Well managed, high growth companies can command high PE's for years and years until they stop
growing. I don't see one scintilla of evidence that the growth in KREM is slowing. In fact' the growth will continue as America's apetite for good food increases. There are LONG, LONG lines at the KREM in Virginia Beach, and just a matter of time before more stores are open. I see NO LINES at Dunkin Donuts.
Dunkinn customers will come to KREM.
I am buying more on any pullback, wish I had bought more after the secondary.
By the way, wasn't the secondary supposed to destroy this stock? Why are we up 15% since the secondary?
My point all along is that KK proponents have never given any thought to a downside. It's just rah rah rah. The fact it was a sleepy company for 60 years or so before some accountants with investment banking experience took control and hyped it seems to have no impact on them. The fact that regardless of lines around the block (in some new locations, certainly not all) seems to guarantee them monopoly-like profits. I've said all along there are a number of other restaurant companies that have similar growth rates with far longer track records and P/E's that are less than half that are better investments. It sounds like you don't disagree with that.
But as for dividends, it is highly unlikely you'll be seeing dividends in the near future, for two reasons. One, if they can continue to find good locations, they should strike while the iron is hot and re-invest any spare cash in the business. Two, if they can't find those opportunities, it is unlikely they will be cash cows. Looking at the restaurant industry, for the most part it is not a group that pays significant dividends, and I wouldn't expect KK to be an exception.
Even if its not, I bet you its cheaper to have them in a Brad Pitt movie or on Will&Grace than it is for MacDonalds to have MJ and Bird doing their off the wall, off the light, off the traffic sign and in the hoop spot. It costs money to run those spots repeatedly. But KK will be seen everytime a movie is rented.
Let me point out one thing for full disclosure. The figures of 1% of total franchisee revenues and $25K per year franchise fee were quoted by someone else posting on this board in the last few days. I believe that I remember seeing the $25K figure in the registration statement, but I didn't spend the additional time to scan the entire document to verify the 25K figure or the 1% franchisee revenue figure. I took all other amounts in my post directly from the registration statement. I'll verify these 2 figures in the next few days, but I don't have the necessary time today to scan the document. Regarding your statement about the future decrease in the price of the stock, I think there will be a steep drop in the price shortly, but not necessarily immediately after the expiration of the lock-up period. Once the stock price is adjusted downward to a reasonable P/E ratio that is justified by the revenues and cash flows, it will once again be a good investment. It's a solid company with great growth potential (in terms of size of the chain), but the revenue and cash flows don't support the current P/E ratio.
Hey how have you been? I got tired of slamming the door on all those Boston Market comparisons, of course if KK wants to add $40 million of debt financing then I would be making the Boston Market comparisons, but history happens for a reason and hopefully people learn. I was not laughing at your calls on AMZN etc. (great article on Amazon in the Washington Post today). I think you could foresee the downturn. A friend of mine worked for Covad the DSL provider and the minute the dot com's dried up it just followed the chain. But then we come back to KK and people wondering why the stock is priced so high. Well it makes money, it has a low float, and I'm sure a few shorts have been squeezed. But I disagreed woth you all along in terms of how fast this thing would drop. I could see it back to the $30's by next year, but I could also see a dividend plan within the next two years. (I like dividends, a lot of people don't these days, but I think a potential cash cow like KK is a good candidate)
Great analysis. I do think that the cost of opening new company owned stores can be a little prohibitive depending on the markets the company wants to move into. Also, a strong franchise base can be a great foundation to any company, otherwise, why franchise? I was kind of surprised to see KK only takes 1% of sales I could see this rising. Also, I think the reason you see the company stores doing better is that they are the more established stores and they are in the heart of KK customer base. I think that if KK is not a fad in it's newer markets, and I don't think it will be, then I could see the franchise stores outperforming the company owned ones. I agree with everyones statement aout the P/E ratio. My main point was for people who shrill about this company's stock being so confoundingly high. Sure it's high and there is no way I would buy in at this price because I think it will move lower. But not in a giant gasp, but more of a slow realization as other companies come back to profitability. The thing about KK is that it makes money and it sells a product that everyone can understand and I believe it is a product that will sell regardless of market conditions.
