Krispy Kreme Doughnuts (NYSE:KKD) customers and investors alike might want to ask Krispy Kreme to supply some Alka-Seltzer with each doughnut or share purchased. That's because Krispy Kreme, whether it's its delicious but fatty doughnuts or its inability to stem a serious sales slide and file timely financial statements, can cause indigestion. Let's not even talk about what the stock price has done as a result. To date, company turnaround efforts have been akin to the way Alka-Seltzer deals with indigestion: a temporary relief of the symptoms rather than a cure for past excess, be it overeating or reckless growth.
If you recall, Krispy Kreme was a Wall Street darling shortly after it went public back in 2000. A number of investors, myself included, believed the hype and inflated financials indicating that Krispy Kreme had a chance at becoming the next Starbucks (NYSE:SBUX). The situation instead became more similar to the Boston Market restaurant debacle, which eventually resulted in a bankrupt concept and the eventual purchase by McDonald's (NYSE:MCD) for pennies on the dollar.
Krispy Kreme's developments quickly changed as the initial hype and excitement turned out to be a mirage: buzz-building new store openings, unethical and self-dealing repurchases of its own franchisees at inflated prices, and a crippling debt load. Soon thereafter, sales began to plummet and an avalanche of problems fell on the company, followed by the need to close stores, bankrupt and furious franchisees, shareholder lawsuits, and Securities and Exchange Commission investigations.
It's no surprise that Krispy Kreme did not release first-quarter earnings. It's hard to trust any fiscal 2007 results when fiscal 2006 numbers are missing. What it did announce is that it expects a net loss for the quarter and that revenue will likely fall 24% to $116 million. Systemwide sales fell almost 17%, which management attributed to fewer stores, lower sales to franchisees, and lower royalties and fees from franchisees. Things remain grim indeed.
Unless you have some insight into a potentially miraculous turnaround at the company, I would avoid this stock because there's not much ability to utilize Foolish gumshoe skills and determine the company's true operating health. Financial statements are limited because of filing delays; as a result, the most recent audited numbers are from January 2005, or 17 months ago. Plus the analyst community has left the company for dead, as only two analysts cover the stock now. The one thing we do know is that management alluded to continued potential liquidity issues in today's press release. Head for the hills if you're a conservative investor and are interested in preserving your principal.
Grasping for any positives, a new CEO was appointed in March, and management said it's seeing signs of stability in the U.S. and has a few international growth opportunities: It granted development rights to one party for the Hong Kong and Macau markets. Unfortunately, overall there's no clear way to ensure that things don't get worse or the company goes out of business before the situation improves. For now, Krispy Kreme has way too many non-operating issues to work through before it can focus its attention on store growth and profitability.
Starbucks is recommended in Motley Fool Stock Advisor, andKrispyKreme is a former recommendation. For more stocks from the top of Tom and David Gardner's list, try a free 30-day guest pass.
Fool contributor Ryan Fuhrmann is long shares of McDonald's and Starbucks but has no financial interest in any other company mentioned. The Fool has an ironclad, fat-free disclosure policy. Feel free to email him with feedback or to discuss the company further.
