Opinion on  Krispy Kreme Doughnuts Inc (KKD)     Sector: Services  >  Industry: Restaurants
KKD: Buy on the Rumor, Sell on the News?

The last we left Krispy Kreme(kkd) several months ago, its shares had been goosed after Prudential's Howard Penney recommended the stock with an advanced price target even though the company hadn't filed numbers with the SEC in well over a year. Those numbers have since been filed and its stock is close to making a complete round-trip to where it was before the hypey runup.

Adding to the downward pressure: JP Morgan analyst John Ivankoe, whose firm helped bank the company -- and who was once one of its biggest fans -- issued his first report on the doughnut maker in a considerable period. (He waited until the numbers were filed; imagine that.) While the worst may be over, Ivankoe says he kept his "underweight" ranking because other than closing stores, he doesn't seem to think much has changed. "The sales recovery plan relies upon increased coffee sales, doughnut variety and convenience store channel expansion," he wrote. "These strategies were tried before."

He adds: "The sales turnaround plan, as we understand it, is unusually, even surprisingly, similar to the brand growth effots of the previous management team." His bottom line: "...We are unambiguous in our bleief that KKD is an overpriced equity given our view of future fundamentals." And this: "...we do not believe investors are farily compensated to take the necessary risks of completing brand turnaround..."

If you go back a few months, I was incredulous when back when analyst Howard Penney of Prudential not only initiated coverage on Krispy Kreme (kkd) with a bullish opinion, but offered up a valuation even though the company hadn't filed financials. Now that financials are filed, Krispy Kreme is back to reporting quarters on a timely basis, as the company did Thursday with its fourth quarter. Yet, as bewildering as his initial report was, Penney continues to hold firm with a $17 price target even though the company missed his expectations, didn't offer guidance and Penney himself lowered numbers for this year's fourth quarter and its following fiscal year as a whole. (He's still "upbeat" on the turnaround and is impressed by rising cash, falling debt.)

This time, investors are more dubious. Maybe they realize that many of the things being discussed by Krispy Kreme, including convenience stores, small stores and international growth have been tried before.. But don't worry: The whole wheat doughnut will save the day.

The beat, my friends, goes on.

Krispy Kreme (kkd) closed down is down 38% at below $4 for what
may be the first time ever on terrible earnings news and the company's
concession that its turnaround isn't going as planned.  Especially troubling is the company's concession that for the first six months six
months of the year it wasn't in compliance with EBITDA covenants of its lending agreements --
not good when cash and cash flow are going down, as has been the case at
Krispy Kreme.

This is the same company whose stock a boost into the teens earlier this year after an analyst prematurely tried to juice
the stock on his belief that shares would soar when the company filed
long-delayed financials with the SEC. His comments alone caused the
stock to rise. But the proof is always in the numbers, which suggest
such gimmicks as a whole wheat doughnut aren't going to save the day.

As longtime readers of this blog (and my columns) know, that many of the new ideas being chatted up by new management of Krispy Kreme, including convenience stores, small stores and international growth, have already been tried, with little success, before.

There are those who believe the company needs to start from scratch with a new structure away from the public (as in stock) eye. If Krispy Kreme keeps violating loan covenants, that may not be as far-fetched as it sounds.