Knobias Clip Report (12-6-2007)

Submitted By Knobias ClipReport

KKD: New Operational and International Strategy Results in Earnings Surprise

Thursday’s session revolved around President Bush’s speech regarding a 5 year interest rate freeze on subprime loans with distinct characteristics to thwart many that are at risk of foreclosure. The decision is one that will bring increased debate about morals and the bailing out of some who should have never been able to afford homes originally without the adjustable rate mortgages. The President and Secretary Paulson noted that the freeze will stave off foreclosures which would cause increased loss of value from investors and homeowners alike. Either way, the government is trying to do something, which is commendable and should boost market confidence, but the moral dilemma will continue as will debates about government intervention into private industry.

While the government attempts to turnaround the mortgage and lending problems, another small cap name saw increased attention due to their turnaround.

Krispy Kreme Doughnuts, Inc. (KKD) announced their third quarter results on Thursday. The Company reported revenues decreased 11.7% to $103.4 million compared to $117.1 million in the third quarter of last year. Company Stores revenues decreased 11.3% to $72.8 million, while Franchise revenues were flat at $5.7 million and KK Supply Chain revenues decreased 15.1% to $24.9 million.

But more importantly, the Company reported net loss for the third quarter of $798,000, or $0.01 per diluted share, compared to a net loss of $7.2 million, or $0.12 per diluted share, in the comparable period last year. The Company continues to streamline their operations and close down underperforming locations. They also are implementing their spoke and hub strategy which saw 20 new satellites open during the quarter, continued reduction in general and administrative expenses, and reduced supply chain costs by outsourcing their coffee supply.

What was also interesting was their international numbers. Krispy Kreme has increased their international franchisee sales increase by 48% year over year. While the American movement to lose weight and ward off weight related diseases, the movement isn’t happening in other nations, especially in the Asian countries.

"As we look past the third quarter, we continue to focus on improving Company shop performance, driving the hub and spoke model, growing our international franchise business, refranchising certain domestic markets and reducing costs to help offset rising commodity prices," said Daryl Brewster, the Company's President and Chief Executive Officer, in the earnings release.

Following the news, shares gained some 27% on 4.45 million shares traded. With the Company continuing their international expansion as well as contracting domestically, more profitably locations could become the result. With that in mind, investors would be wise to watch.



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