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# Krispy Kreme Doughnuts, Inc. Message Board

• di_vur_se_fi di_vur_se_fi Nov 22, 2004 11:01 PM Flag

## Receivables massively bloated

KKD, according to this morning's p/r, had accounts receivable \$73.4 million at the end of Q2. This represents over 43% of revenue (39 days outstanding).

Why does KKD have such high receivables? After all, it's a RETAIL doughnut shop, right?

Well, for one thing, the company stated in the May 7th p/r that 60% of company store sales are offsite (which generate receivables). So, during Q3 (using 60% as a reasonable estimator), 60% of the \$121.2 in company stores sales (\$72.7 million) is offsite. KKD states that their receivables terms are 30 days for offsite and as much as 54 days for franchisees (equipment purchases).

Let's backout what the days outstanding to franchisees are assuming that all offsite sales are fully aged (30 days). We therefore expect that 30/91 * \$72.7 = \$24.0 million as the outstanding a/r due to offsite sales.

What about the residual (\$72.7 - 24.0) of \$48.7 million?

kkd's other revenue (franchise royalties/fees and mix/equipment sales) is from franchisees; this was \$6.2 (franchise royalties/fees) + \$42.7 (mix/equipment sales) = \$48.9 million.

So, assuming that the offsite customers are paying on-time (in exactly 30 days), the entire residual receivable total represents 99.6% (\$48.7 / 48.9) or over 90 days outstanding from FRANCHISEES.

Let's further assume that 4 stores had been delivered unpaid for equipment (Q3 had 4 franchisee openings); at \$600,000 per store, that's \$2.4 million (we'll give kkd a break and say all these sales occured in the last 56 days of the quarter).

So, \$48.9 - \$2.4 = \$46.5 million is due to mix sales to and royalties due from franchisees.

33.3% of the quarterly royalties is \$2.1 million. So, \$46.5 - \$2.1 = \$44.4 million is outstanding mix sales to franchisees.

Therefore, of the \$40.2 million in mix sales (\$42.7 - 2.4), 110% of it has not been paid (100.5 days).

This is WAY, WAY too high. IMO, this is evidence of MASSIVE CASHFLOW PROBLEMS AT THE FRANCHISEES.

If, however, you want to argue that the franchisees are likely paying on-time, then the alternative interpretation of the high receivables (inability to collect from offsite vendors) is nearly as troublesome (inevitability of large charge for uncollectible accounts).

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