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Krispy Kreme Doughnuts, Inc. Message Board

  • di_vur_se_fi di_vur_se_fi Oct 5, 2004 10:25 AM Flag

    $4.6 million hickey

    http://www.ohio.com/mld/beaconjournal/9839026.htm?1c

    That's about 4.6 cents per share for those of you keeping store.

    And the beat goes on...

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    • In terms of profitability, we don't know how the company stores stack up against the franchise stores because of the way KKD now does its segment accounting for intersegment transfers.

      What is sold from KKM&D to the company stores is transferred at KKM&D's cost of production. Thus the profits generated in all stages of production by donuts that are ultimately sold in company stores show up in the company store segment.

      The sales from KKM&D to franchisees are accounted for at higher prices that are actually paid. The profits from these donuts are split between the franchisees & KKM&D. The profits reported by KKM&D consist of (1) profits on sales on donut ingredients etc. to franchisees and (2) profits on sales of capital equipment to franchisees.

      What seems to be happening is that KKM&D has been jacking up the prices it charges franchisees to improve the parent company's profitability and the franchisees have been squeezed. If, as di_vur convincingly argues, the franchises are unprofitable, this situation is not viable in the long term. It may be possible however to set ingredient prices at a level that yields a reasonable degree of profit to both KKD and its franchisees. This would allow KKD to go forward into the long term as a national chain, albeit at a lower level of profit than today.

    • you wrote:

      But that doesn't explain why the company store segment has done so much better than the franchise segment in the past. Had they totally dominated the wholesale donut market in areas of the older company stores?

      ---

      What do you mean by "so much better"? Are you referring to profitability or revenue? Better profitability, I believe, is due to "aggressive" accounting. Better revenue is probably due to a few huge, legacy company commissaries which greatly skew the company store numbers upward.

    • Yes, now that you mention it, i remember Tate alluding to the "honeymoon phase". Memory lane. I had forgotten that and thot i might have adopted it myself, lol. I wonder if quoting Tate would persuade csteru that there might be something to it.

      Yes, the consolidations should be a factor, and perhaps that coupled with the opening of fewer new stores in the company segment than in the franchise segment... But that doesn't explain why the company store segment has done so much better than the franchise segment in the past. Had they totally dominated the wholesale donut market in areas of the older company stores?

    • you wrote:

      What's more clear, and more significant, is that company factory stores sales are in decline on a per-store basis, at least for the past qtr, and that they're becoming more like the franchise stores, a trend for at least the last 1.5 yr of so. We're not sure why, and we don't know when the decline will end.

      ---

      Company stores now contain many new/newer markets thanks to consolidation; these stores are passing out of the honeymoon phase. This would include Baltimore, Kansas City, Northern California, Glazed (Colorado, Minnesota, Wisconsin), Dallas, Michigan, New England, Philadelphia.

      The phrase "honeymoon" didn't come from me; it came from none other than Former COO (former CFO) Tate who explicitly used that term in describing markets during the May 7th (earnings warning) cc; specifically, Tate said that KC (4 years old) was mature and having declines; NoCal (3 years old) was showing some signs of maturity, but that Denver, Minnesota, SoCal (not a company market), and Chicago (not a company market) were STILL IN THE HONEYMOON PERIOD.

    • Now whether that's happening or not, i have no idea. But it's certainly possible. There are many factors contributing to the sales curves, of course. But we know that huge opening-month effects were often reported in the past; and i mean really huge. I'll bet you this: if we plotted the data of new store openings against ave sales per store, i'll bet that the peak of store growth rate coincided with either the peak of sales per store OR the peak in growth rate of sales per store. (I'm too tired to dig through old filings, though. But here's a chance for someone to prove me wrong!)

      What's more clear, and more significant, is that company factory stores sales are in decline on a per-store basis, at least for the past qtr, and that they're becoming more like the franchise stores, a trend for at least the last 1.5 yr of so. We're not sure why, and we don't know when the decline will end.

