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# Krispy Kreme Doughnuts, Inc. Message Board

• di_vur_se_fi di_vur_se_fi Aug 8, 2001 1:53 AM Flag

## Perfect execution

For the sake of argument, let�s say that KKD�s store count grows as the company forecasts and same store sales increase at a healthy pace.

Namely, assume that
1) KKD adds 250 stores by the end of FY2006 to the 174 stores open at the end of FY2001 (19.5% compounded growth rate).
2) KKD�s same store sales grow 8% a year

Combining the two assumptions yields a SYSTEMWIDE sales increase of 29.1% per year (1.195 * 1.08 = 1.291). Systemwide sales in FY2001 were \$448 million; with 29.1% annual growth for 5 years systemwide sales will grow to \$1.605 billion. Using doughnut industry assumptions from an earlier post,

http://messages.yahoo.com/bbs?.mm=FN&action=m&board=1600706247&tid=krem&sid=1600
706247&mid=32501

the domestic donut market will grow to \$5.97 billion by calendar year 2005 (except for January, the same as KKD�s FY2006). KKD�s market share will be 26.9%.

Now, let�s assume that KKD reaches its steady state (grows at the rate of the industry) after FY2006. What is it worth?

Using the first-set of assumptions and equation from the previous post,

Company value = (1 - Tax rate) * Systemwide Revenue in FY2007 * (Royalty + Mix profit) / (discount rate � growth rate)
Company value = (1 � 35%) * \$1.605 billion * 1.04 * (4.5% + 1.0%) / (11% - 4%)
Company value = \$852 million

=>

�Fair� stock price (53.61 million shares and 26.9% market share) = \$852 million / 53.61 million = \$15.90

Note: \$15.90 represents the �fair� price on January 31, 2006. Discounted back to the present, using 5% for the 5 year bond rate, 5.5% for the equity risk premium (historic outperformance of equities vs bonds), and a Beta of 1), the

Current �fair� stock price = \$15.90 / (1 + 5.0% + 1.0 * 5.5% ) ^ 5 = \$9.65

(Admittedly, this analysis neglects the presumably positive income stream between FY2001 and FY2006. Including this stream and using similar math, the Current �fair� stock price increases to \$12.18)

What if KKD is able to grow at the 29.1% for 10 years, before settling into the steady state? Similar math yields a Current fair value of \$29.19 (vs \$12.18).

As this is similar to the current stock price and given my assumptions, it appears that the market has discounted
1) 79% market share for KKD in 10 years
2) over 1000 KKD store openings over the next 10 years
3) 8% annual same store growth

Are these characteristics realistic? Only time will tell.

Note: Regarding the store openings, this will require SOMEONE to spend \$1 - \$1.3 billion in capital expenditures (over \$1 million per store). As it appears that much of the new store opening expenditures is being financed directly and indirectly by KKD (investments, loans, loan guarantees, etc�), it will likely require KKD to raise large amounts of additional capital. If they use debt, the risk of eventual insolvency increases. If they use equity, dilution will significantly decrease the share prices calculated above (because the denominator is larger).

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• I agree with much of your analysis. However, the following statement that you made is unsubstantiated garbage: "As it appears that much of the new store opening expenditures is being financed directly and indirectly by KKD (investments, loans, loan guarantees, etc�), it will likely require KKD to raise large amounts of additional capital."

KKD has a few joint ventures, but they are not financing (directly or indirectly) much of the new stores being opened. If you want to compare KKD to Boston Chicken, then I have no problem with that. However, KKD has not made the error of providing significant financing to its franchisees. To say otherwise it an attempt to mislead people. Krispy Kreme's stock price is way overvalued, but stick to facts rather than trying to create problems that don't exist.

• What a complete waste of time reading your post was. Check out the mkt cap to sales ratio's of Starbucks when the stock is at a high and then when it's at a low and you will have some idea what KKD can sell at. Go back 5 years when SBUX had sales of only 1 billion and get an even better idea. Wake up before up lose all your money short this super winner.

• Great post -- Following sums it up PERFECTLY.....

"Note: Regarding the store openings, this will require SOMEONE to spend \$1 - \$1.3 billion in capital expenditures (over \$1 million per store). As it appears that much of the new store opening expenditures is being financed directly and indirectly by KKD (investments, loans, loan guarantees, etc�), it will likely require KKD to raise large amounts of additional capital. If they use debt, the risk of eventual insolvency increases. If they use equity, dilution will significantly decrease the share prices calculated above (because the denominator is larger)."

You want a preview? Just take a look at Boston Chicken a few years back. They had great expectations. TOO great -- and went bk. I dunno if KKD will BK, but all the hype on this stock and their growth potential -- if they TRY IT, major pain ahead..... Would be FAR FAR better if they took it slow -- but that's our society for ya..... Everybody wants instant gratification -- don't work for most of us -- Didn't work for Boston Chicken -- Won't work for KKD.

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