Gather round for a little horror story, folks. California, 1997. An upstart quick-service chicken chain named KOO KOO ROO (Nasdaq: KKRO) is spreading like a thick Hollywood fog. The company is building namesake restaurants all over and people are lining up for the skinless poultry. That's right, man, skinless. Pretty creepy, huh? Okay, skinless chicken isn't that horrific -- it's health conscious, and Koo Koo Roo puts out a pretty decent spread with a fresh-tossed salad station. The restaurants also often boast an adjoined company-owned coffee shop and Color Me Mine do-it-yourself ceramic shops.
Friendly, cheery, tasty, clean. But, you see, something wrong is happening here. Something so bloodcurdlingly ominous that it can't be understated -- they moved the chicken, but they forgot to take out the profits! Did you hear me? They moved the chicken, but they forgot to take out the profits! Someone, please, turn on the lights.
Click! Bulb goes on overhead. Despite the heady expansion, the losses seem to be getting only steeper at Koo Koo Roo. For years a profitable Koo Koo Roo has been promised, but so far it hasn't come through. All it would take would be more units and the economies of scale would kick in. Around the corner? This has been some long block.
Despite the new restaurants, cash flow is still negative and the losses continue to mount. As gross profits are contracting, one has to wonder who put the Koo Koo in Koo Koo Roo. The company has now bought into Color Me Mine and even picked up the bankrupt Hamburger Hamlet. (Hamlet? Try Lady Macbeth. Wiping away the red is never easy. Double, double, toil and trouble.)
The company piled on debt to pay for Hamburger Hamlet. Paying 13% interest for a company that went under because it was leveraged to begin with is not very encouraging. Color Me Mine has been a letdown. Any more lack of focus and this would be a total blur.
In its acquisitions, expansion, and financing, the company has resorted to an all-out assault on shares outstanding. While the share price inched over $10 two years ago, shares outstanding have more than doubled in that time. So, in a market capitalization sense, the stock is trading at its highs. So, even if the company turns a profit, how many shares will it have to be divided into? And when?
This is popular horror fare. The stock is heavily shorted, so a short-covering rally could provide a short-term boost to the share price. But ultimately it will be the fundamentals that price the Koo, and when it does, it won't spare you enough change for a side item.
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