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Krispy Kreme Doughnuts, Inc. Message Board

  • zipperdydoodah zipperdydoodah Jun 16, 2005 11:23 PM Flag

    Stephen Cooper's strategy

    I have spent some time puzzling over this - and I have wondered what Cooper's strategy really is. And I think I have it.

    But lets spell out the material as we know it.

    1). The business is loss making at the moment - we do not know whether it is loss making in an absolute sense - or whether it is only loss making after you run through the legal fees etc associated with the current uncertainty. But it is loss making after legal fees etc - and it is probably not very profitable net of those fees in the best case.

    2). There may be a profitable core. That is if you close down say 200 out of 400 stores you will wind up with a profitable 200 store franchise. It may be that you need to close 100 stores or 300 stores. There is SOMETHING there though - the brand is worth something and the way to extract that value is close unprofitable stores. As bulls are quick to remind you on this site - some stores are staggeringly unprofitable. This is the good news - because it means some stores are profitable. It would be bad news if all the stores were bad.

    3). So far Cooper has not closed many stores.

    4). Krispy Kreme has guaranteed many of the franchisees. KKD does not control all of the stores - and some of the franchisees are staggeringly unprofitable - noted by the fact they are breaching their debt covenants and KremeCo is bankrupt.

    5). There have been NO financial statement - and yet none of the accounting looks too hard. It simply does not look hard to account for a donut store. You might have problems because previous management stole the files regarding purchase of franchises - but there are even rules for "fresh start" accounting in these circumstances. If this were a case of stolen files we would be told that by now. So I am assuming that the filings have not been made because it is not in Krispy Kreme's interest to make them.

    So what is going on.

    Bears would say that he is not closing any stores because he can disavow leases in bankruptcy.

    But this is too simplistic. If that were the case he would just file bankruptcy now.

    Bulls would say he is not closing many stores because they can work it off. But that is implausible. Many of these leases are long dated.

    I got another hypothesis.

    If KKD files bankruptcy now then KKD only owns about 100 stores. Most of the rest are in the franchises who will file bankruptcy separately where necessary. So KKD does not want to file bankruptcy now. If they do they can't achieve the real objective here - which is to shrink this to the profitable 100 or 200 store franchise.

    But KKD can wait and wait (with Silverpoint's money bankrolling them). As they do the franchisees will one-by-one give up the ghost. KKD can't honour the debt but it can ASSUME OWNERSHIP OF THE FRANCHISEE - which is more or less what will happen with KremeCo.

    When it assumes ownership of the franchisees it winds up controlling all 400 stores. Only then does it file bankruptcy. Then KKD can shrink from 400 unprofitable stores to 100-200 profitable ones.

    Silverpoint will own it.

    There is NO POINT filing bankruptcy until the franchisees fold it.

    And there is no point filing the accounts until you have assumed the franchisees - because if you do that the gig is up.

    Its the only hypothesis I can think of that fits all the facts.

    Zipper

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • >>Maybe... It is the franchisees interest to avoid paying KDD anything. If the franchisees can outlast KKD then KKD goes bust and the franchisees have an arrangement - presumably on much better terms than the existing arangement.<<

      Almost 2 years ago I kept shouting "WHO HAS DEEPER POCKETS"? and the silence was deafening...

    • first, I've been short this one for several years.

      second, I also think that bankruptcy is the final solution for them.

      I think that you might be right on the mark with your analysis...it makes pretty good sense and explains why they have not already gone bankrupt.

    • Having missed the original discussion in its entirety, I have just read all 74 posts in retrospect of subsequent developments. Makes a lot of sense, yet things haven't worked out as suggested, particularly with respect to cash flow and timing -- the rolling up of franchisees is continuing but at a slower pace.

      Would be much interested in updated discussion from Zipper, Di_vur_se_fi et al.

      Cooper's strategy aside, how to rationalize the current share price, continued institutional longs, lack of trading volume, etc. Assumptions of stupidity and hedging aren't all that satisfying to me, yet??

      • 2 Replies to diogenes1234
      • <<Assumptions of stupidity and hedging aren't all that satisfying to me, yet??>>

        How about the stupidity of your continued declarations that Erskine Bowles will be indicted for corrupting KKD?? Pretty stupid, isn't it, digenetic?

        And your allegations that people that had waited in line at KKD openings were paid by KKD to do so?? Take a look at Lawboy's posted viseo....How many were paid for waiting in line at the HK opening? I'm sure you, the genus that you are, can pick 'em out on a video, right?

        Say, how's your and your daughter's favorite donut company, Wicnchells, doin'?? How much development do THEY have going on?

    • Interesting...

      What are the principal remaining franchises, how many stores do they own/control, and what do we know of their financial performance and condition?

    • read the thread that i am replying to. so much time has passed by...

