Thursday, December 11, 1997
Koo Koo Roo
Price (12/10/97): $2 11/16
HOW DID IT FIND TROUBLE?
Koo Koo Roo has been in trouble for a long time, it just took investors a long time to notice. This fast-service chicken restaurant chain has been losing money as far as the eye can see. The question surrounding this stock is how the price had stayed as high as it did for as long as it did. There are at least a few answers to that question.
Koo Koo Roo has had explosive top-line growth. Revenues have grown at a 98% clip over the past three years. This certainly could have attracted investors. A Peter Lynch-style investor might have been attracted by the restaurants themselves, which are evidently trendy, clean, and popular. Finally, investors might have been entranced by management's consistent statements that profits were just a couple of quarters away.
However, the trouble for Koo Koo Roo is that explosive revenue growth has only brought increasing losses. Peter Lynch-style investing doesn't include profitless companies, no matter how packed the restaurants appear to be.
No profit for years on end means Trouble.
Koo Koo Roo (named for the sound a rooster makes in the morning) operates 45 restaurants in California, Washington, D.C., Maryland, Virginia, and Florida. It also has operations in Canada. The Koo Koo Roo California Kitchen serves skinless chicken and other "healthy" foods.
In addition, the company has recently purchased Hamburger Hamlet, which is coming out of bankruptcy. This acquisition was completed earlier this year. This gives the company a position in the "unhealthy" foods business, as well.
In November the company found a buyer for its not particularly profitable Color Me Mine paint-your-own-ceramics studios. This was a move to concentrate on the food end of the business.
12-month sales: $63.6 million
12-month income: ($18.8 million)*
12-month EPS: ($1.21)*
Profit Margin: N/A
Market Cap: $62.9 million
(*Includes a $5 million pre-tax charge)
Cash: $13.8 million
Current Assets: $23.8 million
Current Liabilities: $10.04 million
Long-term Debt: $13.5 million
HOW COULD YOU HAVE SEEN IT COMING?
My fellow Daily Double/Trouble writer Rick Munarriz (TMF Edible) has been quite prescient about the fate of Koo Koo Roo. The company was a featured short in the Edible Eight portfolio since late spring of this year. Rick also featured the company as his Halloween scary stock. Investors who read the Motley Fool would have been in a position to at least avoid, if not prosper from, this Trouble.
A look at the historical financials for this company would have been enough to keep a Foolish investor away. Negative cash flow, negative earnings, and a balance sheet with increasing debt was enough to give an investor pause. Each quarter the earnings reports disappointed. The top line looks great, but it is the bottom line where the money is made.
WHERE TO FROM HERE?
In its recent earnings report the company said that, barring unforeseen circumstances, it will generate a breakeven or positive cash flow in the coming quarter. But management has made similar statements before. Will they be right this time or have they tossed out another rubber chicken?
The answer to that question is -- who knows? Until this company can show investors it can make a buck, there is no reason to expect the stock will go anywhere unless hope makes another bid to win out over reality.
At this point Koo Koo Roo is a nice place to eat, but the stock certificates may not be worth more than a placemat.
-Mark Weaver, MD
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