The details of my Big Bet against Krispy Kreme

[Mr. Now]

Congratulation to DesertCat from Mr. Now.

DesertCat develops some excellent analysis on KKD, backs his opinion with money, and publishes both.

We are all are much better off, as a result.

Thank you, DesertCat.

[mother_brain]

Here are today's stories listed at yahoo finance for KKD. Not very posistive judging from the headlines.


• Krispy Kreme Shares Sink on Weak Forecast
Associated Press (Tue 1:35pm)

• Krispy Kreme slumps; revenue off, loss estimated
at MarketWatch (Tue 11:05am)

• Krispy Kreme revenue dives
at MarketWatch (Mon 6:52pm)

• Krispy Kreme Delays Annual Report
Associated Press (Mon 6:34pm)

• UPDATE - Krispy Kreme expects loss for quarter, 2006
at Reuters (Mon 6:16pm)

• Krispy Kreme Reports Preliminary Revenues for Fourth Quarter and Fiscal Year Ended January 29, 2006
PR Newswire (Mon 5:36pm)

• Krispy Kreme sees big hole in '06 revenues

link

[rockrock]

[ QUOTE ]
If anyone knows of any positive analysis on KKD, I'd love to read them to contrast with my thesis.

[/ QUOTE ]

From morningstar

[ QUOTE ]
Bulls Say

Krispy Kreme's name and brand still have some value.


The company has survived other difficult periods over the past 68 years.


With the $225 million in financing, management has more time and cash to properly restructure the business.


The company's expanded beverage program, which includes espresso drinks and frozen blends, provides an opportunity to increase sales.


Kroll Zolfo Cooper has opted to take its success fee in warrants for 1.2 million shares at $7.75 a piece, providing the turnaround firm a strong incentive to increase shareholder value


[/ QUOTE ]

Hardly compelling. Good luck with your positions and good luck to all kkd employees that will be out on the street if you are right.

[DesertCat]

[ QUOTE ]
[ QUOTE ]
If anyone knows of any positive analysis on KKD, I'd love to read them to contrast with my thesis.

[/ QUOTE ]

From morningstar

[ QUOTE ]
Bulls Say

Krispy Kreme's name and brand still have some value.


The company has survived other difficult periods over the past 68 years.


With the $225 million in financing, management has more time and cash to properly restructure the business.


The company's expanded beverage program, which includes espresso drinks and frozen blends, provides an opportunity to increase sales.


Kroll Zolfo Cooper has opted to take its success fee in warrants for 1.2 million shares at $7.75 a piece, providing the turnaround firm a strong incentive to increase shareholder value


[/ QUOTE ]

Hardly compelling. Good luck with your positions and good luck to all kkd employees that will be out on the street if you are right.

[/ QUOTE ]

Right now it's back up to $8.14, so it looks like the market didn't view the report as negatively as I did. As you point out those bull arguments aren't very compelling. They actually don't have $225M in financing, that's what was originally announced but it's shrunk and they have used almost all of it by now.

On the beverage angle, interestly the SoCal franchisee has just reported that his effort to roll out drinks from Coffee, Bean, Tea and Leaf was first approved by KKD, then vetoed by KKD's lawyer. Interesting way to treat the franchiser in your largest market.

[Sniper]

Cat, if value investors aren't buying it up when it drops, who is doing the buying?

[Mr. Now]

"Cat, if value investors aren't buying it up when it drops, who is doing the buying? "

Sniper, this response from Mr. Now is for other readers:

Mr. Now thinks that almost all the buying potential for KKD, if any, is represented by the massive short interest. Literally every share available for shorting is now sold.

These shorts all have to buy back (cover) to complete the trade.

If the last (short) seller has sold, just a little buying power can propel price.

For these reasons, Mr. Now suspects that at some point, a massive counter-trend rally will test the resolve of shorts to keep the pressure on. This is especially true if most shorts have nice profit on paper, at the start of the event.

[DesertCat]

I have no clue who's buying. But I wonder if I should have taken profits on my May puts yesterday, they bounced back into the red by day end and they only have four weeks or so left.

[Mr. Now]

You can be right and still be very wrong with near-term options.

In the worst case, you buy when volatility is high and daily bars are wide. Price declines as anticipated, but volatility also dries up, as daily bars get narrow.

Now the time premium evaporates rapidly, as option expiry nears, and declining price just does not decline enough to go below your strike.

In this worst-case scenario, you are so right, yet, so wrong.

[Groty]

Unless you are aware of a negative catalyst that will push the stock price down over the next month, time decay is going to suck all the value out of the May contracts.

[DesertCat]

[ QUOTE ]
Unless you are aware of a negative catalyst that will push the stock price down over the next month, time decay is going to suck all the value out of the May contracts.

[/ QUOTE ]

Potential Negative Catalysts: Filing of calendar year 2004 financials are due by end of April. If they file, it won't be pretty, and they may have to disclose bad news from 2005 and 2006. If they don't file, the delisting process starts and they are (once again) in violation of their loan covenants. They have said their accountant won't attest to the accuracy of those financials (lack of controls). The new CEO is unlikely to sign these financials for the same reasons. I think the reality of the situation may be sinking in with him, and wouldn't be surprised if he resigned. And they may be facing a serious liquidity squeeze if any more lenders pull out. If they are in violation of loan covenants, the lenders can force them into bankruptcy.

I almost pulled the trigger this morning to dump my May options for a small profit. But all those potential catalysts are so interesting I just have to roll the dice and see what happens. I'd be hating life if I sold those options now only to see KKD close at $4 on May 20th.

KKD is up today, and my options are all back in the red.