      - we now see that KZC did accomplish some of this, we know that SP is dissapointed with the going concern value.
      - the lawsuits turned out to be immaterial. KZC made a deal (or so they say) for 3 GCFF stores and maybe an option for the rest at zipper's "$50,000". LoneStar recaptured and ST soon to follow
      - my "what about BAC" comment might be timely now
      - what i think we might be missing is property liquidation. As cash flow deteriorates, KKD can start selling off stores. Assuming they are totally break-even, KKD's EBITDA stays the same but interest expense is reduced. This makes up for things like Rigel's bk yesterday.
      - eventually though, a smart lender should push KZC to finish the job faster because they are expensive. I think that this is the real catalyst. Dissapointment and doubt of collateral causes the slow pushing out of KZC. And since KZC must exit this only after a bk, this is by definition an acceleration of the day of bk.

    • http://finance.messages.yahoo.com/bbs?.mm=FN&action=m&board=1600706247&tid=krem&
      sid=1600706247&mid=145626&thr=145626&cur=145626&dir=d


      there's one paragraph in Zipper's theory that we still have to figure out, that may give us soe answers:

      <<If you were a sensible GE Capital at this point you would (a) call all the breaches of covenants on the franchisees and (b) expect KKD to pay. When this does not happen you file involuntary bankruptcy for KKD, all the franchisees and then GE capital winds up in a position to pick-and-chose the stores. But GE Capital will not behave in this way. The other banks have less incentive (or detailed knowledge) because with the exception of BB&T most banking groups are bankers for only one franchisee and BB&T is not the banker for many.>>

      1)Why won't GE do this?
      2)So what if you're a creditor for only 1 franchisee?
      3)What about BAC ???!!

      zipper also may have been right about the take-it-or-leave it stupid little offers, an offer was made to take over GCFF's entity. I'm not sure i understand what the terms for that were... What debt would have stayed with KKDC?

    • I have spent some time puzzling over this - and I have wondered what Cooper's strategy really is. And I think I have it.

      But lets spell out the material as we know it.

      1). The business is loss making at the moment - we do not know whether it is loss making in an absolute sense - or whether it is only loss making after you run through the legal fees etc associated with the current uncertainty. But it is loss making after legal fees etc - and it is probably not very profitable net of those fees in the best case.

      2). There may be a profitable core. That is if you close down say 200 out of 400 stores you will wind up with a profitable 200 store franchise. It may be that you need to close 100 stores or 300 stores. There is SOMETHING there though - the brand is worth something and the way to extract that value is close unprofitable stores. As bulls are quick to remind you on this site - some stores are staggeringly unprofitable. This is the good news - because it means some stores are profitable. It would be bad news if all the stores were bad.

      3). So far Cooper has not closed many stores.

      4). Krispy Kreme has guaranteed many of the franchisees. KKD does not control all of the stores - and some of the franchisees are staggeringly unprofitable - noted by the fact they are breaching their debt covenants and KremeCo is bankrupt.

      5). There have been NO financial statement - and yet none of the accounting looks too hard. It simply does not look hard to account for a donut store. You might have problems because previous management stole the files regarding purchase of franchises - but there are even rules for "fresh start" accounting in these circumstances. If this were a case of stolen files we would be told that by now. So I am assuming that the filings have not been made because it is not in Krispy Kreme's interest to make them.

      So what is going on.

      Bears would say that he is not closing any stores because he can disavow leases in bankruptcy.

      But this is too simplistic. If that were the case he would just file bankruptcy now.

      Bulls would say he is not closing many stores because they can work it off. But that is implausible. Many of these leases are long dated.

      I got another hypothesis.

      If KKD files bankruptcy now then KKD only owns about 100 stores. Most of the rest are in the franchises who will file bankruptcy separately where necessary. So KKD does not want to file bankruptcy now. If they do they can't achieve the real objective here - which is to shrink this to the profitable 100 or 200 store franchise.

      But KKD can wait and wait (with Silverpoint's money bankrolling them). As they do the franchisees will one-by-one give up the ghost. KKD can't honour the debt but it can ASSUME OWNERSHIP OF THE FRANCHISEE - which is more or less what will happen with KremeCo.

      When it assumes ownership of the franchisees it winds up controlling all 400 stores. Only then does it file bankruptcy. Then KKD can shrink from 400 unprofitable stores to 100-200 profitable ones.

      Silverpoint will own it.

      There is NO POINT filing bankruptcy until the franchisees fold it.

      And there is no point filing the accounts until you have assumed the franchisees - because if you do that the gig is up.

      Its the only hypothesis I can think of that fits all the facts.

      Zipper

      • 3 Replies to zipperdydoodah
      • Why pay even a nominal sum for franchises? If KKD wants to take stores from franchisees, they can do take away their franchise rights at any time without paying a cent. All franchisees are likely in violation of their franchise agreements, specifically agreements to open franchises on a specific schedule. Since there hasn't been a new store in years, my guess is they are all in violation. And revoking franchise rights means KKD can start over new store concepts in key markets, an possibly new franchise partners, etc, instead of being stuck with stores that are too large and expensive to ever make money.