By the way have you ever eaten a KK?
The $500k franchisee equipment purchase fees that you mentioned are one-time fees that are reflected in the KREM financial statements as KKM&D revenues, not franchise revenues. When I referred to franchise cash flows, I was referring to the revenue classifications utilized in the KREM audited financial statements. The following data was taken directly from the latest KREM registration statement filed with the SEC and represents the results from operations for the nine-month period ended 10/29/00. See my analysis of this information below.
Company-Owned Franchised KKM&D
Rev. 156,543 6,704 55,657
Op.exp. 132,902 2,786 47,145
G&A 9,215 1,527 3,318
Dep&amort 4,987 - - Op. income 9,439 2,391 5,194
Op income % 6.0% 35.7% 9.3%
Avg. # of stores from
1/1/00-10/29/00 59 95 20
Average op. income
per store $159.98 $25.17 $259.70
Avg. store-week info. Rev. Cash Flow
Company-owned $69 26.6%Franchise owner (not KREM) $42 Unknown
New Store Investment Info:
As you can see, the majority of KREM's cash flows are generated from the $9,439 in operating income from the 59 company-owned stores. As the Company opened 20 franchisee stores during the nine-month period ended 10/29/00, $10 million in KKM&D revenue was generated from the initial purchase of the donut-making equipment. From my review of the registration statement, I didn't find KREM's cost of manufacturing the donut-making machinery (not surprisingly), so it is impossible to break that profit out from the ordinary fees generated from ongoing franchisee purchases of donut ingredients. If you logically assume that the initial sale of the donut-making equipment is profitable for KREM (the Company would incur minimal legal fees to finalize the sale documents and the cost to manufacture the machinery), then the majority of the KKM&D operating income of $5,194 would be due to this initial purchase of machinery by new franchises.
The franchise revenue includes the $25k per year annual franchise fee and the 1% of franchisee revenues that you referenced in your post. As you can see, while franchise revenue earns a higher operating income % than the company-owned stores, the total dollar amount of operating income generated by the 59 company-owned stores is 3.94 times the operating income generated by 95 franchise stores. As I stated, while the margins are lower, the total income generated is much higher, thereby resulting in much higher cash flow.
If you read my initial post, "Current Drivers of KREM Earnings", posted on 2/19/01, you would see the following statement. "KKM&D revenues will probably begin to be a major source of revenue growth for the company in the future as it slows the expansion of company-owned stores due to cash constraints that the expansion could impose." I concluded that the company generates substantial income from the initial one-time revenues generated from the establishment of franchise stores. In addition, the rapid increase in the number of franchise stores would help absorb the company's corporate general and administrative expenses. This is a well-run company that should not be going bankrupt (as some people here would suggest) in the foreseeable future as long as it stays the course with its current expansion plans. I have never stated that this company is not well-run, I have stated that its growth rate does not justify a P/E ratio of 70+. I stand by that statement.
So I was wrong, huh? Only about the timing. This stock has been dead money for nine freakin' months, and didn't even get a pop during hte last earnings announcement. It's had a short pop form the split announcement, conveniently timed to stem the decline after the secondary, we'll see how many other rabbits they have to pull out of their hat, but over the long term this thing has nowhere to go but down.
People also laughed when I said YHOO, AMZN, GOTO, etc. were heading for a fall, but they sure aren't laughing now. Even the heavyweights like MSFT, SUNW, CSCO, etc. are down 70% or more. I will admit this kind of nonsense can go on for an extended period of time, but in the end it all comes down to valuation. Always.
Your argument that "KREM is only held back by its inability to multiply itself faster" is an argument to why the stock is overvalued. It can't continue to grow itself fast enough to support its stock price. And you guys keep comparing this stock to Starbucks and MCD's. Both those companies have a much more reasonable P/E.
I just bought more May 60 puts this morning.
Seeing stuff on TV and buying stocks was exactly my point. On no it wasn't, my point was about KK cash flow and how their advertising budget was lower than other food specialty companies. There was an article on how KK got free advertising from Fight Club and Will and Grace. I'll see if I can find the link, it was a long time ago.