of income.
Krispy also declined to provide earnings guidance for its fiscal year ending Feb. 1, "never a good sign," as John S. Glass, a CIBC World Markets analyst, noted in a recent report. He thinks the company will earn 61 cents in fiscal '05, and 81 cents in fiscal '06, versus 91 cents last year. He rates the stock Sector Underperform.
"The idea that Krispy Kreme has hit bottom is a nonstarter, given it's just beginning to cut back store openings, which provide two important sources of income," says hedge-fund manager David Rocker, of Rocker Partners, which is short the shares. "In addition, the balance sheet has been deteriorating, and it appears a sale and leaseback in the latest quarter provided most, if not all, of the cash on the balance sheet."
Glass has a 12-to-18-month price target of 10. The company's tangible book value is about $7 a share. So, at 8 to 8.50 -- about 10 to 11 times '06 estimates -- Krispy might be worth a nibble.
-- Lauren R. Rublin
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