... We longs have been dinging Krispy Kreme for its many faults not the least of which is its fast approaching market saturation. Let's take a look at the Bull Case for Krispy Kreme -- what it is that justifies KKD's 60 P/E multiple.
The company is continuing its expansion strategy, which we believe will increase its concept to more than 800 stores in the U.S., from about 300 currently, within five years. KKD also recently awarded development rights in the U.K. and Ireland, and opened its first store in Australia. We expect revenues to increase at a 23% CAGR over the next five years, due to expansion and same-store sales growth.
Thomas Weisel says:
"This business possesses one of the strongest growth stories in our universe coverage. We continue to assert that Krispy Kreme is still very much in the early phase of its growth cycle given the company's modest domestic store base and unique consumer branded product."
Value Line has a 2007 target for KKD of $64 - $98, stating:
"We believe there are still plenty of opportunities for growth through domestic and international expansion."
That's really something. Doofus couldn't say it better. But why the Bull Case?
... Something to shoot out. To do battle with. This the common knowledge that supports KKD today. Longs win by accepting the common knowledge, Shorts by disagreeing with it.
... Sometimes it pays to be Short. It always pays to be skeptical.
not today it don't.
... Ouch. Yet, dear friend, the day is young. And tomorrow is another day.
So why is Krispy's market saturated? Keep it short. 2,000 words or less
1) Hot/Now stores. Great business. Requires 250,000 population. Built out in US.
2) Satelite Donut 'stores.' Reheated donuts, entrenched mom and pop owner/operator competition. Will canabalize Hot/Now and wholesale business. High fixed costs. Newport Beach, worst case.
3) Wholesale: Completely different business -- route servicing. Transportation costs critical. Entrenched competition with larger, more efficient factories, lower costs.
4) Walmart: Toughest bargainers in retail. Again, entrenched competition has equal direct costs/donut. KK factories geographically unsuited to Walmart supply chain.
5) Overseas markets: Problematical. A guess at best. Costly and time consuming to exploit. Dunkin failed in Britain.
6) Add beverages, broaden menu of Donut shops: In effect, Coffee Houses. Too little, too late.
... Yes. But this largely has to do with top-line sales. Basically, the pattern is to add low margin, low profit business which will drag bottom line earnings even more.
And this is a company which S&P, Weisel, and Value Line are telling us faces clear sailing into the future, a certainty as far as the eye can see if we accept the 60 multiple as fair value. The Bull Case.
You said, "KK factories geographically unsuited to Walmart supply chain."
This is the single best statement I've ever seen you make. While Walmart stores are in large cities as well, a very large percentage of their stores are in very small markets that don't have a city anywhere near them that has a population large enough to support a KKD store.