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Krispy Kreme Doughnuts, Inc. Message Board

  • di_vur_se_fi di_vur_se_fi Jan 5, 2005 10:28 PM Flag

    Tangible Book Value May Be Negative

    There has been much discussion of kkd's book value in the past few days and weeks as "investors" try to discern kkd's value, searching for a possible floor.

    Using the q2 10-q, I'll try to give my guesstimate of what that floor might be based upon TANGIBLE Book Value.

    As of the end of q2, kkd had book value of $439.5 million; with 61.75 million shares outstanding, that's book value of $7.11 per share.

    Now, let's make a few adjustments; we must reduce book value to account for those assets which are partially or fully impaired; we must also reduce book value for any likely liabilities which are not shown on the balance sheet.

    First of all, let me list those assets which I believe are essentially worthless:

    Other receivables: $4.9
    Notes receivable, affiliates: $5.4
    Prepaid expenses: $6.7
    Deferred income taxes: $20.0
    Assets held for sale: $3.3
    Long-term notes receivable, affiliates: $2.9
    Investments in unconsolidated joint ventures: $9.9
    Goodwill: $172.7
    Other intangible assets: $3.4
    Other assets: $10.4

    Total: $239.6

    Adjusted Book Value: $439.5 - $239.6 = $199.9 million

    Additionally, my guess is that a/r of approximately $64 million has at least $20 million in uncollectible accounts (mainly franchisees, some wholesale accounts).

    Inventory is also problematic as $14.2 million is "purchased merchandise" held in the distribution center which is most likely boxer shorts and t-shirts and $9.0 is equipment (if you don't open new stores, do you really need doughnut manufacturing equipment). Let's say that $15 million of the $23.2 million inventory total is impaired.

    Adjusted Book Value: $199.9 - $35 = $164.9 million

    Now, how much do you think the $297.2 million in pp&e is worth. My guess is around $100 million; after all, how much would used doughnut making equipment sell for on the secondary market?. In other words, the only value here is in the land (maybe $50 million) and the residual value of the buildings.

    Adjusted book value = $164.9 - $197.2 = -$32.3

    Finally, don't forget to adjust for any loan guarantees; while the cjv loan guarantees are already contained in kkd liabilities, the equity method jvs are not; this amount is $20.2 million.

    Adjusted book value = -$32.3 - $20.2 = -$52.5

    Lastly, though I won't try to estimate it, don't forget that kkd had $155.7 million in operating lease liabilities NOT shown on the balance sheet so it won't be cheap for them to close down money losing stores.

    Tangible Book Value = -$52.5 million or -$0.85 per share

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    • And all your money will go to those American lawyers in the BK! That's the American way screw the little guy

    • Hi, Di. You wrote,

      "My take is that #2 shows is equivalent to $8.132 million and #1 was used to reduce company store operating expenses, which had gotten preposterously small in the last 6 quarters or so. "

      Yes, playing Devil's advocate, I would say that the $8.1 million, the reported KKM&D profit, would be from sales to franchisees and unc-jvs. If reported correctly (i think) any "profit" from sales to #1 (company and cjvs) could, if from mix sales be applied to reduce company store expenses by an equal amount, and if from equipment sales be used to reduce company store cap investments by an equal amount (rather than operating expenses, as written); ie, "profit" in category #1 would be a wash, with no effect whatever.

      Company stores have had significantly higher sales per factory store than fanchise stores, which should allow higher margins. You have made a compelling case, though, that something mysterious happened a bit over a year ago to improve their margins. All i can say is, if they have spelled out in black and white that they have been capitalizing expenses... and it got past everyone--even you, who have long suspected as much... I don't know what to say. It's too amuzing, if true.

    • Perspiculator,

      You and Di make a strong case that something was amiss. I only started following the stock in 2003, so i didn't notice the change. When i first read that phrase, i did a double take. I re-read it and re-read it, then figured that i couldn't understand it, that it couldn't be taken literally. Taken literally, as applying to intracompany KKM&D sales, it would be a disclosure that they were capitalizing expenses. I'm neither an accountant nor have any training in financial analysis, but i can't imagine how that could be allowed. (That would be the mother of all loopholes since it could render reported earnings and op cashflow meaningless. Aside: do the auditors read the final versions of 10Qs and 10Ks, or just certify the books?) It would be astonishing indeed if the clause were written intentionally to "disclose" that they were capitalizing expenses. But that's your bold hypothesis: that we should believe them this time. Kinda like a robbery in broad daylight.

    • you wrote:

      But the filing also did not state explicitly that "profits" on intercompany equipment sales, specifically, were used to reduce operating expenses.


      Well, there are two types of equipment sales:

      1) intercompany (consolidated entities)
      2) unconsolidated jvs and independent franchisees

      You seem to be saying that maybe the "profits" that they speak of were for only #2. That may be, they may have written "sloppily". However, what then does the entry (q2 fy05)

      kkm&d operating income = $8.132 million

      represent, if that is the case.

      If "all" the profits were used to reduce company store operating income, wouldn't kkm&d operating income be $0?

      My take is that #2 shows is equivalent to $8.132 million and #1 was used to reduce company store operating expenses, which had gotten preposterously small in the last 6 quarters or so.

    • >> But the question is, did they write precisely here and betray an accounting trick, or just write sloppily?

      I don't know for sure, of course. But I can point to the following evidence that this is precise and not sloppy writing:

      1) This text is not long-standing boilerplate. It first appeared in the May 2003 10-K, at the same time as the intracompany eliminations and KKM&D revenues were retroactively restated with no explanation. The sentences appear just above the changed numbers. One would think that the language accompanying a restatement would be carefully vetted.

      2) The literal reading would explain why Company Stores' operating expenses seem to be anomalously low. No other plausible explanation is known to me. Coincidentally or not, Di_vur_se_fi's message pointing out the anomaly in Company Store operating expenses -- which he has long thought was his most important posting of all -- was posted shortly before the 10-K was issued with the restatement of numbers and first appearance of this language.

      3) It suggests, although does not fully provide, explanations of several hard-to-understand events of Spring 2003: the use of cash to buy the Dallas franchise, the Casstevens departure, the failure to issue a secondary stock offering.

      4) These are the same people who came up with the very peculiar definition of "comparable store sales" which was disclosed much later than it came into use.

      5) As I said the first time: they said it, why not take it literally? The language is opaque, buried at the end of lengthy documents, exactly what a lawyer might do if he wanted to be able to say later that he had disclosed something but didn't want anybody to notice it now.

    • Ah don't ask him that. He can't even answer the first question. What I want to know is why he thinks a company can sell machines to a franchisee for a profit but can't sell the same machine to a company owned store for a profit. Both the franchisee and company owned store are profit centers. There's no difference. The gent doesn't understand the accounting of transfer pricing.

    • >>"thou shall not profit on sales to onesself".<<

      Ever hear of vendor financing?

    • Me too. I'm gonna buy more donuts, but not the stock. I made that mistake once before.

    • Yep, boy, Billy-Bob you done got you some solid high-fallootin doo-diligints there. Ain't no one kin argue wit that. This here one's a shure thing gonna make you one o them wall street typhoons.

    • i like your style, just rremember this is an AMERICAN IPO and AMERICAN con men at work. I hope longs get out alive. better yet, shorts forced to pay up.

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