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Krispy Kreme Doughnuts, Inc. Message Board

  • diogenes1234 diogenes1234 Aug 5, 2004 12:59 PM Flag

    A Cure for All That Ails....

    KKD's got problems:

    -- Overexpansion and unprofitable stores..
    -- Leases and lease/loan guarantees..
    -- Questioned accounting/SEC inquiry..
    -- Law Suits..
    -- Debt coming due...
    -- Managment disrepute..
    -- Zero Financial credibility..

    Solution:
    -- Livengood resign, he's rich and has done his job.
    -- Board resign, except McColl who brings in Wachovia
    -- Bring in new CEO and management team..
    -- Prepackaged Chapter 11. Bring in new capital, pay off banks, close marginal and unprofitable stores, cancel leases, cancel grocery commitments, restructure franchises, settle SEC, clean up accounting, vacate class action suits.

    New capital gets 80% of equity, new management gets 10%, present shareholders get 10%. If restructured company then worth $500 million, present shareholders get maybe $1. The way of the world.

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    • It's certainly not inconceivable that kkd has used every trick in the book. I'm betting that they've used most of them.

    • As to whether it's all hypothetical, recall what the WSJ wrote on May 25:

      Why would Krispy Kreme pay its franchisee extra money just so the franchisee could turn around and repay that same amount in past interest? One possible answer, accounting experts say: boosted earnings.

      Collecting on the unpaid interest resulted in an immediate profit for Krispy Kreme in the form of "interest income." The cost was rolled into the total purchase price, nearly all of which was put on Krispy Kreme's balance sheet as an intangible asset called "reacquired franchise rights." That asset doesn't get amortized, or subtracted from earnings over time.

      "It looks like they took money from one pocket, put it into another pocket, and called it income," says Lori Holder-Webb, an accounting professor at the University of Wisconsin who specializes in acquisition accounting. "I can't tell you that's illegal, but it's not something I would suggest my students get into." Charles Mulford, a professor at Georgia Institute of Technology, says that "if true, that sounds to me like a flat-out violation" of accounting principles, which he believes may have resulted in earnings being overstated.

    • Q2 (early May to early August)

      Tax benefit = 156,000 * 0.35 * (20 - 1.30) = $1.021 million

      This is relatively small compared to the $42 million of the previous year, especially given that it's a fairly big exercise.

    • Good point.

      What you are describing is similar to what I'm talking about. In your scenario, the money would go from the franchisee to kkd before the buyout (inflating kkd's revenue and income) and from kkd to the franchisee at the buyout (as an inflated purchase price). In my scenario, the money went from kkd to the franchisee at the buyout (as an inflated purchase price) and from the franchisee to kkd after the buyout (by paying kkd expenses). This is all hypothetical, of course, and we may not find out what has happened, if anything, for quite awhile (or we might find out this week).

    • The accounting issue concerning franchise repurchases isn't just amortization.

      It's also whether operating revenues and profits were inflated. Did money pass from the franchisee to KKD, before the purchase, that KKD reported as operating revenue -- and then was the same money paid back by KKD to the franchisee as part of the purchase price and put on the books as intangible asset?

      If money went, in a concerted way, quickly back and forth, it would be a severe accounting (and personnel) issue. Even if there was no such overt hanky-panky, though, and the only accounting remedy is to amortize the intangible asset, economic questions remain.

      How much of KKD's reported past profits were one-time profits related to franchising and opening new franchised stores? We don't know. Lack of this knowledge makes it harder to estimate KKD's long-term profitability.

      As for your footnote about whether we need an SEC -- I agree 100%.

    • "$42.8 million of that flow was due to "Tax benefit from exercise of nonqualified stock options" which, because the stock has cratered, will be greatly diminished for the time being."

      I see that the most recent options excercise was on May 27th (STRICKLAND, ROBERT L.
      Director 156,000 ), would this count for the current quarter or the previous quarter?

      Isn't this ironic, in order for KKD to get the "tax benefit", longs need to hope that insiders cash their options!

    • It certainly does.

      However, there are so many possible issues, but only a few would directly result in the Golden Sombrero (the two most likely, imo, I have already mentioned; the amortization, or lack thereof, of repurchased franchises is totally UNIMPORTANT, imo, because it has no effect on cashflow; if this is all the SEC finds, the stock will probably rally significantly).

      Aside: To all you anti-regulatory, anti-government shorts - if the SEC were not given the legislative authority to get to the bottom of kkd's books, what mechanism would lead to a more efficient conclusion, i.e. avoid the destruction of even more capital (through hypothetical secondaries and debt offerrings)?

    • "The inquiry generally concerns the Company's franchise reacquisitions and the Company'spreviously announced reduction in earnings guidance"

      Could the work "generally" imply that the inquiry may also concern other issues?

    • equally important in making the decision to go short on KKD was the analysis of the buy back of McAleers Dallas operation.
      This kind of thing does not have legs anymore.

    • I started to follow KKD 2 years ago when I saw the P/E at 40. That did not make sense to me for a donut franchise. I am very familiar with Tim Hortons here in Canada and I don't think there is a better run company in the food industry. So I started to compare KKD and Tims.

      Two issues came up early on:
      1. the company reporting was unclear; using the word "metrics" and not telling you what is included in sales numnbers, was one. Together with the opening hype issue, that was very apparent to anyone who looked at the traffic pattern and counted the customers.
      2. the second enlightenment came, during the further advance of the stock price, by reading the posts of di ver si fy. Detailed analysis showed that KKD was hiding something, likely capitalizing expenses and showing sales that had no sustainability.

      When i compared the daily sales of a Tim horton and a kkd, it did not take long to see who had the better business model. KKD looked like a bull during th eopening days and lost its momentum after a few months. Tim's started slowly and gained momentum year after year.

      The conclusion was simple: Tim's was the better business.

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