        So why doesn't KKD revoke franchise rights? My guess is there are three key reasons.

        1) They'll lose the remaining franchise and mix fees they can suck out of the franchisees before they finally go belly up.
        2) Franchisees have legal claims and fraud allegations (ala GCFF) against KKD they will pursue in court, so KKD wants to play nice for as long as possible.
        3) KKD has no more borrowing capacity, and the $19M in remaining cash is dwindling with the recent cash outflow to buy GCFF and the loss of $3M+ in AR to Rigel. How are they ever going to build a new store or con a new franchise partner?

        I think the hubris of posters on this board is to think that Cooper or Silverpoint or the invisible new CEO have some "grand plan" to save KKD or instead, profit from it's demise.

        Instead, I think all parties are pedaling as fast as they can until the wheels fall off the bike. Cooper is making great money, they have no incentive to quit, bankruptcy just means more fees. The invisible CEO is a CEO of a public company for the first time in his life, he'll milk that for as long as possible and then blame the results on others (unless he can make a lateral move to another public company CEO spot). Silverpoint made a horrible loan that they are stuck with, I mean, is the guy who sponsored it even there anymore?

        Silverpoint doesn't want bankruptcy. Then they have to fight it out with all the other creditors, all of whom are going to use alleged fraud as a reason to move their claims in front of Silverpoint. So they'll milk KKD for as much interest as they can get before BK, all the while praying for some sort of magical turnaround that could enable them to exit with their loan fully repaid.

        The only way KKD buys more stores, even for nominal amounts, is if someone holds a gun to their head. That's essentially what GCFF did, and KKD was lucky GCFF ran out of cash and settled their claims cheap.

      • Many people (like me) have also believed the same hypothesis, but don't bother sometimes responding to people who just disagree about everything...so yes, you nailed it on the head in your post - the remaining question is merely about the time frames...

        Oh and also, I think Cooper needs to ensure that KKD corporate has control of a majority of the stores first prior to BK in order to control the Krispy Kreme brand, as I've mentioned. I don't know where that critical mass is, but it's obvious from franchisee comments that KKD corporate is trying to push the biggest ones into BK first. Conversly I think there are franchisees that are playing a similar game.

        Again I ask..."WHO (which lender consortium) HAS THE DEEPEST POCKETS?!?!"

        If I recall correctly, I think I posted this question LONG before your hypothesis post...

      • You are point on in my book.Before the Publis offering there was a "core" of active stores that were profitable.there is no doubt in my mind that once the Frans' are driven out ,a new KKD will arise.Not that any current equity holders will have any interest left...hank

    • I once wrote a post (my first on this board) pointing out what Stephen Cooper's strategy is.

      The post is linked back and it suggested that Stephen Cooper was wanting to organise the franchisees to file bankruptcy first.

      At the time it was a controversial post - several people (prominent on this board) thought I did not have much grasp of the issue.

      But Di - bless him (or her!) did and (s)he instantly recognised it as an idea worth following.

      I am gratified that 4 months later my post is recognised by the major players on this board to be essentially accurate...

      I still maintain the sequential bankruptcy strategy is the one that will be followed. Buying shares immediately prior to bankruptcy (for nominal considerations - say 50 grand each) is the basic ideal... they need to give the prior owners something or the current owners might act to spite them. But small amounts will do...

      Zipper

      • 1 Reply to zipperdydoodah
      • That's actually what happened with Freedom Rings.

        kkd bought Freedom Rings 30% ownership stake for "nominal" consideration, then took them into bk.

        How would kkd replicate this with other franchisees?

        Much more difficult because the other franchisees have major non-kkd creditors (Freedom Rings doesn't - look at the creditor filing, they even stiffed a high school for about $1300 (I wonder if the hapless soul sitting in the drive thru at the closing of a suburban Philly store had paid for his doughnuts - lol)) who must be negotiated with and compensated during any reorganization.

        Also greatly complicating matters is the SCAP abuse lawsuit as kkd has found out with ST, Lonestar and gcff.

        I don't see any way that pooper scooper can pull this off in a timely manner and, given the horrendous cashflow, time is not on his side.

    • It's one small step for chimps, one giant leap for chimpkind...

    • Who are you kidding? What liquidation value? They own a few stores and they lease a few more.

      The equipment second hand is worth about 10c in the dollar.

      The brand - well - if you liquidated the company that would be worth nothing.

      Nah - there is not 120 million in liquidation value there. No way.

      The ONLY hope that SP have is that they can find 100 stores making 200K or some equivalent variant ...

      I do not think they can do it BUT I stand behind my suggestion as to Cooper's strategy - that is what he is trying to do. And to do it he has to fold in the franchisees.

      He has a weak hand (which is why he does not publish accounts). The franchisees have a weak hand too. They make no money and their debt is guaranteed by KKD which means it is guaranteed by something that would normally get eaten by dung beatles.

      Zip

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