      By the way, your major thesis, summarized well in your last paragraph, was always my assumption, really until seeing the results of the last qtr. Yes, it should be fixable, but i don't think it's at all clear what profits will look like once it's been fixed. I expect it to get uglier, as does most everyone except, that is, for those whose opinions actually count, the traders and investors who have turned the stock around (so congrats, for the time being).

    • Sorry to continue this, but when it is asserted that that i've suggested the impossible, i'm compelled to respond.
      you wrote:
      "2- Re avg sales per store- if both gross sales are rising as is the # of factory stores, and if you know from comps that mature stores are slightly up, there is only one possible explanation to explain the decline in sales per store: The new stores have lower sales. Play with the numbers- it is MATHEMATICALLY IMPOSSIBLE to arrive at the idea the new stores have better sales..."

      On the contrary, it is quite possible. We don't know whether it is, but i can easily prove that it's possible, as described below.

      But my main point, what's more important is that sales at older company stores have almost certainly been decreasing during the last 2 qtrs on a per-store basis. Total company store sales increased by only 3%, from 120 mm to 124 mm, but company store-weeks increased by 15%, with 5 new stores opened and 8 old joint venture stores consolidated. Heck, in the last qtr, company store sales suffered a net DECREASE of 1% even though store-weeks increased by 7.6%. If not for the added stores, opened and consolidated, it's hard to think that we would not have seen a decrease in sales from this segment over the last 6 mo, imo. And again, any satellite stores that were opened added to sales but not to the store-weeks count, meaning that they have been working harder just to tread water (read lower margins).

      Now, as to the "mathematical impossibility", never write an absolute statement (except this one) without thinking it through very hard. Your error was that you only considered the effect of one qtr. Extend the trend and watch what happens: a very different effect.

      For simplicity assume that there are only mature stores at first. Now begin adding 20% new stores each year for exponential growth. Assume that new stores have lower sales at first but build to the mature level of sales during the first 2 years. The first 20% increase in stores would lower the ave. sales/store by a certain amount. In the second year, the next 20% increase would lower the ave. again, but by less. The ave. would approach assymtotically to a constant, a number deterimined by the exponential average of store age. So after a few years, it would be pretty steady. Now run the same program mentally, but this time give the new stores a honeymoon effect, with sales higher at first but decreasing gradually to the mature level. The ave. would rise but by lesser amounts year after year and then approach a constant assymtotically. OK so far?

      Now watch what happens if after a period of exponential growth in store number, the store count increases at a decreasing proportional rate or worse, at a declining absolute rate. It should be obvious that once the growth rate is decreasing, then for either situation above (honeymoon effect or the opposite) the curve for ave. sales per store would reverse course, depart from the assymtote, and begin a gradual return to the toward the number that applies to mature stores. Still with me?

      So if a honeymoon effect of retail sales is dominant (or was, not so long ago) then average sales per store would have risen as store openings accelerated but should have reversed course once new store openings decreased on a percentage basis, which they have done, by the way. Honeymoon effects were greater proportionately in the past (and also greater in magnitude, in the fad's heyday), so a positive factor to ave. sales per store has been diminishing. At least it's a possible factor. By the same reasoning, if new stores generate less sales than mature ones, as you say, notice that when proportionately fewer new stores are opened in a current period than during a previous period of comparison, then this would have a positive effect on sales per store--just the opposite of what you thought. Sales per store could still decrease, but for other reasons.
      (c

    • <it's my business if i don't want to wear a motorcycle helmet" rants that i muck up their insurance rates if i end up in the hospital for eight months, or worse, in a coma for 10 years.>

      Wouldn't be a problem if they'd just toss you out when your checkbook ran dry

    • And don't forget to take your lipator!

    • """Do yourself a favor and read the ingredients found in a KKD donut. """

      then go buy a dozen. they're fantastic

      but only eat them one at a time

    • """A blood test for the presence of Krispy Kreme antigens in the blood. """

      wouldn't it be easier just to rummage around in their pockets for evidence of receipts...?

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